- Capital Gains Tax (CGT) is a tax charged on the gain made while disposing of assets.
- Tax experts are urging Britons to make the most out of Capital Gain Tax allowance before the deadline of 5 April as CGT bills are set to rise.
Whether you are saving or investing, tax efficiency is an important aspect to consider as it can make a significant difference to your overall wealth and minimise the tax burden. The Capital Gains Tax (CGT) is charged on gains made after selling, transferring, gifting, or exchanging certain assets. CGT is the amount, which is the difference between the selling price and purchasing price of any asset.
The tax is typically applicable to shares, investment funds, second properties, sale of a business, inherited properties, valuable assets, assets transferred below their market value, and cryptocurrencies.
CGT in the UK depends on two things: if the taxpayer is a basic rate, higher rate or additional rate taxpayer, and the type of asset sold. If you are a higher or additional rate taxpayer, you have to pay 28% on the gain from residential property and 20% on other chargeable assets, and basic rate taxpayers have to pay 18% on residential property, and 10% on other assets.
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Tax experts are urging Britons to make the most out of Capital Gain Tax allowance before the deadline of 5 April as CGT bills are set to rise. Savers may choose to hold their stocks market-related investments in Individual Saving Account (ISA) or in pension accounts that are tax-free. For the tax year 2021/22, the Capital Gain tax-free allowance is £12,300, which means if your gain is under this amount in this tax year, then no capital tax has to be paid.
Here are the five ways to make the most out of capital gain tax exemptions.
- Offset losses
You can minimise your CGT liability by using losses to offset your gains in the same tax year. As CGT is calculated on the gains you make by selling assets, you can deduct your gain from the losses you have made from selling other assets whose value got depreciated.
Also, you can carry forward unused losses from previous tax years to bring your gains under the exemption limit, provided they are reported to HM Revenue & Customs (HMRC) within four years from the end of the tax year in which the assets were sold. While calculating CGT liability, you can also offset some transaction costs such as solicitor fees or estate agent fees.
- Transferring assets
If you are married or in a civil partnership, you can use two sets of allowance of a total of £24,600 as it is exempted from CGT, which means you can transfer assets to your partner, known as interspousal transfer to make use of CGT exemption.
There is often no cost for transferring. You can contact your broker, platform, or advisor to facilitate the transfer.
Also Read: Which are the Best Lifetime ISAs right now?
Use annual allowances
If you make an investment in assets beyond ISA or pension wrappers and held the asset for the long term without selling you may accumulate a huge CGT liability that will be imposed when you sell all your holdings. This is also known as pregnant gain.
To avoid this, try to use your allowance each year by disposing of a part of the asset to reduce the risk of incurring a significant CGT liability in the future. CGT allowance can’t be carried forward to the next tax year.
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- Use ISA and pension allowances
Profits made on assets held within ISA and pension accounts are exempted from CGT, so it makes sense to make use of tax-efficient pension and ISA allowances, particularly for a higher-rate taxpayer. For the tax year 2021/22, ISA allowance is £20,000 and for married couples and civil partners, it is £40,000.
You may consider disposing of all your assets to utilise CGT exemption and then immediately buying back the same assets inside the ISA account. This strategy is known as Bed and ISA or Bed and Pension.
- Invest in an Enterprise Investment Scheme (EIS)
You may consider reinvesting your capital gain in Enterprise Investment Scheme (EIS) companies that are CGT free. EIS companies are small, unquoted, and early-stage companies and are therefore highly risky and illiquid. Besides, investment in these companies carries a 30% income tax credit. A CGT liability is only deferred when investing in EIS and will re-crystallise when the ESI shares are disposed of, but it can be possible to keep rolling over the liability.