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Capital gains tax (CGT) is a levy on the profits generated from selling assets, such as stocks, shares, property, and personal possessions.
While it is unavoidable for many investors and property owners, several strategies can be employed to minimise the impact of Capital Gain Tax (CGT) and protect your hard-earned gains.
1. Use Your Annual Exemption:
Every UK taxpayer has an annual CGT exemption, which allows them to realise capital gains of up to a certain amount without incurring any tax liability. For the 2023/24 tax year, this exemption is set at £6,000. Make sure to plan your asset sales strategically to maximise the benefit of this exemption.
2. Leverage Tax-Efficient Wrappers:
Tax-efficient wrappers, such as Individual Savings Accounts (ISAs) and Self-Invested Personal Pensions (SIPPs), offer the advantage of sheltering your investments from CGT. Gains generated within these wrappers are exempt from CGT, allowing your investments to grow tax-free.
3. Embrace the Concept of Bed and ISA:
The ‘bed and ISA’ strategy involves selling an asset outside an ISA to realise a capital gain and then immediately repurchasing the same asset within an ISA. This effectively transfers the asset into a tax-free environment, allowing all future gains to be exempt from CGT.
4. Capitalise on Losses:
Capital losses can be offset against capital gains, reducing overall CGT liability. If you have any realised capital losses, carry them forward and use them to offset future gains.
5. Consider Married Couples’ Allowance:
Married couples and civil partners can pool their annual CGT exemptions, doubling the allowance to £12,000 annually. This can particularly benefit couples with differing investment strategies or capital gains levels.
6. Manage Your Taxable Income Levels:
CGT is charged at different rates depending on your income tax band. If you are on the cusp of a higher tax band, consider delaying the sale of assets until the following tax year to avoid paying a higher rate of CGT.
7. Invest in Enterprise Investment Schemes (EIS) and Seed Enterprise Investment Schemes (SEIS):
These government-backed schemes provide tax relief for investments in early-stage companies. Along with the potential for high returns, EIS and SEIS investments also offer generous tax breaks, including CGT deferral and relief.
8. Explore Social Investment Tax Relief (SITR):
SITR is a tax relief scheme designed to encourage investments in social enterprises. Like EIS and SEIS, SITR investments offer tax relief, including CGT deferral and relief, while contributing to social impact.
9. Utilise Gift and Inheritance Strategies:
Gifts of assets between spouses and civil partners are CGT-free. This can effectively transfer assets to a lower-taxpaying spouse or civil partner, potentially reducing overall CGT liability.
10. Seek Professional Advice:
For more complex investment portfolios or situations involving significant capital gains, seeking professional financial advice can be invaluable. A qualified financial advisor can help you develop a customised CGT mitigation strategy tailored to your circumstances.
Capital gains tax is unavoidable in investing and asset ownership in the UK. However, employing the abovementioned strategies can effectively minimise your CGT liability and protect your hard-earned gains. Remember, planning is critical.
By understanding the CGT rules and proactively implementing strategies, you can confidently navigate the maze of CGT and maximise your investment returns.