Top 10 tips to minimise Capital Gains Tax (CGT)
Capital Gains Tax (“CGT”) is a complex tax with different rates of tax being paid on the same transaction, depending on reliefs claimed, levels of income, and other gains in the year. So here are our ten top tips on how to minimise the tax you pay.
Maximise use of annual exemptions for up to £6,000 tax-free allowance
One of the simplest things you can do is maximise the use of your annual exemptions. This currently exempts the first £6,000 (£3,000 in 2024/25) of gains in a single tax year from CGT. For even better value, consider spreading the gain from a single transaction across tax years, or spreading different transactions across tax years so that you benefit from multiple exemptions.
Transfer to a spouse to use their annual exemption or basic rate band
A transfer to a spouse will not trigger a CGT charge. Making this transfer in the run-up to a transaction may allow you to use an additional annual exemption, and potentially some basic rate band. However, you should be careful not to prevent reliefs from being claimed on the part being transferred.
Crystallise losses to set against the gains
Capital losses can be offset against gains in the same tax year or future tax years but cannot be carried back. This means it can be worthwhile to sell assets (especially shares) currently sitting at a loss ahead of big transactions. If you want to keep owning the asset, your spouse or an ISA can usually immediately re-purchase these with no tax consequences.
If an asset you own has become worthless, a negligible value claim can also be made to crystallise the loss, even if it is no longer possible to sell it. For example, where you own shares in a company that is in insolvent liquidation.
Manage income levels to maximise available basic rate band
If your taxable income is less than £50,270, your unused basic rate band can be used against capital gains. This has the impact of reducing the tax on this part of the capital gain by 10%, and therefore if you can move income between years this will help reduce your tax bill.
Claim available reliefs in time
There are a significant number of potential reliefs, especially for business assets, including gifts holdover relief, business asset disposal relief and rollover relief. If you meet the criteria, the result is a reduction in the bill, or a delay in the charge becoming payable. However, these reliefs have to be claimed by a statutory deadline or lost.
It is worth noting that to allow them to be claimed, capital losses must be notified to HMRC within 4 years of arising.
Use your full £20,000 ISA allowance each year for gradual exemption from capital gains tax
If you invest within an ISA wrapper, this will exempt capital gains within the wrapper. It can therefore be worthwhile making sure you use the ISA allowance of £20,000 each year to grow the tax-free pot.
Consider re-investment in certain early-stage investments to defer or remove the gain
Certain early-stage investments qualify as Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) investments. Re-investing proceeds up to set limits in these schemes allow the gain to be deferred or in the latter case 50% of the gain to be exempted if the shares are owned for 3 years. As a bonus, growth in the value of these shares is also exempt from CGT.
Gift assets through a trust
If you wish to gift assets to somebody other than your spouse, this will trigger a CGT charge. If the amount being gifted is less than £325,000, a trust could be used to hold the gain over, both on entry and on distribution to the beneficiary, as long as the assets stay in the trust for at least 3 months.
If you have multiple residences, elect which is to be treated as your main residence
Your main residence will qualify for relief from CGT. Where you have multiple residences, you can choose which is to qualify for relief by electing within 2 years of buying another property. This time restriction doesn’t apply if your second residence is rented rather than owned. You can vary this election at any time.
Re-invest business gains in business property
This will allow you to claim rollover relief, which defers the gain for up to 10 years or to the sale of the replacement asset, depending on the replacement asset.
Hopefully, the above will help you in minimising your CGT bill. If you would like more information on this, please contact Krista Woodman at firstname.lastname@example.org or Tamara Shaw at email@example.com