Tips to help you minimise your Capital Gains Tax bill

The increase in Capital Gains Tax is not as severe as many had feared and there is still scope for mitigation.  CGT will be levied at 18% for those who are basic rate taxpayers, and at a flat rate of 28% for those who pay income tax at the higher rates.  There is no relief for purely inflationary gains.  The sting in the tail is that gains will be added to your income and if the total pushes you into a higher income tax band you will pay CGT at 28% on your profits. Where taxable gains, after the first £10,100 exemption and income combined, are over the higher rate income tax rate threshold of £43,875, you will be charged at 28% on the balance of gains over that level.

Those who will have difficulty avoiding the higher rate of CGT are long term holders of property as there are no concessions in the Budget for inflationary gains and it is expensive to buy and sell properties.   But many couples will have equalised assets or moved them into a spouse’s name prior to 2008 when CGT was levied at income tax rates, to take advantage of one partner paying lower rates of income tax or being a non-taxpayer and utilising both  partners' nil rate band of £10,100.

With CGT now at 28% for many investors, it will certainly pay to think carefully about ownership if any new properties are acquired.  Here again, if the intention is eventually to leave the properties to children or grandchildren it may be worthwhile including them as owners for future IHT mitigation.  If you are gifting a second home or investment property to an adult child or grandchildren be careful of the ‘gifts with reservation’ restriction if you continue using the property yourself or you could end up failing to avoid IHT and leaving your children liable to both IHT and CGT.   This doesn't apply if the property is acquired in several names. Trusts could be used too to make use of the Principal Private Residence exemptions for children or grandchildren.

For owners of second homes it will still be possible to mitigate CGT by selling the Principal Private Residence without incurring a tax charge and moving into the retirement home.  When this is eventually sold, CGT will be payable on that proportion of the gain which reflects the period when it was not the owner’s PPP. 

For example, if you bought a second home 10 years before retirement and at 65  moved into it and lived there for 20 years, only one third of the gain on the retirement home (10/30ths) would be subject to CGT.  In addition, if a property has, at any time, been your PPP, the last three years of ownership are free from CGT.  Moreover, if it has been let commercially you may be entitled to a further CGT exemption on sale of £40,000.

The alternative, often used by those who are substantial buy to let investors,  is to become non-resident in the UK and during the first full tax year abroad sell all property holdings and stay abroad for at least five full tax years.  This way there will be no CGT liability in the UK.  But be careful where you move to.  Most of Europe and the US and many other countries levy tax on capital gains, sometimes at higher rates than the UK, and you might end up paying more.

Most people with gains on shares and other paper investments will continue to be able to avoid CGT, as they have done in the past, by realising gains within their £10,100 (2010-11) annual nil rate band.  Only 1 in 131 taxpayers, or 247,000 out of 32.5 million, had to pay CGT in 2009, largely due to utilising their annual nil rate band.  Few individuals have annual gains in excess of this level and if assets are equalised, it means that a couple can take profits of up to £20,200 in a year – tax free.  Transfers between married couples or civil partners are not regarded as a sale of assets and so are not subject to CGT.

‘Every taxpayer has an annual CGT exemption, which will remain at £10,100 for the current tax year,’ commented Barbara Ann King of Barclays Stockbrokers. ‘If unused, this annual exemption is lost. Investors should consider realising their gains periodically in order to take full advantage of these allowances, rather than crystallising a large gain which would expose them to a 28% CGT charge.’  It is worth considering moving assets into the names of children or grandchildren too to take advantage of their nil rate band – particularly if it is also part of Inheritance Tax planning.

It also makes sense to make full use of tax free ISAs and pensions, if you have not already done so, because the roll up of investments is totally free from CGT, ‘What this hike in CGT highlights is the attractiveness of ISA-investing which continues to be exempt from CGT,’ commented Darius McDermott managing director of Chelsea Financial Services.  You can also do ‘bed and ISA’ or ‘bed and SIPP’ (click here to read how these schemes work) to realise capital gains on assets subject to CGT and transfer them into these tax shelters.

Had you invested the maximum amount in PEPs and ISAs every year since they first became available 23 years ago in 1987, you could now have £165,600 sheltered from Capital Gains Tax - and potentially income tax too if you hold gilts or corporate bonds in your account.    A couple could have stashed away £331,200.  If the money been invested in an index fund linked to the FTSE100 it could easily now be worth as much as £950,000 – and there would be no CGT payable on any of this.  Which is why only the seriously rich pay any substantial sums in CGT.