Investing your wealth can be a useful way to generate an income in later life. You may receive regular dividend payments from shares, for instance. Alternatively, you might invest in property and generate rental income.
However, if you rely on investments to make up part of your income now and in retirement, it may be a good idea to think carefully about the tax you are likely to pay.
There are several taxes that may affect investors, including Capital Gains Tax (CGT), and the number of people paying this is likely to increase in the near future.
Indeed, the Office for Budget Responsibility (OBR) predicts that, in the 2023/24 tax year, the government will raise a total of £17.8 billion from CGT.
Fortunately, there are ways to potentially mitigate this tax so you can retain more of your wealth.
If you are not aware of whether you are affected by CGT or not, read on to learn everything you need to know.
You may pay CGT when you dispose of an asset
CGT is a tax on the rise in value of an asset. You may have to pay the tax when you dispose of an asset that is worth more than you paid for it. However, you only pay tax on the gains, not the full value of the asset.
For example, say you purchased a painting for £10,000 and kept it for 10 years. Then, you sold it for £20,000. You might have to pay CGT on the £10,000 difference, depending on what other assets you sold in that tax year.
Your rate of CGT depends on your marginal rate of Income Tax. You are likely to pay:
- 10% if you are a basic-rate taxpayer (or 18% when selling a qualifying residential property)
- 20% if you are a higher- or additional-rate taxpayer (or 28% when selling a qualifying residential property).
CGT may be payable on a range of assets including:
- Stocks and shares held outside of an ISA
- Material possessions, including art or jewellery
- Inherited properties and second homes.
The rules surrounding CGT on properties can be difficult to navigate, so if you are unsure, it may be useful to seek professional advice.
You have a CGT annual exempt amount of £6,000 in the 2023/24 tax year
Each person has a CGT annual exempt amount of £6,000 in the 2023/24 tax year. This means you can earn up to £6,000 when disposing of assets without paying any CGT.
So, using the same example as above, if you made a £10,000 profit when selling a painting, and it is the only asset you made a profit on that year, £6,000 of that is free from CGT. You may then have to pay tax on the remaining £4,000.
However, changes to the CGT annual exempt amount could mean that you are more likely to be affected by the tax in the future.
In the Spring Budget, the government announced that they planned to half the annual exempt amount to £3,000 in April 2024.
As such, it may be more important than ever to find ways to mitigate CGT.
5 ways to potentially reduce your CGT bill
1. Consider how you use your annual exempt amount
When selling assets, think carefully about your annual exempt amount and try to use it in the most efficient way possible.
For instance, if you wanted to sell some shares and the gains are likely to exceed your annual exempt amount, you could sell half now and then sell the rest the following tax year.
This could mean that you stay within the annual exempt amount in both years and do not have to pay CGT on the sale.
2. Transfer assets to your spouse or civil partner
In most cases, you can pass assets to your spouse or civil partner without paying CGT on them.
When they eventually come to sell the asset, they may have to pay CGT on it. This is calculated based on the value when you originally owned the asset, compared with the value when they sell it.
That said, they still have their own annual exempt amount to use. So, by transferring the assets in this way, you can effectively double the gains you can make before paying CGT.
Further to this, the rate of CGT is based on the marginal rate of Income Tax of the person selling the asset. As such, if your spouse or civil partner is in a lower tax bracket than you, transferring the asset to them to sell could mean you pay less CGT.
It is important to note that a spousal transfer must be considered a “genuine transfer of beneficial ownership” for it to be exempt from CGT.
HMRC differentiates between the “legal” owner, which is the person who legally owns an asset, and the “beneficial” owner. The beneficial owner is the person who derives benefit from the asset.
For instance, if you pass legal ownership of some shares to your spouse, but you continue to benefit from the dividends, you may have to pay CGT on them.
It can be worth seeking professional advice so you do not fall foul of these rules.
3. Use your full ISA allowance
Any assets held in an ISA are free from CGT. Consequently, buying and selling investments through a Stocks and Shares ISA can be a simple way to reduce your tax bill.
In the 2023/24 tax year, you can contribute up to £20,000 across all of your ISAs, and it may be beneficial to use this full allowance before making investments elsewhere.
4. Offset your losses
If you make a loss when selling an asset, you can offset this against your gains. Essentially, this reduces the amount that you may have to pay CGT on.
For instance, if you sell a painting and make a £10,000 gain, but you also sell shares at a loss of £3,000, you can deduct this loss. So, only your total gains of £7,000 may be subject to tax.
When you report a loss to HMRC, the amount is deducted from any gains that you made in the same tax year.
If reporting your losses brings you below your annual exempt amount, you can carry any additional losses over and they will be available to use in future years.
You may be able to report losses from previous years if you still exceed your annual exempt amount, after reporting losses for the current tax year.
This can be quite complex, so it may be useful to seek professional advice to ensure that you are making the calculations correctly.
5. Consider how you withdraw your income
The rate of CGT you pay is based on your marginal rate of Income Tax. Consequently, you may pay less CGT if you can draw less income and remain in a lower tax band.
This is more difficult if you are still playing rugby professionally. But if you are working part-time or retired and drawing flexibly from your pension, it can be a good option if you have savings or investments to provide an income instead.
Get in touch
If you are concerned about a big CGT bill, then please do get in touch with us at DBL Asset Management.
Email firstname.lastname@example.org or call 01625 529 499 to speak to us today.
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.
The value of your investments (and any income from them) 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. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
The Financial Conduct Authority does not regulate tax planning.