How to navigate Capital Gains Tax

Tony Clark, Senior Propositions Manager, St. James’s Place

By Tony Clark, Senior Propositions Manager, St. James’s Place

Capital Gains Tax (CGT) is a difficult subject to get your head around and some people get caught out and face fines for failing to properly declare their gains, whilst others can end up paying it unnecessarily.

Here we’ll answer some commonly asked questions to help you navigate GGT.

Firstly, what exactly is Capital Gains Tax?

CGT is a tax that is charged when you sell (or even give away) something – for example, an investment – that has recently increased in value. It’s a common misconception but the tax isn’t charged on the total sale price; instead, it’s levied on the profits or gains that you made during the time you owned that asset.

For example, you buy a vintage watch for £12,000 and sell it for £18,000, your capital gain is £6,000.

When does it apply?

The sale proceeds of pretty much any personal item that is in your possession can be affected by CGT, that includes shares and investments, buy-to-let properties, second homes, jewellery, fine wine, paintings, coins and stamps and other collectables.

That said, there are some exceptions:

• Shares or investments held in a pension or an ISA – these wrappers shelter their contents from tax
• Your primary home
• Your car
• Assets you leave to charity

Is there any tax-free allowance for Capital Gains Tax?

In the current tax year (2021/22) you have the benefit of £12,300 of gains before you have to pay CGT. You may see this referred to as your annual exempt amount. This allowance has been frozen by the government until 2026, when it will be reviewed again.

How much can it affect me?

This will all depend on your annual income. If you pay the basic rate of tax and the gains you have made are still within the basic-rate band, you’ll pay 10% CGT, that is unless you are selling residential property, in which case the rate rises to 18%.

If you pay the higher-rate tax, or maybe your gains in combination with your income bring you into the higher rate, you’ll then have to pay 20% for most assets and then 28% for residential property.

How could I reduce my Capital Gains Tax bill?

If you are looking to minimise your exposure, then there are several ways to legally reduce the amount of CGT that you have to pay. Nevertheless, what’s best for you will wholly depend on your situation, and it might also need to be managed over time.

• Transferring your assets to your spouse or partner. Most transfers of capital between spouses or civil partners are free from CGT. By moving your assets over to them, you’ll be able to use both of your annual allowances, making the most of the tax break.
• Increase your pension contributions. Because the value of CGT you pay is directly linked to your rate of Income Tax, if you increase your pension contributions, you can reduce your income for tax purposes and as a result the rate of CGT that you are charged.
• Make the most of your annual allowance. Unfortunately, you aren’t allowed to carry forward any unused allowance from the previous year. Although, by carefully planning ahead and selling your gains slowly over several years, you can make sure you keep them inside of the annual allowance.
• Keep your assets. If you make improvements to a holiday home or if you restore a valuable painting, you can deduct those costs for tax purposes.

‘Bed and ISA’ – you may have heard of it but what does that mean?

Basically, this is this process of selling up some of your investments and then repurchasing them within a tax-efficient ISA wrapper. It’s a great way to minimise your exposure.

It allows you to use up your ISA allowance, while sheltering the investments from CGT. It is a very practical option for if you need to sell gains up to the CGT annual allowance but don’t actually want to sell the investment.

What about if I make a loss on an asset?

It goes without saying that assets don’t always go up in value. We’ve all been there.

If you make a profit when selling one item and a loss when selling another, you can deduct the loss from your gain when working out how much tax you need to pay. As well as this, you are able to carry forward any losses that haven’t been used to offset gains for up to four years.

Even if you don’t owe any CGT, it can still be a good idea to declare any losses on your tax return. This will reduce issues in the future if you want to offset any gains.

What would happen if I sold my business?

You may be able to qualify for Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) if you are a sole trader or business partner and you’ve owned the business for at least two years. The relief reduces the rate of CGT on disposals of certain business assets from 20% to 10%.

Knowing this should give you a clear idea of the different eventualities associated with CGT. It should act as a guide to navigating through this complex tax and ultimately reduce the amount of CGT you are paying in the long run.