All investors want to make capital gains, but if your investments are held outside tax wrappers such as individual savings accounts or self-invested personal pensions, a gain can come with a hefty tax bill. Unfortunately, many investors are not making enough use of tax efficient strategies and allowances available to them.
Figures from the 2013 unbiased.co.uk/TaxCalc Tax Action research show that UK taxpayers could be wasting as much as £171m in unnecessary capital gains tax (CGT) payments this tax year. This represents a rise in CGT waste from 2012 of £38 million.
CGT is a charge that arises from the disposal of assets that have increased in value. This tax does not apply on the sale of your primary residence or your car, but gains made on the sale of shares or buy-to-let properties as well as some other kinds of assets are taxable. Each UK taxpayer has an annual CGT free allowance, which for the 2012/2013 tax year currently stands at £10,600.
For the tax years 2011-12, 2012-13 and 2013-14, CGT is levied on any gain above the allowance at 18 per cent for basic rate taxpayers and 28 per cent for higher rate taxpayers. The tax rate you use depends on the total amount of your taxable income, so you need to work this out first.
So, whether you are selling all, or part, of your business, or some other assets (for example property or shares) it’s important to plan for a capital gain in order to minimise the tax burden.
The Tax Action research found that one of the main areas of CGT waste occurs as a result of people not using individual savings accounts (Isas) to shelter their investments from any tax liabilities. But investors who are already fully subscribed to Isas (the annual Isa allowance for 2013/14 is £11,520) may have other options to reduce their CGT bills.
Here are seven ways to reduce your Capital Gains Tax (CGT) bill, identified by Carol Cheesman, the principal of Cheesmans Accountants (http://www.cheesman.co.uk).
1. Use your annual exemption
The annual exemption, which is £10,600 for the 2012-13 tax year and £10,900 for the 2013-14 tax year, cannot be carried forward if unused and so should be used each year, if appropriate, to crystallise gains on investments. Remember though, that same year gains and losses have to be merged before the annual exemption is applied.
Spouses and civil partners are entitled to their own annual exemptions and these can be fully utilised by making a transfer to a spouse or civil partner. However, Ms Cheesman says: "Be sure to leave a reasonable interval between the transactions and specify that the transfer is absolute and unconditional."
2. Utilising losses
It may be beneficial, particularly where there are current year gains taxable at the higher rate of 28 per cent, to crystallise any investments standing at a loss. Ms Cheesman says: "The set off of losses against same year gains cannot be restricted and so any potential wastage of the annual exemption should be considered."
3. Claim capital losses
A capital loss must be claimed within four years of the end of the tax year in which it occurred for relief to be given. The loss claimed can subsequently be carried forward indefinitely.
4. Relieve capital losses against income where possible
Capital losses realised in respect of unquoted shares can, in some cases, be relieved against income. Relief must be claimed within 12 months of 31 January following the end of the relevant year of assessment.
5. Deferring disposals
Deferring the sale of assets until after the end of the tax year should be considered if the annual exemption for the current year has already been used. This will utilise the 2012-13 annual exemption and defer the payment of any capital gains tax due by 12 months until 31 January 2014.
6. Bed and spousing
The practice of 'bed and breakfasting', whereby a person sold stocks or shares and then repurchased them shortly afterwards to secure a higher acquisition cost, has for many years been negated by the rule requiring a disposal to be matched with any acquisition of securities of the same class in the same company in the next 30 days. This only applies to a repurchase by the same person, however, so a spouse or civil partner can repurchase the shares without this rule being applied.
7. Negligible value claims
A negligible value claim can be made where an asset becomes worthless. Ms Cheesman says that the loss can be treated as arising in the tax year in which the negligible value claim is made or as arising in any of the two tax years immediately preceding the claim, provided HM Revenue & Customs are satisfied that the asset was of negligible value in those two years.
Ms Cheesman says: "By planning before you make a capital gain you can limit your tax liability but it is important to plan in advance and not leave it until the last minute."