Capital Gains Tax (CGT) is an important consideration for investors. Here we discuss the best strategies that could help you to reduce your CGT bill in the current tax year 2022/23.
We’re all aware of the Income Tax we pay on our earnings, but there is another tax that can hit our pockets when we sell shares, property or other assets.
It’s called Capital Gains Tax, often abbreviated to CGT, and it is levied at rates of up to 28% so it can have a serious impact on your financial plans.
However, there are allowances and schemes in place that allow you to reduce your liability and, in some cases, not pay the tax at all. Here is what you need to know.
What is Capital Gains Tax (CGT)?
Just as Income Tax is payable on your income, CGT is paid when you make a capital gain. It kicks in when you dispose of an asset such as stocks and shares, a second home, a painting, or a business that has increased in value during the time you’ve owned it.
By “disposing of” an asset, accountants mean that you are selling it, giving it away, swapping it or transferring it to somebody else.
How is CGT applied?
CGT is paid only on the increase in the value of the item you have disposed of. For example, if you owned a buy-to-let property that you bought for £200,000 and you sold it for £400,000, the tax would be due only on the £200,000 increase in value rather than the entire amount.
However, there are also exemptions and allowances that reduce or remove the need to pay tax. For example, you do not pay CGT when you sell the home you live in. Nor do you have to pay if you transfer an asset to your husband, wife or civil partner.
Everybody has an annual CGT allowance, and you can make capital gains up to this threshold without paying any CGT.
How can I make use of tax wrappers to pay less CGT?
When assets within these wrappers increase in value, the increase does not attract CGT at the time of disposal. However, personal properties such as main residences and buy-to-let premises are not allowed to be invested in personal pensions or SIPPs.
- The annual ISA allowance for the tax year 2022/23 is £20,000 per person.
- The annual pension allowance for the tax year 2022/23 is £40,000 per person. However, if your adjusted annual income is more than £240,000 or you have already started to flexibly access your pension, your annual allowance might be lower.
What are the best investment strategies to reduce your CGT bill?
- Selling a certain amount of assets outside your ISA or pension each year to make the most of your CGT allowance.
- Contributing more to your pension through your employer’s salary sacrifice scheme, if they offer one, to bring down your taxable income and pay CGT at a lower rate.
- Transferring assets to your spouse or partner to ensure that you make use of both of your CGT allowances.
- Carrying forward any capital losses you have made in earlier years to reduce your capital gains tax liability.
Need further advice about your investment strategy/financial planning?
Nutmeg can provide you with financial advice to help you reduce your CGT liability and ensure your investments match your financial goals. For more information, consider booking a free call with a member of our Wealth Services team.
Frequently asked questions about CGT
Here are answers to some of the most-asked questions about CGT:
How much capital gains tax will I pay?
The amount of CGT you pay depends on how much you earn as well as the type of asset you have disposed of. If you sell your main residence, you are not liable for CGT on any gain in value.
If you are a basic-rate taxpayer, the rate you pay depends on the size of your gain, your taxable income and whether your gain is from residential property or other assets:
- 18% tax on gains from selling a property, though this rises to 28% on any amount above the basic rate
- 10% tax on gains from selling other assets, though this rises to 20% on any amount above the basic rate.
If you are a higher-rate or additional-rate taxpayer, you will pay:
- 28% tax on gains from selling a property.
- 20% tax on gains from selling any other asset.
However, you can make £12,300 of gains in the 2022/23 tax year without paying any CGT at all. And if an asset is jointly owned by a couple, you can both use your allowances.
As an example: If a higher-rate taxpayer sells a second home for £500,000 that was bought for £400,000, he or she will be liable for CGT on the £100,000 of profit that has been made. However, the taxpayer can use their £12,300 allowance to reduce the taxable gain to £87,700. They then pay 28% of that to HMRC: £24,556.
If the gains you make push you from being a basic-rate taxpayer into the higher-rate bracket, you will pay CGT at the higher rate.
When is capital gains tax payable?
Depending on the type of asset, there are different rules about when to report your CGT liability.
If you make gains on the sale of shares or other assets, you use your Self-Assessment tax form to report the gain and pay what is due on 31 January with any other tax liability.
If you do not fill in a Self-Assessment return, there is a service on the Gov.uk website to report capital gains in real time.
You must report by 31 December in the tax year after you made your gain and pay by 31 January.
If you make a gain on the sale of residential property that is not your main residence, you must report it within 60 days and pay the tax. There is a service on the Gov.uk website to allow you to do this.
What is the capital gains tax threshold?
The capital gains threshold is £12,300. If you make gains below this amount, you are not liable for CGT.
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