By Tony Clark, Senior Proposal Manager, St. James Square
Capital Gains Tax (CGT) is a difficult subject to understand and some people get caught and risk fines for failing to report their gains correctly, while others may end up paying it unnecessarily.
Here we’ll answer some frequently asked questions to help you navigate GGT.
First of all, what is capital gains tax?
CGT is a tax that is levied when you sell (or even give away) something – for example, an investment – that has recently increased in value. It’s a common misconception, but tax isn’t charged on the total sale price; instead, it is taken from the profits or gains you made during the time you owned the asset.
For example, you buy a vintage watch for £12,000 and resell it for £18,000, your capital gain is £6,000.
When does it apply?
Proceeds from the sale of virtually any personal items in your possession may be affected by CGT, including stocks and investments, rental properties, second homes, jewelry, fine wine, paintings, coins coins and stamps and other collectibles.
That said, there are a few exceptions:
- Stocks or investments held in a pension or ISA – these wrappers protect their contents from tax
- Your main residence
- Your car
- Assets you bequeath to charity
Is there a tax deduction for capital gains tax?
In the current tax year (2021/22) you benefit from £12,300 of earnings before you have to pay CGT. You may see this called your annual exemption amount. The good news is that this allowance has been frozen by the government until 2026, when it will be reviewed again.
How can this affect me?
Everything will depend on your annual income. If you pay the base rate of tax and the gains you have made are still within the base rate bracket, you will pay 10% CGT, unless you sell a home, in which case the rate increases to 18 %.
If you are paying tax at the highest rate, or perhaps your earnings combined with your income brings you to the highest rate, then you will have to pay 20% for most assets, then 28% for residential property .
How can I reduce my capital gains tax bill?
If you’re looking to minimize your exposure, there are several ways to legally reduce the amount of CGT you have to pay. However, what’s best for you will depend entirely on your situation, and it may also need to be managed over time.
- Transfer your wealth to your spouse or partner. Most capital transfers between spouses or civil partners are exempt from CGT. By transferring your assets to them, you will be able to use your two annual allowances, making the most of the tax relief.
- Increase your retirement contributions. Since the value of the CGT you pay is directly related to your income tax rate, if you increase your pension contributions, you may reduce your earnings for tax purposes and therefore the CGT rate. which is billed to you.
- Make the most of your annual allowance. Unfortunately, you are not allowed to carry over any unused allowance from the previous year. However, by planning carefully ahead and slowly selling your gains over several years, you can ensure that you keep them within the annual allowance.
- Keep your assets. If you make improvements to a holiday home or restore a value board, you can deduct these costs for tax purposes.
“Bed and ISA” – you may have heard of it, but what does it mean?
Basically, it’s that process of selling some of your investments and then buying them back in a tax-efficient ISA package. It’s a great way to minimize your exposure.
It allows you to use up your ISA allowance, while protecting the CGT’s investments. This is a very convenient option if you need to sell gains up to the annual CGT allowance but don’t want to sell the investment.
What if I make a loss on an asset?
It goes without saying that assets do not always appreciate in value. We have all been there.
If you make a profit selling one item and a loss selling another, you can deduct the loss from your gain when calculating the amount of tax you owe. On top of that, you can carry forward losses that haven’t been used to offset gains for up to four years.
Even if you don’t owe CGT, it may still be a good idea to report any losses on your tax return. This will reduce problems in the future if you want to offset the gains.
What would happen if I sold my business?
You may qualify for Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) if you are a sole trader or business partner and have owned the business for at least two years. The relief reduces the CGT rate on the sale of certain professional assets from 20% to 10%.
Knowing this should give you a clear idea of the different eventualities associated with CTG. It should serve as a guide to navigating this complex tax and ultimately reducing the amount of GTG you pay in the long run.