Hargreaves Lansdown have outlined 10 methods for saving on capital gains tax as investors await possible changes to the tax by the new Labour government.
Labour hasn’t yet outlined any plans to change current rules, but the change in government increases the chances of amendments to the tax in the future.
“As Rachel Reeves settles into Number 11, attention will turn back to capital gains tax,” said Sarah Coles, head of personal finance, Hargreaves Lansdown.
“The government said it doesn’t have any plans to change the current rules, but it hasn’t ruled it out either. If they don’t get the robust growth they need in order to make their sums add up, there’s a risk this particular tax is in the frame.
“More to the point, even if the government doesn’t make any tweaks at all, you could still pay more capital gains tax – thanks to frozen income tax thresholds. CGT rates depend on your marginal tax rate, so if the freeze has pushed you from basic rate to higher rate tax, your capital gains will cost you more.
“Meanwhile, investors are still reeling from the fact that the previous government slashed the tax-free allowance from £12,300 a year to just £3,000 over the course of two years. It means more people face paying more of this tax, and anyone who hopes to make any gains from investments, should consider how to protect themselves.
“This should include asking yourself whether you should realise some gains in the current tax year. You can crystalise £3,000 of gains tax-free. You might even want to realise more, especially if you’re a basic rate taxpayer keen to pay 10% on those gains while you know where you stand. However, it’s vital not to rush into anything. No changes have even been floated, and if they did come in, it wouldn’t be until next April at the earliest. So there’s plenty of time to weigh up your position and make a sensible decision.”
10 ways to save capital gains tax by Hargreaves Lansdown
- Consider your tax position next year.
You will often have a choice as to when you take a capital gain, so it’s worth considering in the context of what you think could happen to CGT and your overall tax position. If, for example, you expect to earn far less income next year and be in a lower tax band, deferring cashing in could mean you pay a lower rate of CGT on at least some of the gain. Conversely, it may be beneficial to take your profits in this tax year if you expect to pay more tax in the future.
- Use your annual allowance
You get an annual CGT allowance on a use-it-or-lose it basis. If you’re building up a big gain, you can realise it gradually, over a period of years, £3,000 at a time, and pay no tax. You can sell investments and reinvest the money, effectively resetting your gains to zero.
- Offset any losses you make during the tax year
In any given year you may have losses on some investments and gains on others. You can use this to your advantage. When you complete your tax return, you can add details of the losses you’ve made, which will be offset against the gains when you’re calculating how much CGT you owe. In some cases, this will bring the CGT bill down to zero.
- You may be able to deduct any unused losses from previous tax years
If you make more losses than gains, you should still make a claim for the extra losses. You will then be able to carry them forward into next year, to offset against any gains you make then. You can’t do this unless you have made a claim for the loss in the year you made it.
- Use a stocks and shares ISA
After the annual exemption of £3,000, CGT on stocks and shares is charged at 10% for basic-rate taxpayers and 20% for higher and additional-rate payers. By moving investments into an ISA, CGT is completely avoided. It’s worth noting this isn’t just a boon when you decide to sell up and cash out, it also makes an enormous difference every time you rebalance your portfolio as you go along.
- Use Share Exchange (Bed & ISA)
ISAs aren’t just useful for brand new investments. If you have assets outside an ISA or pension, you can use the Share Exchange (Bed & ISA) process to sell assets outside an ISA – within your £3,000 CGT allowance – and move them into the ISA wrapper. That way you don’t have to worry about either dividend tax or CGT on these investments at any point.
- Don’t forget Sharesave schemes
Workplace share schemes can be incredibly valuable, but they may come with a capital gains tax sting. Fortunately, there’s an ISA rule that helps you save capital gains tax on shares from a Sharesave scheme or Share Incentive Plan (SIP). As long as you transfer the shares into an ISA within 90 days of the scheme maturing, and they are valued at less than your annual ISA allowance of £20,000, there won’t be any CGT to pay on these shares.
- Plan as a couple
If you’re married or in a civil partnership, you can transfer the ownership of some assets to your spouse or civil partner. There’s no CGT to pay on the transfer. When they sell up, there may well be tax to pay, and the gain will be calculated by comparing the cost on the day of selling with the day when their spouse originally bought the asset. However, they have a CGT allowance of their own to take advantage of, so a chunk of the gain won’t be subject to tax. If they’re taxed at a lower rate, they may also pay any CGT at a lower rate too.
- Consider CGT-free investments
These aren’t going to save you any CGT you’re currently liable for, but may prevent you from creating another liability in future. They include gilts and things like Venture Capital Trusts. These aren’t right for everyone, and in the case of VCTs, they’re higher risk, so should only ever be considered as a small part of a large and diverse portfolio. However, if they suit you, in addition to the CGT and dividend tax saving, you can get up to 30% income tax relief on the amount you invest.
- Pay into a pension
Money paid into a pension will grow free of CGT, but that’s not all. Higher and additional rate taxpayers benefit from tax relief at their highest marginal rate. As a result, making contributions can push people out of paying higher rate tax altogether. The capital gains tax rate is lower for basic rate taxpayers, so bringing yourself under this threshold means you’ll pay tax at a lower rate on at least some of the gain.”