How to Manage Your Capital Gains Tax bill

Unless you’re investing within tax wrappers such as an ISA or pension, gains you make on investments (including shares and property) will be exposed to Capital Gains Tax (CGT). With soaring share prices, more people are sitting on significant capital gains. This is compounded by the recent hike in the rate of CGT and meagre allowance of £3,000 per year. So here’s some strategies to manage your liability.

A quick run-down

• If you sell an asset for more than you paid for it, you will have crystallised a profit, or gain, and Capital Gains Tax (CGT) will be payable on that amount.
• The first £3,000 of capital gain is tax-free, this is your allowance. This is a cumulative annual amount and not per event.
• The rate of CGT you’ll pay over this allowance is dependent on your income tax bracket. Basic rate taxpayers will pay 18% and higher or additional rate tax-payers will pay 24%.
• There are some assets which you don’t need to pay CGT on such as your main residence, your car and gifts to charities.

How can I manage my CGT bill?

If you’re sitting on some capital gains, there are some strategies to reduce the amount of tax you pay.

• Gifting assets to a spouse or partner
  Most transfers of assets between spouses or civil partners are free from CGT, meaning no tax is paid at the point of transfer. The benefit here is that, once transferred, you can each use your £3,000 annual allowance.

• Become a basic rate taxpayer
  As the rate of CGT is dependent on your income tax bracket, if you’re close to either of the tax thresholds, you could look to keep your income just inside the lower tax band. This could be achieved through making pension contributions. Plus you’ll get all of the additional tax benefits that come with investing in a pension.

• Plan when to trigger your gains
  Whilst it’s not always possible, spreading your gains over multiple tax years will reduce the total amount of CGT you pay. For example, if you’re encashing a share portfolio, you could choose to do this either side of the new tax year, meaning you utilise two annual allowances. Bear in mind your allowance does not carry forward to the next year, so you need to use it, or lose it!

• Maintain or improve your assets
  If you’re lucky enough to own a holiday home or valuable painting, you can write off the costs of maintaining them against your CGT bill.

• Offset
  If you’ve made a loss when selling another asset, you can deduct the loss from your gain when calculating how much CGT overall you need to pay. You can also carry forward losses from previous years.

Whilst it’s always pleasing to make a profit on an asset, care needs to be taken when disposing of it so that you pay as little tax as possible. With the new, higher rates of CGT this is even more important and with just a month to go until the end of the tax year, now is an ideal time to consider getting on top of your CGT bill!