3 practical ways to cut your Capital Gains Tax bill

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Capital Gains Tax is the nemesis of many an investor or buy-to-let landlord. Now, new figures from HMRC reveal that Brits paid a record amount of Capital Gains Tax (CGT) in the 2019/20 tax year.

HMRC recorded £65.8 billion of gains last year – a rise of 3% from the previous year – resulting in a total tax charge of £9.9 billion. Interestingly, while the total amount of tax paid increased, the number of people paying CGT fell by 6% to 265,000.

You’ll potentially pay CGT on the gains you make from certain investments, buy-to-let property, and other assets. Read on to find out more about the eye-watering tax bill, and for three ways you can mitigate the amount of CGT that you pay.

Most tax comes from a small number of taxpayers making large gains

In the 2019/20 tax year, 265,000 Brits paid a total of almost £10 billion in CGT. This liability was realised on £65.8 billion of gains.

The HMRC data reveals that most CGT comes from a small number of taxpayers who make the largest gains. In 2019/20, 41% of the total CGT take came from those who made gains of £5 million or more. However, this group represents less than 1% of CGT taxpayers each year.

In the same tax year, 43% of the CGT gains for individuals came from the 13% of CGT liable individuals with taxable incomes above £150,000, the additional rate threshold for Income Tax.

There are several reasons for why the total amount of tax is rising.

Firstly, in recent years the government has tightened the tax rules for buy-to-let landlords. Changes to the tax treatment of mortgage interest on buy-to-let properties have encouraged many small landlords to decide that holding rental property is no longer profitable. If they have sold up, this will often have triggered a CGT charge – sometimes at 28% if they are a higher- or additional-rate taxpayer.

In addition, strong investment returns in recent years will have seen many investors realise strong gains on their portfolios.

Finally, the chancellor announced changes to Business Asset Disposal Relief (BADR) – formerly Entrepreneurs’ Relief – in March 2020. Rishi Sunak scaled back the lifetime BADR allowance from £10 million to £1 million, potentially increasing the tax paid by business owners when they sell their company.

A 2020 review by the Office of Tax Simplification recommended reforms to CGT to help cover the cost of pandemic support. So, as the amount of tax paid rises and with reforms squarely in the chancellor’s sights, what can you do to reduce the amount of CGT you pay?

1. Make the most of ISAs

There are lots of positive reasons to consider investing in ISAs – and one is that any gains you make are exempt from CGT.

Whatever profits you make from a Stocks and Shares ISA – and these could be significant over a long period of time – are exempt from CGT. It makes investing in an ISA incredibly tax-efficient.

You can contribute a total of £20,000 a year into an ISA in the 2021/22 tax year. Remember that this amount applies to an individual, so couples can invest up to £40,000 in the 2021/22 tax year and benefit from CGT-free growth.

In addition to the CGT benefits, you don’t pay tax on any dividends from shares in an ISA and most people don’t have to report the income and capital gains from their ISAs on their annual tax return.

2. Use your CGT annual exempt amount

In the 2021/22 tax year, you can make some profit from an asset before any CGT is payable. This is your CGT “annual exempt amount” and stands at £12,300. The chancellor has frozen this amount at £12,300 until 2026.

If your assets are owned jointly with another person, you can use both of your CGT annual exempt amounts. This effectively doubles the profit you can make before CGT is due.

In very simple terms, if you made a profit of £20,000 on a jointly held asset, you would typically pay no CGT on this gain (assuming you hadn’t made any other gains in the same tax year).

It’s important to remember that you can’t carry forward a CGT allowance to a future tax year. If you don’t use it, you will lose it. So, crystallising gains up to £12,300 each tax year can be a solid strategy for reducing the amount of CGT you pay on, for example, investment gains.

3. Plan as a couple

If you are married or in a civil partnership, you are free to transfer assets to each other without a CGT charge. So, dividing your assets more equitably to take advantage of your individual CGT annual exempt amount can reduce the overall tax you’ll pay as a couple.

Bear in mind that, if you choose to transfer any of your assets to your partner, if you later sell the asset, you’ll be charged based on the gain made during the period it was owned by you as a couple, rather than since the asset was passed to your partner.

Get in touch

If you’d like to look at ways of mitigating Capital Gains Tax, please get in touch. Email enquiries@blackswanfp.co.uk or contact your adviser on 020 3828 8100.


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