Personal tax may have been out of focus in the Autumn Budget, but that should not obscure the gravity of changes which had already been announced.
An overhaul of the Capital Gains Tax regime seems inevitable and likely to prove expensive to those with significant exposure. There are, however, several ways to manage down your liability that can be put in motion without delay, explains Oliver Mulry, Investment Manager at Kingswood Group.
Put very simply, capital gains tax (CGT) is a tax on the profit when you sell something that has increased in value. It is the gain you make that is taxed, not the amount of money you receive. Many assets such as your principal private residence (PPR), personal belongings worth less than £6,000, UK government gilts, premium bonds, betting, lottery or pools winnings are exempt. Assets like individual shares, collective investments and second properties, are generally liable to CGT, though not every gain realised on these types of asset needs to result in a CGT bill.
As things currently stand, every individual has a personal annual CGT allowance of £12,300 for the 2020-21 tax year. For many this is more than sufficient to avoid any level of CGT tax liability. Depending on the individual’s total other taxable income in the year that the gain is realised, any capital gains over and above the allowance are charged at either 10/20%, or 18/28% if the gain was made on a non-primary residential property.
Depending on the individual’s total other taxable income in the year that the gain is realised, any capital gains over and above the allowance are charged at either 10/20%, or 18/28% if the gain was made on a non-primary residential property
Although the current CGT rates are low compared to the rates of income tax (20%, 40% or 45%) and inheritance tax (40%) and are also historically low compared to previous rates of CGT (which has been charged at 40% before), there are still a number of ways in which it can be reduced or even removed altogether:
Gains, and losses, are exempt from CGT in an ISA wrapper, therefore it is important to fully utilise your ISA allowance on an annual basis
There are also some other more complex ways in which you can manage down your CGT liability, and are all considered as part of wider financial planning opportunities by Kingswood’s advisers:
By contributing to a pension, not only do you benefit from income tax relief on the way in, but all gains made on assets within the pension wrapper are completely tax free
The likely changes to CGT have got a great many of our users worried about far larger exposures than they had planned for. Yet as with Inheritance Tax and other levies, you will often find you have more control over what you pay than you might think. Taking professional advice as soon as possible could save you thousands, so why not let us arrange a no-obligation discussion with an expert to explore your options?
We won’t know how big the final bill will be until the current Covid crisis is over, but the government is certainly having to borrow copious amounts of money as its current spending far outweighs what it’s recouping in tax receipts. The Office for Budget Responsibility estimated borrowing would be the highest figure ever seen outside of wartime in the current tax year. That borrowing has to be repaid, and reforms to CGT might be one way in which tax receipts are increased. The Office of Tax Simplification (OTS) has published its first report as part of the CGT review; whilst several simplifications were recommended, the main takeaways of the report were:
Where before it was less than 1% of income tax payers left to foot a CGT bill, three times as many people may have to pay capital gains tax if the recommendations are followed to pay for the cost of the Covid pandemic.
For many, therefore, now might be a time to also consider biting the bullet and paying an increased amount of CGT given that rates are at historically low levels, and the current regime is firmly in the Chancellor’s spotlight. It is worth remembering that the small steps you take early on can help to avoid a much larger tax bill further down the line.
Where before it was less than 1% of income tax payers left to foot a CGT bill, three times as many people may have to pay capital gains tax if the recommendations are followed to pay for the cost of the Covid pandemic
The investment strategy explanations contained in this piece are for informational purposes only, represent the views of individual institutions, and are not intended in any way as financial or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.
We always advise consultation with a professional before making any investment decisions.
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