As capital gains tax bills are set to jump, tax experts are urging people to make full use of this year’s CGT allowances, before the April 5 deadline.
CGT is a levy Britons have to pay when they sell or give something which has increased in value. This usually refers to a second property or buy-to-let, shares and funds, and even cryptocurrency holdings.
Most savers will hold their stock market-based investments in either a pension or an ISA and these assets are automatically protected from CGT.
Receipts from the tax jumped 20% from £10.8bn to a record high of £12.9bn in the 12 months to the end of January.
Allowances and exemptions can amount to sizeable savings and should be considered by every investor looking to minimise the tax burden.
Everybody also gets a yearly CGT allowance, otherwise known as the annual exemption. So, in the tax year 2021/22 most people can crystallise up to £12,300 in gains on assets before paying CGT – but that is one of several tax allowances to be frozen until 2026.
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Here, Jason Hollands, managing director of investing platform Bestinvest, shares some tips on how to get the maximum benefit from capital gains tax exemptions.
If you are married or in a civil partnership you can make use of two sets of allowances and therefore realise gains of up to £24,600 this tax year without incurring CGT.
Transfers of assets such as shares or funds between spouses – known as interspousal transfers – do not give rise to a tax liability and so doing this ahead of selling an asset can prove very tax efficient. Contact your platform, broker or adviser to facilitate the transfer – there is often no cost to doing this. Even when some CGT is still likely, an interspousal transfer to a partner with a lower income can help reduce a tax liability. However, it is important to understand before you transfer an asset to your spouse that they will become the full, legal owner of that asset.
Offset losses: It is worth remembering that while your liability is calculated on gains from assets you have disposed of, you can also deduct from that losses made from selling other assets that might not have done so well.
It may be therefore that you can time your disposal of a loss-making asset to bring your gains elsewhere under the exemption limit. You can also deduct certain transaction costs, such as estate agent or solicitor fees, when calculating a CGT liability.
Prevent a ‘pregnant gain’ building up by using your annual allowances
If you have investments outside of ISA or pension wrappers and hold onto them for many years without selling, you could build up substantial CGT liability that will kick in when you want or need to sell all your holding. This is referred to as a ‘pregnant gain’.
Over that time, many annual CGT allowances will have gone unused – there is no rollover with the CGT exemption. To avoid this big end-of-the-road tax bill it is possible to use your allowance each year by disposing a portion of the asset while staying within the annual allowance and not triggering CGT. If you want to remain invested in the long-term, after a short period (30 days) you can buy back the same investment. This should not be confused with the 30 and 60-day rules for reporting CGT on a property sale.
‘Bed and ISA’ or ‘Bed and Pension’
Making use of tax efficient ISA and pension allowances is a great way of ensuring future returns are free from CGT (as well as other taxes, such as dividend tax). If you aren’t already making full use of these allowances but do own shares or funds that might be subject to tax, consider selling these to utilise your CGT exemption and then using the proceeds to fund an ISA or Pension contribution.
This is known as ‘Bed and ISA’ or ‘Bed and Pension’ and as it will take a few days for transactions to clear, you should not leave it until the last few days of the tax-year. Over time this can help migrate all your investments into a tax-efficient environment.
Defer a CGT liability through EIS
It is possible for investors who have made a substantial gain to defer a CGT liability by reinvesting the gain into Enterprise Investment Scheme companies. These are small, early-stage unquoted companies and are therefore higher risk and illiquid.
However, investment in a new share issued by an EIS company does carry tax perks, including a 30% income tax credit and no CGT providing the shares are held for at least three years. A CGT liability is only deferred when investing in EIS and will re-crystallise when the EIS shares are sold, but it can be possible to keep rolling over the liability.
At death a CGT liability will disappear and EIS company shares, providing they are held for two years, are eligible for Business Relief which means they become exempt from an estate for Inheritance Tax purposes.
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