Rule changes will see Capital Gains Tax revenues surge over the next five years, but there are steps you can take before the end of the tax year to help minimise your liability.
It commands far fewer column inches in the press than Inheritance Tax, yet generates significantly more money for the government’s coffers. The Office for Budget Responsibility (OBR) forecasts that Capital Gains Tax (CGT) revenues will hit a new high of £8.8 billion this tax year.¹
What’s more, the OBR expects annual CGT receipts to surge by 50% over the next five years to £13.3 billion.² A large chunk of this is anticipated to be paid by buy-to-let investors unloading properties as tax changes bite. But investors realising the stock market gains made in recent years, and HMRC’s clampdown on unpaid taxes, are also expected to boost revenues.
Another contributing factor is that capital gains taxation is complicated. Despite there being a range of reliefs and exemptions available, the struggle to calculate gains and losses accurately means that many people end up paying CGT unnecessarily or, worse still, face fines due to incorrect disclosure.
So what steps can be taken before the end of the tax year to help mitigate a CGT liability?
The most valuable, and underused opportunity to minimise your CGT bill is the annual tax-free allowance of £11,300, which is available to every taxpayer. Gains above this figure are taxed at up to 20% (for 2017/18) on assets such as shares, and up to 28% from the sale of residential investment properties. In the 2018/19 tax year, which begins on April 6, allowance will rise to £11,700.
“For many investors, this allowance is sufficient to avoid a CGT liability if it is used effectively, but it cannot be carried forward into the next tax year and will be lost each year,” says Tony Müdd, divisional director at St. James’s Place. “By ‘washing out’ gains each year up to the limit of your annual allowance, and reinvesting them appropriately, you can reduce the risk of incurring a significant CGT bill in subsequent years.”
If chargeable gains are more substantial, then consider splitting the realisation of profits over two tax years, before and after 6 April, to take advantage of both annual allowances.
It’s also worth remembering that transfers between spouses and civil partners are exempt from CGT. This means that, if necessary, assets can be transferred between couples so that the allowance can effectively be doubled to £22,600 for 2017/18 and £23,400 for 2018/19.
Perhaps the most obvious step is to ensure that you make the maximum possible use of exempt wrappers, such as ISAs and pensions; in that way, you can avoid any future CGT liability altogether.
As the end of the tax year nears, so too does the final opportunity for couples to shelter up to £40,000 from further Income Tax and CGT by using both of their ISA allowances for this year.
As well as benefiting from upfront tax relief and tax-free growth, paying into a personal pension plan can also reduce the tax on capital gains. A pension contribution extends the upper limit of an individual’s Income Tax band by the amount of the gross contribution. If a capital gain, once added to other taxable income in the year, falls within the increased tax band, the CGT liability could be reduced to the lower rate of 10% instead of 20%.
It was previously possible to use up some of your CGT allowance by selling an investment on which you had made a gain, then buying it back the next day; known as ‘bed and breakfasting’. Investors who buy back the same investment within 30 days now have their transactions matched so a higher base cost is no longer achieved. However, under the ‘bed and spouse’ arrangement, spouses or civil partners can buy back the investment sold by their partner immediately, realising the gain free of CGT and enabling the asset to be retained in the family at a higher base cost such that future gains can be lowered or avoided.
Alternatively, a ‘bed and ISA’ involves selling an asset to realise a capital gain and then buying the same investment back within an ISA wrapper. This is possible with investment funds as well as individual shares. The easiest way to utilise your ISA allowance before the end of the tax year is to use available cash to invest, but ‘bed and ISA’ presents a solution for those with less liquid assets.
“Capital gains taxation is a complex area, but not one that should be ignored, which is why it’s important to get professional advice,” adds Müdd. “It’s also remembering that failure to manage capital gains effectively can lead to an outcome that is possibly worse, when assets held in your estate become liable to Inheritance Tax at 40%.”
With a few weeks left of the tax year, there is still time to ensure you’ve taken advantage of all the available opportunities to minimise the impact of CGT on your wealth.
¹, ² Office for Budget Responsibility, Economic and fiscal outlook – November 2017
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.