5 simple ways to pay less tax on your gains

If you make any significant profits on the sale of assets such as non-ISA investments or a second property, then you may find that you join the growing band of individuals paying Capital Gains Tax (CGT).

Figures from MoneyAge show that HMRC took a record amount of CGT in the 2020/21 tax year, with 323,000 taxpayers contributing a total of £14.3 billion, realised on £80 billion of gains.

This is a rise of 42% on the previous tax year, and the number of taxpayers facing a CGT bill increased by a fifth year-on-year.

London and the south-east of England accounted for around 40% of CGT taxpayers and approximately half of total gains and liability in 2020/21.

While some tax may be unavoidable, there are strategies you can use to reduce the amount of CGT you pay on profits. Read on for five tips, but first here’s a refresher on when CGT is due, and what you can expect to pay if you’re liable.

A quick refresher on when you pay CGT

CGT is charged on the gains you make when you sell or transfer certain assets. Most commonly, this is the profit you might make when selling shares, funds (including exchange-traded funds), business assets or residential property that isn’t your main home.

Every individual has an annual CGT exemption, and this has been frozen at £12,300 until 2026. So, if the profits you make this tax year or in each of the following three tax years are below this amount, you’ll pay no tax (more about this below).

Gains above your annual exempt amount are taxed at:

• 10% if you are a basic-rate taxpayer (18% for residential property)
• 20% if you are a higher- or additional-rate taxpayer (28% for residential property).

So, what can you do to potentially reduce the amount of CGT you pay? Here are five tips.

1. Make the most of ISAs

Any gains that you make on money held within an ISA is free of both Income Tax and CGT.

Compare this to holding other sorts of investment where you may have to pay up to 20% CGT on gains above your annual exempt amount.

In the 2022/23 tax year you can contribute up to £20,000 into an ISA so, particularly if you are a higher- or additional-rate taxpayer, it can make sense to utilise your ISA allowance every year.

As it’s an individual allowance, if you’re married or in a civil partnership, the ISA allowance effectively doubles to £40,000.

2. Use your annual exempt amount

Until 2026, every individual has a CGT annual exempt amount of £12,300.

You can make the most of this exemption by selling part of your holding each year and making a gain up to the annual exempt amount. You could then buy back the holding – although be aware that tax rules mean you have to wait 30 days before you can buy the same holding back – and “reset” the cost of your holding at the higher level.

This can reduce the potential profit against which future CGT liabilities will be calculated.

Tax rules can be complicated, so it is often wise to seek advice from a financial planner.

3. Offset any losses

Your annual CGT exemption only applies in the current tax year. You can’t carry any unused exemption forward so, if you don’t use it, you lose it.

However, you can carry forward any losses for up to four years after the end of the tax year that you disposed of the asset. Deducting unused losses from previous tax years can help reduce your gain to the tax-free exemption.

Remember that CGT is only charged on your net capital gains, so make sure to offset your capital losses against your capital gains every tax year to help reduce what you owe.

Just remember to include it in your tax return.

4. Plan as a couple

Transfers between spouses and civil partners are exempt from CGT. So, you can transfer assets from one partner to the other to make the most of your individual annual CGT exemption.

This effectively doubles the annual CGT exemption for married couples and civil partners to £24,600.

Note that the transfer must be a genuine, outright gift.

5. Use the Enterprise Investment Scheme

The Enterprise Investment Scheme (EIS) was introduced in 1994 to encourage investors to support early-stage British companies. It gives you the opportunity to invest in fledgling businesses and provides a range of generous tax reliefs.

Any gains that you make on an investment in the Enterprise Investment Scheme (EIS) is free from CGT if you hold it for three or more years.

For example, if you invested £100,000 in an EIS-eligible investment opportunity, and upon disposal more than three years later your shares were worth £200,000, you would have no CGT liability on that £100,000 gain.

If you are a higher- or additional-rate taxpayer, this is equivalent to a £20,000 CGT saving, assuming you had already used your annual CGT exemption of £12,300.

Note that the EIS-eligible investments are higher-risk investments and are typically suitable for UK-resident taxpayers who are able to tolerate increased levels of risk and are looking to invest for five years or more.

Get in touch

If you’d like to explore ways to potentially mitigate your CGT bill, please get in touch. Email us at enquiries@blackswanfp.co.uk or contact your adviser on 020 3828 8100.

Please note

This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Enterprise Initiative Schemes (EIS) are higher-risk investments. They are typically suitable for UK-resident taxpayers who are able to tolerate increased levels of risk and are looking to invest for five years or more. Historical or current yields should not be considered a reliable indicator of future returns as they cannot be guaranteed.

Share values and income generated by the investments could go down as well as up, and you may get back less than you originally invested. These investments are highly illiquid, which means investors could find it difficult to, or be unable to, realise their shares at a value that’s close to the value of the underlying assets.

Tax levels and reliefs could change, and the availability of tax reliefs will depend on individual circumstances.