Capital Gains Tax bills at record high
Preliminary data from HMRC revealed 239,000 individuals paid £7.7bn in Capital Gains Tax (CGT), while the total, including trusts, came to £8.34bn for the 2015/16 tax year.
This is an increase in both the number of individuals impacted – up from 225,000 in 2014/15 – and the amount HMRC received – up from £6.96bn in the previous tax year.
This challenges the persistent myth that few pay CGT, as receipts continue to climb. In fact, HMRC receives much more in CGT than it does in Inheritance Tax (IHT).
Danny Cox, chartered financial planner at Hargreaves Lansdown, said: “Record numbers of payers and receipts show CGT is making an average 17% dent in investors’ profits. The best way to avoid CGT is to shelter your investments from tax from outset using an ISA or Self-Invested Personal Pensions (SIPPs).
“CGT may not be a consideration when you first start investing, however the more you invest and the longer you invest for, the greater the problem tax on your gains will become.
“Tax influences investment decisions and investors are often reluctant to take profits from holdings which are heavy with gains. This is all the more reason to shelter shares and funds in an ISA so your portfolio is tax worry free.”
Understanding Capital Gains Tax
CGT is charged on the profits made when certain assets are sold, or transferred. If all gains in a tax year fall within the annual CGT allowance (£11,300 for 2017/18) there is no tax to pay.
When gains are realised (funds, shares outside of an ISA or SIPP), CGT will be charged at either 10% (basic rate taxpayer) or 20% (higher and additional rate taxpayer) depending on an investor’s other taxable income.
If the combined taxable income and gains don’t exceed £45,000 (2017/18 tax year), 10% CGT on gains above the annual allowance is paid. Where gains and taxable income exceed £45,000, 20% CGT is paid.
If gains fall into two bands, taking the investor from the basic rate into the higher rate, capital gains tax is paid at 10% on the amount which falls in the basic rate band and at 20% on the amount which falls in the higher rate band.
For a buy-to-let or investment property, the tax is different:
- Higher and additional rate taxpayer – 28%
- Basic rate taxpayer – 18%
Business assets are also treated differently through entrepreneur’s relief, which reduces the CGT rate to 10% for the first £10m of profit where applicable. The relief was extended to include long-term investors in unlisted trading companies bought on or after 17 March 2016. A further £10m of gains will be subject to a lower 10% tax rate as long as the investment is held for three years after 6 April 2016.
Five ways to save Capital Gains Tax
Here are five tips from Hargreaves Lansdown to cut CGT bills:
1) Use the annual exemption
Married couples or civil partners can make gains of £22,600 in this tax year without any tax charges. Investments can normally be transferred between spouses without an immediate tax charge to make full use of two allowances. The annual exemption for CGT can’t be carried forward or backwards so it will be lost if it’s not used.
2) Offset losses against gains
If an investment is sold at a loss, the loss must be offset against any gains made in the same tax year. If there are more losses than gains, the net losses can be carried forward indefinitely to set against future gains in excess of the annual exemption, provided those losses are registered with HMRC on the individual’s tax return.
3) Transferring assets before selling
Married couples or civil partners where one spouse pays tax at a lower rate than the other, may have the option to transfer investments into the other’s name before selling to lower the rate of CGT paid.
4) Reduce taxable income
The rate of CGT is charged based on the rate of income tax paid. Therefore lowering taxable income in any one year could reduce the CGT rate from 20% to 10%.
Reducing taxable income can be done in a number of ways: waiting for retirement and a lowering of income; limiting income withdrawals from a flexible access drawdown; deferring the state pension; greater use of tax-free ISA income; making additional contributions to pensions or charitable donations; or transferring taxable income bearing assets such as cash deposits to a lower earning spouse.
5) Never sell
Providing there is no disposal, gains and their liability to tax can be deferred indefinitely. Since CGT is washed out on death, it is a tax which can be avoided altogether. This becomes especially useful for IHT planning if the assets qualify for IHT relief under Business Property Relief, e.g. a portfolio of qualifying AIM stock or unquoted companies held for two or more years.