The Treasury expects to raise over £4 billion from Capital Gains Tax (CGT) from the last tax year - 15% more than the previous year. In our view the main reason for this rise is the number of investors paying CGT at a higher rate has increased.
CGT is payable at 18% if you're a non-taxpayer or basic rate taxpayer, or 28% if you're a higher or additional rate taxpayer. Remember, CGT is payable when you realise profits in excess of the annual allowance (£10,600 in the current tax year).
One of the simplest way to protect your investments from any future CGT liabilities is to shelter them with an ISA. Once held with an ISA there is no further tax to pay on any investment income, and no tax to pay on gains. Each tax year you have an ISA allowance. If the allowance is used every year it offers the opportunity to build a significant portfolio of tax sheltered assets in the long run. This year the ISA allowance has risen to £11,280, that means a couple could shelter as much as £22,560 in ISAs.
Tax benefits of Stocks & Shares ISAs
For those who already hold investments showing substantial gains there are some simple steps you can take to reduce, or even eliminate completely, any CGT liability. Please note tax rules are subject to change, and the benefits of tax shelters will depend on your circumstances.
1. Offset losses against your gains
If you sell an investment and make a loss, the loss can be offset against any gains you have made in the same tax year. If your losses exceed your gains, you can register the losses on your tax return to offset against future gains.
2. Sell when you pay tax at a lower rate
The rate of capital gains tax is based on the rate of income tax you pay so your CGT bill will be lower if you realise gains when your income is lower. If you know your taxable income will fall in the future, perhaps due to retirement, you could consider delaying selling until then. However you should always look at your investment objectives and merits first and look at the tax benefits as an added bonus.
3. Transfer to your spouse and pay less tax
You can normally transfer investments between spouses without an immediate tax charge.
This means a married couple (or those in a registered civil partnership) can use both their annual allowances to make gains of £21,200 this tax year without paying CGT.
If your spouse pays tax at a lower rate than you, you could transfer the investments into their name before selling to benefit from CGT at the lower rate.
4. Reduce your taxable income
Because the rate of capital gains tax you pay is linked again to the rate of income tax you pay, reducing your taxable income could reduce the amount of capital gains tax you pay. The easiest way to do this is through tax shelters such as ISAs - income from an ISA is free from further tax.
In some cases you might be able to reduce your taxable income for a particular year - perhaps by transferring income-bearing assets such as cash deposits, to your spouse.
5. Use your pension to reduce capital gains tax
A pension contribution can also be used to reduce capital gains tax liability for many investors by taking advantage of the tax relief on the contribution. Effectively your basic rate tax band is increased by the amount of the pension contribution, meaning larger gains might be realised before the higher rate of capital gains tax is payable. For example, a pension contribution of £3,600 will extend your basic rate tax band from £42,475 to £46,075. Providing your taxable income and gains are less than £46,075 in this tax year, you will pay capital gains tax at 18% and none at 28%.
Find out more about Capital Gains Tax and how Tax Affinity Accountants can help you visit our website and arrange an a free initial consultation.
Please remember all stock market investments can fall as well as rise in value so you could get back less than you invest .
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