In the wake of speculation that the Labour Party could raise Capital Gains Tax, Hargreaves Lansdown looks into ways you could pay less tax.
- Use your annual allowance
You get an annual CGT allowance on a use-it-or-lose it basis. If you’re building up a big gain, you can realise it gradually, over a period of years, £3,000 at a time, and pay no tax. You can sell investments and reinvest the money, effectively resetting your gains to zero.
- Offset any losses you make during the tax year
In any given year you may have losses on some investments and gains on others. You can use this to your advantage. When you complete your tax return, you can add details of the losses you’ve made, which will be offset against the gains when you’re calculating how much CGT you owe. In some cases, this will bring the CGT bill down to zero.
If you make more losses than gains, you should still make a claim for the extra losses. You will then be able to carry them forward into next year, to offset against any gains you make then. You can’t do this unless you have made a claim for the loss in the year you made it.
- Use a stocks and shares ISA
After the annual exemption of £3,000, CGT on stocks and shares is charged at 10% for basic-rate taxpayers and 20% for higher and additional-rate payers. By moving investments into an ISA, CGT is completely avoided. It’s worth noting this isn’t just a boon when you decide to sell up and cash out, it also makes an enormous difference every time you rebalance your portfolio as you go along.
ISAs aren’t just useful for brand new investments. If you have assets outside an ISA or pension, you can use the Share Exchange (Bed & ISA) process to sell assets outside an ISA – within your £3,000 CGT allowance – and move them into the ISA wrapper. That way you don’t have to worry about either dividend tax or CGT on these investments at any point.
- Plan as a couple
If you’re married or in a civil partnership, you can transfer the ownership of some assets to your spouse or civil partner. There’s no CGT to pay on the transfer. When they sell up, there may well be tax to pay, and the gain will be calculated by comparing the cost on the day of selling with the day when their spouse originally bought the asset. However, they have a CGT allowance of their own to take advantage of, so a chunk of the gain won’t be subject to tax. If they’re taxed at a lower rate, they may also pay any CGT at a lower rate too.
- Pay into a pension
Money paid into a pension will grow free of CGT, but that’s not all. Higher and additional rate taxpayers benefit from tax relief at their highest marginal rate. As a result, making contributions can push people out of paying higher rate tax altogether. The capital gains tax rate is lower for basic rate taxpayers, so bringing yourself under this threshold means you’ll pay tax at a lower rate on at least some of the gain.
How CGT works
Capital gains tax is charged on the profits made when certain assets are sold, or transferred to someone who isn’t a spouse or civil partner. If all gains in a tax year fall within the annual CGT allowance (£3,000) there is no tax to pay.
When you make gains above the annual allowance, CGT on stocks and shares can be charged at either 10% or 20% depending on an investor’s other taxable income. Provided combined taxable income and gains don’t exceed £50,270, 10% CGT on gains above the annual allowance is paid. Where gains and taxable income exceed £50,270, 20% CGT is paid.
If gains fall into two bands, taking the investor from the basic rate into the higher rate tax band, capital gains tax is paid at 10% on the amount which falls in the basic rate band and at 20% on the amount which falls in the higher rate band.
Where CGT is paid on property, the rates rise to 18% and 24%.