Mitigating tax changes: How to reduce your capital gains tax bill

It is well known that capital gains tax (CGT) is currently under review and that increases for wealthy taxpayers are very likely. Many types of assets attract CGT on disposal, with shares and residential property being the most common. What can you be doing now, to ensure that if and when capital gains tax does increase, you have taken whatever action you can to mitigate the tax implications for you?
Firstly, remember that everyone has an annual CGT exemption, which is £12,300 for the 2020-21 tax year, and also includes children. Any gains realised within that amount will incur no tax. Gains arising in excess of the annual exemption are charged to CGT at a rate of either 10%, 18%, 20% or 28%, depending on your other income and the type of asset.

Make sure you use your annual capital gains tax allowance

The capital gains tax allowance of £12,300 is a “use it or lose it” allowance and cannot be carried forward to future years.

• Use your annual ISA allowance

One of the most basic ways to mitigate the impact of CGT is to ensure you are properly using your annual ISA allowance. You can contribute £20,000 per annum to an ISA and all capital gains arising on investments made within the ISA are free of CGT, with all investment income also being free of income tax.

• Remember to offset losses against gains

If you have made capital losses in a tax year these can be offset against capital gains made in that same tax year. If losses exceed gains in any tax year, the excess can be carried forward and offset against gains made in the future, provided they have been disclosed to  HMRC. For instance, if you sold shares at a loss and also made a gain on a property disposal, but the share losses were greater than the gain on the property sale, the excess losses can be carried forward and offset against future gains. If you have made losses, ensure you include them on your self-assessment tax return so they are disclosed to HMRC and can be used in the future.

• Review how investment property is owned

Owning property within a limited company is a popular way to mitigate the impacts of tapered mortgage interest relief. If you already own the property it will mean ‘selling’ it to the company, triggering CGT. Although there is a cost element to this, it might be better to incur the cost whilst CGT rates remain as currently. Take advice on this to fully explore all the ramifications. We have written about the implications of owning property in a limited company in previous articles: read more.

• Manage your taxable income levels

The rate of CGT payable is dependent on your income tax rate band and reducing your income tax rate can have a knock-on benefit on your CGT. Taxable income can for example be reduced through pension contributions or charitable donations.

• Gift assets to take advantage of tax relief

Capital gains are wiped out on death and assets held within your estate will attract inheritance tax instead. Rather than selling assets, it may be better to gift them and take advantage of the seven-year rule for lifetime gifts. There have been reports of taxpayers choosing this option as a way to minimise the impact of any CGT increases, however bear in mind that gifts of chargeable assets will give rise to a CGT charge based on their market value, and take advise before doing this. Note also that any gifts must be made outright to be effective for inheritance tax purposes and this requires that you give up any rights to benefit from the asset in the future.

If you’re a wealthy individual, it is likely that the amount of capital gains tax you will have to pay is going to increase. Taking steps now where possible, following professional advice, could make a big different to your future tax bills. We are recommending that clients conduct an asset review before 31 December 2020 to ensure they are fully prepared for any changes.