Really, the point of our blog post today isn't to teach you about avoiding capital gains tax, but rather reducing capital gains tax.
That's because ultimately, if you've made a capital gain, you'll need to pay capital gains tax (CGT). There's no avoiding it.
However, there are perfectly legitimate ways to reduce your capital gains tax bill overall, meaning you pay less tax, and keep more of the profit you've made from your property sale, personal possessions sale, or business assets sale - whatever your capital gain may be.
So, if you want to learn about all the ways you can reduce your capital gains tax bill and pay less CGT by avoiding paying unnecessary tax, then stick around for our helpful post today.
If you want a more in-depth look at capital gains tax and how we can help you understand it more and support you with paying the right amount of tax, then check out our services for more information.
For now, though, we'll cover the basics.
Capital gains tax is a special tax that you'll need to pay when you sell or 'dispose of' an asset and make a profit. It's important to note that the CGT applies only to the gain, not the amount of money you receive when you sell as a whole. Still, you can be hit with a significant CGT bill due to any capital gains taxes that are applied to the sale of an asset.
Importantly, though, there are certain business assets and personal assets that, when sold, will automatically mean you have to pay CGT at a specific tax rate. There's also a tax free allowance available for capital gains tax that means you don't have to pay capital gains tax if your profit falls under a certain amount. We'll cover all of this in the following sections.
So, what are the chargeable assets you need to be aware of? Or, in other words, which assets mean you have CGT liability? Well, if you sell any of the following, you'll likely have to pay capital gains tax:
There may well be other situations where capital gains taxes need to be paid, but above are the most common.
How much tax you'll pay depends on your personal income tax band and how much of a capital gain you made. It also depends on what the nature of your capital gain is.
Typically, though, you'll pay CGT rates at:
In addition to the capital gains tax rates, you are given a personal allowance or annual CGT exemption of £12,300 per year (as of the 2022-2023 tax year).
That means any capital gain made below the £12,3oo mark takes away your capital gains tax (CGT) liability - so you won't pay anything at all.
Anything over that, though, and you'll need to pay. You won't be able to avoid capital gains taxes altogether, but you can avoid capital gains tax that's too high.
Want to know how to reduce your capital gains tax bill? Then follow our advice below.
Capital gains tax works in mysterious ways for those who aren't well-versed in it, but for an accountant or financial adviser like us, it's pretty straightforward.
You just have to know the legal and legitimate routes to ensure you only pay CGT where necessary.
If you've paid capital gains tax in the past and not made use of the methods we'll discuss below, then unfortunately there's not a lot you can do about it. However, learning these ways to avoid capital gains tax that's too high can help you with your future CGT liabilities and any future gains you make in the subsequent tax years.
So, what can you do to reduce your capital gains tax bill?
So many people - individuals, businesses, and investors alike - don't realise that their CGT allowance renews each year - and no, UK government tax rules clearly state that you can't carry the allowance forwards or backwards to reduce the capital gains tax you pay.
Every tax year you'll get £12,300 allowance (although this is subject to change and has done so in the past, so make sure you stay up-to-date with any changes), so use it!
CGT is exempted when transferring assets between civil partners or spouses. When you transfer an asset to your spouse or civil partner, you'll be able to make use of both of your CGT allowances - totalling £24,600.
In order to qualify for this 'double allowance', it must be an absolute gift - no strings or terms attached. So if you're selling property, personal possessions, and business assets in the same tax year, it makes sense as a UK resident to gift some of those assets to your partner so they can use their CGT allowance, too, when they sell them.
It's an odd expression, but one everyone who deals with CGT regularly will know about. 'Bed your spouse' simply means that you sell an asset, and your spouse immediately buys it back. It's similar to the old 'bed and breakfasting' concept - which is no longer possible.
Before new tax rules came into place, there was a much more complicated tax system that allowed people to sell investments and assets (like investment property) and buy them back the very same day.
Why did people do this?
Because if you bought a property for, say, £120,000 in 1990, and through various repairs, upgrades, and naturally rising house prices, it was worth £275,000 in 2000, you'd have to pay CGT on the £155,000 net profit.
But by selling it and buying it right away, any future CGT liabilities would be based on the £275,000 you bought it back for instead now. This made a lot of sense for the future, since it might be worth £325,000 in 2010 when you actually wanted to sell. Now you only have to pay tax on the £50,000 difference since you 'bought' the property again in the year 2000, rather than a whopping £205,000 had you had to pay CGT on the initial price of £120,000 from 1990 if you never sold it and bought it back right away.
New rules mean this is no longer possible - because you can't buy back similar investments within a 30-day period any more.
There are still ambiguities in the new rules, however, meaning there's nothing stopping your spouse from buying the same property you sell the same day, essentially allowing you to continue the 'bed and breakfasting' method, but just by using your spouse instead of yourself.
By making charitable donations following a capital gain, you're able to influence your income tax rate and taxable income levels. Donating to charities increases your basic rate income tax band, meaning you can keep more of the money in the tax free or lower tax bands than you would otherwise be able to.
Of course, this is most wise to use when you're on the cusp of a tax band, so you only have to donate a little to save a lot.
Contributing to your pension is something you can also do, because any capital gain invested in your future through pensions is protected from capital gains.
There is a limit on how much you can put in - £40,000 or your current annual income, whichever is lower - but again, it's a great way for higher rate taxpayers to extend their basic rate income tax allowance and ensure they pay less capital gains tax when their CGT bill arrives, and it secures your financial future at the same time.
It's a strategic move, and one that should always be done with the guidance of a tax adviser, but if you're about to sell an asset that will attract a large CGT bill, then it's worth considering which assets you have now that could be sold at a loss.
