Capital gains tax is charged on the profit earned from selling a business, shares, investments, second properties, and family heirlooms. This tax is a significant source of revenue for HMRC, as they collected over £14bn from it in the 2020-21 financial year, representing a 42% increase from the previous year.
The rise in revenue can be attributed to various factors, such as media speculation about changes to CGT rules (which has since proven true), policy changes affecting eligibility for certain reliefs, and an increase in the number of buy-to-let disposals due to changes in tax rules.
Fortunately, individuals can still take several steps to ensure they keep CGT bills to a minimum. Here, we will discuss how taxation affects a business and how businesses can reduce the effect of CGT.
Opportunities for UK investors to reduce Capital Gains Tax (CGT)
1. Time your sales strategically
You may consider timing the sale of your assets so that they fall in different tax years. This could help you to make the most of your annual CGT allowance and potentially pay a lower tax rate.
2. Transfer Assets To Your Spouse Or Civil Partner
If your spouse or civil partner pays a lower rate of tax than you do, you may consider transferring your assets to them to reduce your CGT liability.
You can transfer your assets, such as buy to let property into your partner’s name or split it with them, so that when sold, you can use your annual allowance of £12,300, reducing the tax payable.
3. ISA or Pension investments
To avoid paying CGT, you can invest up to £20,000 in an ISA each year and up to £40,000 for your pension, depending on circumstances.
Investors who hold business investments outside tax efficient wrappers – such as pensions or an ISA – should, however, understand the longer-term effects that this may have on their investments.
4. Use Your Annual CGT Allowance
Currently, there is a capital gains annual allowance of £12,300 per person, and everyone gets a new CGT allowance each new tax year. After that, CGT is due. Your annual allowance cannot be carried over to the following year if it remains unused.
However, the UK’s recent Autumn statement included significant tax changes coming into force as soon as this April.
NB: CGT allowances are set to change as of April 2023
Capital Gain Tax personal allowance will be reduced from the current £12,300 to £6,000 from April 2023 – with a further reduction to £3,000 from April 2024.
Many investors may be asking the question, ‘do I dispose and realise my gains now and pay now?’ or ‘do I want to hold the assets with gains long term (possibly until death)?’.
5. Consider Investing in tax-efficient schemes
If you’re prepared to take extra risk, the government’s venture capital schemes offer outstanding tax reliefs, with each offering a different mix of tax benefits.
Which you choose to go for will largely depend on circumstances and how much risk you’re prepared to take. Typically, the higher the risk involved, the greater the potential tax benefits.
Venture Capital Trusts (VCTs) offer up to 30% income tax relief. Regular tax-free dividends are used to pay returns, which is a bonus, and any profits are exempt from Capital Gains Tax (CGT). The allowance is a very respectable £200,000 a year.
Enterprise Investment Scheme (EIS) investments also offer up to 30% income tax relief. While no tax-free dividends are available, it is possible to defer capital gains, which is a huge bonus.
For as long as you stay invested in any EIS, you can switch off to any CGT bill. CGT will only be payable when you exit the EIS scheme unless you choose to reinvest the funds into another EIS.
The EIS allowance is quite substantial, with a limit of £1 million per year, or £2 million, if you invest into “knowledge-intensive” companies and a minimum of £1 million was invested.
Investors can decide whether to realise their investment now and potentially generate a capital gain or postpone it to a later time. In either case, investing in EIS can provide significant CGT deferral relief for larger assets such as rental properties, second properties or businesses. This could result in a significant gain which could be managed out using EIS.
Adding EIS to a modern portfolio would offer further diversification. EIS returns are free from capital gains tax if the investments are held for a minimum of 3 years, and income tax relief is claimed when investing.
Consult an expert
It is important to note that the above strategies may not be suitable for everyone and that you should seek professional advice before making any decisions. Also, tax laws and regulations can change, so keeping up-to-date with the latest developments is essential.
