In this article, our experts will discuss 9 proven methods that can help reduce your Capital Gains Tax liability significantly.
The newly introduced changes to pension rules have made it extremely difficult to save much as part of the retirement plan. Therefore, it has become extremely crucial to make the most out of those assets that you have already managed to acquire.
Though the current rates at which Capital Gains Tax is charged are relatively low, still, there are several legal ways through which you can decrease CGT or even completely get rid of it.
1: Avail CGT allowance
CGT allowance allows every individual to make tax-free gains of up to £12,300 on investments. If for any reason you don’t use your CGT allowance for the tax year it applies to, then you can’t carry it forward in the next tax year.
So, the practice is to use your tax-free CGT allowance each tax year to reduce a hefty CGT bill in the coming years.
2 Adjust Losses
If your overall gain in any tax year surpasses your annual CGT allowance, then it will be wise to dispose of some assets at a loss.
The losses and gains incurred in any tax year are offset against each other, thus reducing the taxable amount of gains thus translating into reduced tax liability.
It is pertinent here to note that you have to notify HM Revenue & Customs about the losses within 4 years at the end of the tax year in which you have sustained the losses.
3 Transfering assets to your Civil Partner or Spouse
Existing laws allow you to transfer your assets to your spouse or civil partner tax-free. This means that assets can be transferred between husband and wife or civil partners so that both annual CGT allowances are used. However, any such transfer must be an outright gift and genuine.
4: Bed and Spouse
Both civil partners and spouses are allowed to immediately purchase back the shares sold by their civil partner or spouse. Doing so permits you to retain your assets while any gain is realised CGT-free.
5: Investing in an ISA/Bed and ISA
Losses and gains held within an ISA are exempt from Capital Gains Tax, so it is advisable to avail ISA allowance in each tax year.
Since April 2020, an adult aged more than 18 years is allowed to make an investment in Shares ISA and Stocks up to £20,000. Likewise, since July 2014, a single new NISA permits you to invest an amount of up to £20,000 in shares and stocks or cash.
For married couples and civil partners, this translates into up to £40,000 annual in tax-privileged investment.
Same as the ‘Bed and Spouse’ option, a ‘Bed and ISA’ means to sell your assets for realising a capital gain and then purchasing them back instantly inside ISA. Doing so allows you to enjoy future gains on these assets CGT-free.
6: Contributing to a pension and Capital Gains Tax Liability
Where one has net relevant earnings, by contributing to a pension, the tax on capital gains can be brought back to 18{f5c46dbfd7a370437117a81398f3ac99c38e148024d17c03e20eb6cfc854a7af} from 28{f5c46dbfd7a370437117a81398f3ac99c38e148024d17c03e20eb6cfc854a7af}.
A pension contribution increases the upper limit of your income tax band by the amount of gross contribution.
7: CGT and Charity
If you donate any of your assets — be it property, land, or shares — to a charitable organisation, or gives them to charity at price lower than the market value, then there are several CGT and income tax reliefs available.
8: Investing in an EIS and Capital Gains Tax Liability
If you make gains via investment in Enterprise Investment Scheme (EIS), then they will wi be CGT-free provided that you have held your investment for 3 or more years.
If you incur a loss while disposing of your shares, you can elect for the amount of the loss to be set against any income for the year in which you have disposed of your shares, instead of setting it against the capital gains.
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Likewise, to Trustees of certain Trusts and individuals, a CGT deferral relief is available. It means you can defer gains on capital tax if you have invested the gain in an EIS qualifying company. The gain may arise from the disposal of any kind of your asset, but you have to make the investment within 3 years after or 1 year before the gain has arisen. Fortunately, HMRC have not set a minimum period-limit for which you must hold a share; you can bring back the deferred gain into charge whenever you dispose of shares, or share are deemed to be disposed of under EIS.
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The disadvantage of EIS is that such schemes are at a higher risk when compared with shares and traditional stocks.
9: Holdover Relief and Capital Gains Tax Liability
When you holdover relief on certain assets, the chargeable gain gets postponed. You may claim holdover relief for:
- Gifts of unlisted shares in trading companies etc,
- Gifts of business assets,
- Gifts of agricultural land,
- And, certain types of gifts are specifically exempted from IHT.
If you are looking for highly-qualified, experienced, and chartered tax advisors to sort out letting relief for you and save thousands of hard-earned pounds legally, contact us for a 15-Minute Free Call.
