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Capital gains tax take hits £10bn – use these tricks to pay less

·3-min read
Rishi Sunak cartoon
Rishi Sunak cartoon

Taxes paid on the sale of investments and second homes have reached an all-time high of £10bn, official figures showed, with investors urged to use savvy ways to cut their bills.

Some 265,000 people paid £9.9bn in capital gains tax during the 2019-20 financial year, up 3pc from the prior year. The amount of money the Government makes from the duty, typically charged at up to 28pc on residential property and 20pc on other assets, has increased every year bar two since the financial crisis.

The tax take is forecast to rise further in each year bar one over the next five years, reaching £14.4bn in 2025-26, according to Government estimates.

A five-year freeze in the £12,300 annual tax-free amount announced at the March Budget will result in taxpayers handing over an additional £65m to the state.

Chancellor Rishi Sunak was previously rumoured to be considering a change to the levy in order to boost the public finances. A report from the Government's tax adviser, the Office of Tax Simplification, commissioned by the Chancellor himself, said aligning CGT rates in line with those of income tax would generate an additional £14bn a year for HM Treasury.

Some advisers have even suggested investors cash out of long-held investments now while profit tax rates are at historic lows, before it is too late. But what can investors and landlords do to minimise their tax bill?

Apply for ‘Business Asset Disposal Relief’

Formally known as “Entrepreneurs' Relief”, this tax rule allows qualifying individuals who have shares in a company they have built or they work for to sell their stake and pay CGT at a discounted rate of 10pc.

Taxpayers claimed more in ER in 2019-20 than ever before. Some 46,000 people claimed the relief of £28.9bn in capital gains, paying only £2.8bn in taxes. There is a £1m lifetime limit on claims, introduced in 2020. To qualify you must be a shareholder, officer or employee of a company and have held at least 5pc of the share capital of the company for at least two years before selling your stake.

Sell to your spouse

You can transfer assets to a spouse or civil partner tax free. This allows you to split your assets, such as an investment portfolio, in two. Both partners can then use their individual tax free allowance, effectively doubling your protection.

You may also be able to split the sale of your assets, depending on what they are, into two chunks either side of the tax year, which starts on April 6. This allows you to make use of two lots of annual tax free allowances on what is effectively one sale, again effectively doubling your protection.

Offset the gain with a loss

Previous losses can be used to offset profit taxes in a future year. You can carry forward any loss incurred in the previous 10 years and deduct this from your gain, which will result in a lower tax bill or cut your tax bill entirely.

Tax rules also permit you to deduct costs incurred in improving your asset, such as refurbishing a second home, or restoring high-value paintings or jewellery.

High-risk investment

Investments in the Enterprise Investment Scheme, a venture capital scheme designed to funnel cash into fledgling firms, qualify for “deferral relief”.

This allows you to delay the payment of any tax due on profits when invested into the scheme, until the EIS investment is later sold – and you can defer a gain even if you have already paid the tax.

You can defer gains of any size, made up to three years before and one year after the EIS investment. Such investments are high risk, but offer the prospect of growing your money over the long term, providing additional funds to cover the eventual tax bill.

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