Capital gains tax (CGT) is charged on profits (gains) that you make from selling (disposing) assets. For instance, if you sell a Buy-to-Let property, then you pay 28% on the profits – after your CGT allowance – if you are a higher or additional rate taxpayer. Given that it takes a lot of patience, discipline and often hard work to generate capital gains, it is understandable that many investors are keen to find legitimate ways to mitigate a needless bill. In this article, our team at Vesta Wealth offers four ideas to help cut a CGT bill.
#1 Maximising your allowance
Every tax year (April-April) you are entitled to make up to £12,300 in capital gains – outside of tax-efficient vehicles like your ISA – without CGT. This includes shares and bonds in a general investment account (GIA) and additional property outside of your main home. Therefore, if you are planning on selling shares in a given calendar year (e.g. because you are about to use the funds for a house deposit), then bear this threshold in mind. It may be worth spreading the sales across two tax years, to mitigate an unnecessary bill.
#2 Using an ISA
In addition to this, you can save/invest up to £20,000 into your ISA(s) each tax year. Any gains you make from investments within this wrapper will be free from CGT. If you make full use of this yearly ISA allowance, therefore, you could build up a significant tax-free ISA portfolio. Over 10 years, for instance, this could represent £200,000 plus any investment growth on the ISA funds.
It is often wise to use your ISA allowance strategically alongside your annual CGT allowance, mentioned above. For instance, if you want to build a Buy-to-Let portfolio as well as an equity portfolio, then it might make sense to build up the latter within an ISA. This is because property cannot be held directly within an ISA. If you ever need to sell shares and property in the same tax year, then this could help shield your finances from needless CGT.
#3 Building up a pension
A pension is one of the most tax-efficient tools available to invest towards your retirement. In 2021-22, you can put up to £40,000 into your pension(s) each tax year, or up to 100% of your earnings – whichever is lower. At the end of the tax year, this annual allowance refreshes up until age 75. So, whilst you may still be able to access any unused allowance from the previous three tax years, you will certainly lose any from the fourth previous year.
Any capital gains accrued within a pension are CGT-free. Additionally, any pension contributions you make are usually subject to tax relief – boosting your wealth even more. For a basic rate taxpayer, this tax relief stands at 20%; meaning it only “costs” you 80p to put £1 into your pension. For someone on the higher rate, the tax relief is even better – up to 40%.
#4 Tax-efficient activities and investments
Certain investments – or activities – offer CGT exemptions when specific conditions are met. To start, most gifts made to a charity, spouse or civil partner are exempt. Often, you can use this exemption to help reduce a CGT bill for your household. For instance, if you have used your CGT for the tax year but your spouse has not, then you could gift them some assets that you both wish to sell – so he/she can utilise their CGT allowance.
You also do not normally need to pay CGT when you sell UK government bonds (gilts) and Premium Bonds. There are also certain schemes that can offer tax benefits to investors. The Enterprise Investment Scheme (EIS), for instance, offers CGT exemption on profits from any shares you hold in a qualifying scheme – provided you hold them for at least two years.
Take advantage this tax year
As you may have noticed in the ideas above, many of them rely on using allowances available for the tax year. We are writing this in late January; just over two months before the start of the new year in which starts 6th April. The deadline does creep up very quickly.
Leaving the arrangement of your finances until the last days or weeks can often result in missed opportunities to save on CGT. For instance, selling a Buy-to-Let property will likely take a few months to process, at the very least. If the sale goes through after the 2021-22 tax year closes, then any profits made after your CGT allowance will be counted towards the next tax year. This could limit your ability to sell other assets outside of your ISA in the following 12 months.
With this in mind, consider taking time to review your wealth and finances now. Are you making full use of your allowances? Could your household finances benefit from transferring assets to a spouse or partner, to make use of their unused allowances? Speak with your Financial Planner if you are interested in making the most of the opportunities and allowances available.
Invitation
If you would like to discuss your financial plan and retirement strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
Reach us via:
t: 01228 210 137
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.