Things like poorly performing shares, for example. You can carry forward any losses that haven't been used to offset gains for up to four years too, meaning you could make a capital loss in one tax year, and then carry that forward to be used in one of the next four tax years to reduce your capital gains.
You can also use some of your losses to offset ordinary income tax rate too, but again, this is best discussed with an adviser to see which is the most strategic move.
There are many ways to do this - including charitable donations and pensions which we've already covered - but you can reduce taxable income by waiting for retirement before you make a capital gain, sacrificing your salary, or reassigning/transferring assets to spouses/civil partners with a lower ordinary income.
By doing this, any capital gains you make won't push you towards the higher tax bands, so you'll pay less tax during the tax year.
If you're thinking of selling shares, for example, or another divisible asset, then it makes sense to split up the sale of those shares either side of two tax years. Essentially, if you sell half your shares in the 2022-2023 tax year, and then half in the 2023-2024 tax year, you double your capital gains allowance and reduce the amount of capital gains tax you pay - and that's if you have to pay tax at all!
An ISA, or Individual Savings Account, essentially acts as a tax shelter for your income and capital gains. CGT doesn't apply to any capital gains made in an ISA.
So what does that mean?
Much like the bedding the spouse example, you could sell your assets but purchase them again using your ISA. You'd still have to pay CGT on the initial sale, but it protects your assets in the future once it's a part of your ISA.
This works best when you know the asset is only going to increase in value, and you want to keep as much of the profit when sold as possible.
Investing in small companies is tax efficient, but risky. As any investment is. But for those willing to take a risk, the rewards could be unrivalled. Why? Because through investing in small companies through schemes such as Venture Capital Trusts (VCTs) or an Enterprise Investment Scheme (EIS), you could actually avoid capital gains tax altogether - and if not, seriously reduce the bill.
Like we said, though, this route is not for the faint of heart. You can easily lose money through a scheme like this if the company doesn't turn into a success, so it's always best to talk with advisers, investors, and accountants before making any decision here.
You may be eligible for a tax relief. There are many examples, so we couldn't possibly include them all here, but if you work with us, we can certainly see which reliefs apply to you.
For a quick rundown, here are two of the most common ones.
You won't have to pay any capital gains tax if you're selling a UK property that is your primary residence, and it's never been used to generate rental income (i.e. you've never let out a portion of it to a tenant); it is your only house; it has never been used for commercial purposes since owning it (it's OK for it to have been a work from home office); the building is less than 5,000 square feet; and you've lived in the home for many years - proving it was not just bought for making a profit.
Essentially, if you aren't operating in the property sector as a business, but you're just a private homeowner looking to sell their one and only residential property, then this relief allows you to sell your property without paying CGT at all!
If you're selling business assets, then by applying for Business Assets Disposal Relief you'll be able to pay CGT at a much lower rate than usual - 10%, rather than 20%, cutting your bill in half.
Only certain assets qualify for this sort of relief, and there is a lifetime limit of up to one million pounds, so it may not be something you can use if you're selling a large business or you've used it in the past for the sale of high-value assets from your business. Still, it's worth discussing with a capital gains tax accountant to see if you might qualify for it today.
Never forget that you can deduct any costs you've had to incur in the sale of your assets. For example, if you sell a rental property and have to pay stamp duty, solicitor's fees, etc., then this can all be used to reduce your capital gains.
This is completely fair and honest, since your total capital gain is not your profit alone, but your profit less any costs incurred during the sale.
Many people forget this, though, so when selling assets you'll likely need to pay any CGT on, record all costs diligently so you can minus them from your gains later.
This is a slightly less cheery point, but one that's worth making all the same. If you're thinking of selling assets later in life, maybe to give some money to your children/grandchildren or significant people in your life, it may not actually be worth it.
Upon your death, an inheritance tax will be applied to your entire estate, and if you've already paid CGT on an asset and bought it back later in an ISA, or your spouse bought it back the same day, you'll still have to pay that inheritance tax. That means paying tax twice, and nobody wants to do that.
So speak with a financial adviser to determine if selling assets now, or waiting until after your death, makes the best financial sense.
Foreign property or overseas property can cause complications with capital gains tax. That's because, as a UK resident, you'll always have to pay a capital gains tax on properties you sell overseas.
However, in certain circumstances, you'll also have to pay tax in the country you're selling the property in, essentially increasing your tax burden and meaning you're paying more tax than most.
By working closely with a capital gains tax accountant, you'll be able to make sure you don't spend more money on your tax bills than is strictly necessary. It may be that under your specific circumstances, avoiding paying tax twice isn't possible, but at least you'll have the most up-to-date tax advice if you can avoid it entirely, or at least lessen the burden.
Speaking of working with a capital gains tax accountant, that leads us to our final point today, and indeed, probably our most important one of them all.
You see, all of our tips today are great, but there are certain circumstances where they will/won't apply to you, and without the support of an accountant or financial adviser, you may not be able to tell which one it is.
It's also possible for some of the tips we've spoken about today to be used in conjunction with one another - so a large capital gain might be able to be split across charitable donations, an ISA, and pension contributions to significantly reduce the final tax bill, for example.
Reducing your capital gains tax bill and advising you about your best course of action is literally the reason capital gains tax accountants and advisers exist. So make use of them.
If you feel as though you need a capital gains tax accountant to support you with paying CGT, then why not contact us here at Auditox Accountancy? We're experts at dealing with CGT, and we'd be more than happy to look at your unique circumstances to give you the best advice possible. We look forward to hearing from you today!