More people are unable to pay their capital gains tax (CGT). How, therefore, can you safeguard yourself?
In 2019–20, the government owed around £10 billion in capital gains tax (CGT), approximately three times the previous ten-year bill. And it’s possible that the liabilities have subsequently increased, illustrating the enormous tax obligations that investors who cashed out as stock markets surged may still have to pay.
In this post, look at how investors might reduce their exposure to CGT and where to find accountant services in Warrington.
How to Apply Capital Gains Tax
Gains from the sale or transfer of certain assets are subject to CGT. Generally, this refers to any gains you may make by selling shares, funds, company assets, exchange-traded funds, or residential property (though usually not your main home).
Each person has a yearly CGT exemption. This allowance is locked at its present amount of £12,300 until 6 April 2026. You won’t pay any tax if your capital gains during this tax year or any of the next four are less than this sum.
However, gains exceeding the yearly exemption are taxed at 10% or 20%, depending on your other income. A change in government policy is possible.
What steps can you take to lower your CGT bill potentially? Here are some pointers.
Make the Most of Tax-Efficient Packaging
I’m often amazed at how few high-net-worth investors utilise their individual savings accounts (ISA). Some people are unaware that capital gains are tax-free on all ISA investments, regardless of size, and that the current annual ISA threshold is £20,000. Some people never get around to it.
Use Your CGT Allowances Wisely
The £12,300 yearly CGT limit is a “use it or lose it” kind of exemption. Thus, you cannot roll any unused portion over to future tax years. Losses, however, may be carried over. Therefore, if you have a loss in one year, plan for the next tax year since you may be able to deduct it from any future capital gains. Just keep in mind to report it on your tax return.
CGT is only assessed on your net capital gains. Therefore, every tax year, be careful to balance your capital losses and profits to assist lower your tax liability.
If the spouse or civil partner is in a lower tax rate or hasn’t used up all of their CGT allowances, transferring assets to them may also reduce the CGT charge. Because each person gets their allowance, a married couple in 2022–2023 may be able to realise tax–free capital gains of up to £24,600. In most cases, transfers made between spouses and civil partners are tax-free.
Consider the chance you may accumulate a sizable unrealised capital gain over time that is more than the yearly CGT exemption.
After each tax year, you may sell at least a portion of the holding and purchase it back using your yearly allowance to lower this risk. By doing this, you increase the cost of your holding and lower the possible profit that will be used to determine future CGT liability.
According to tax regulations, you must wait 30 days before purchasing the same holding back. Therefore, you can also consider investing in an exchange-traded fund (ETF) that offers comparable exposure in the interim if you’re not comfortable with this out-of-market risk.
Realising a gain in a general account and utilising the earnings to pay for unused pension or ISA allowances are two other possible CGT options. These may be used to move your assets into a more tax-beneficial position potentially. They are sometimes called “Bed and SIPP” or “Bed and ISA.”
However, since the regulations are complex, investors should consider consulting their accountant or financial advisor.
Control Your Taxable Income Amounts
Reducing your income tax rate may positively impact your CGT since the rate you pay CGT is based on your income tax band.
Increasing your pension contribution or giving to charity are two easy methods to lower your taxable income.
Higher-rate taxpayers may also reduce the CGT applied on such assets by halving it to 10% by transferring assets to spouses who pay basic income tax or do not work.
Avoid Paying Twice
Capital gains are reduced upon death since your estate is required to pay inheritance tax. Therefore, realising CGT by disposing of assets later in life might result in double taxation on the same item. If unsure, speak with a company that offers an accounting service.
Conclusion
You cannot decide whether to pay capital gains tax if you believe you may be subject to it. However, you may lower your payment by using the reliefs and allowances offered with proper preparation.
Regardless of the client’s company size, Accountants247 provides cost-effective, high-value solutions to match each client’s demands. Get your quote now if you need accountant services in Warrington.
