Capital Gains Tax Planning: Create more bang for your buck!

5th April 2016

Like Inheritance Tax, Capital Gains Tax, or CGT, is a voluntary tax paid by individuals who don’t plan or take advice. Additionally, capital gains tax planning is often overlooked by investors but is a strategy that offers considerable tax benefits to increase your investment returns.

The capital gains tax rate was reduced in the 2016 Budget. From April 2016, individuals who pay basic rate income tax will pay CGT at 10% (previously 18%), and higher rate taxpayers, or investors whose gain takes them into a higher rate band will pay CGT at 20% (previously 28%).

What is CGT?

CGT is a tax that you pay on the profit of something that has increased in value that you then sell or dispose of. CGT is only paid on the increase you have made, not on the value of the item you have sold. However, you don’t pay capital gains tax on the full amount you make as everyone is entitled to a yearly tax-free allowance – which currently stands at £11,100 for 2016-17.

What is meant by ‘disposing’ of an asset?

The government list for disposing of an asset includes:

selling it
giving it away as a gift
transferring it to someone else
swapping it for something else

What do l pay it on?

You pay CGT on what the government call ‘chargeable assets’ these include:

most personal possessions worth £6,000 or more e.g. jewellery, paintings, antiques etc
buy-to-let properties, inherited property, business property
shares that aren’t in an ISA or PEP and certain bonds
business assets – fixtures and fittings, plant and machinery etc

Are there any exclusions to paying CGT?

Yes. You don’t have to pay CGT if all your combined gains in one financial year fall under your tax-free allowance and also if you ‘gift’ an asset to your husband, wife, civil partner or a charity – although they may have to pay CGT themselves if they later sell or dispose of the asset.

With careful planning, gains can be managed each tax year so that they remain tax free and when combined with the new dividend allowance of £5,000 (also available from 6th April, 2016), investors can build tax efficient portfolios well above the current ISA subscription limits.

CGT planning also includes other tax efficient strategies to maximise investment returns, such as:

‘Bed and ISA’ – this allows you to sell your shares (free of charge) and then use the profits to open, or top up, an ISA.
‘Bed and Spouse’ – this allows one spouse within a marriage or civil partnership to sell assets (such as shares) to a broker to create a profit, while the other buys them back at the same time.
‘Bed and SIPP’ – this is a very popular strategy for saving towards your retirement by selling assets and then buying them back under the umbrella of Self-Invested Personal Pension plan (SIPP). All income and profits made inside the SIPP are tax-free.