With record numbers of people paying capital gains tax and tax free allowances plummeting, CGT is no longer a tax most investors can ignore. Although almost half (45%) of the total CGT paid is on super gains of £5 million or more, this tax is not just for the super wealthy as 214,000 people paid CGT on gains of up to £25,000.
Overall, the numbers paying this wealth tax has more than doubled in 10 years and this number is only set to rise. UK capital gains tax receipts (CGT) hit a record £16.7 billion in tax year 2021/22 up 15% on the previous record year. The number of payers was also up 20% to 394,000, more than doubling in 10 years.
“Taking advantage of your CGT allowance annually has shifted in priority to a must do and Bed and ISA provides a neat solution to shelter investments from future tax,” said Helen Morrissey, head of retirement analysis at Hargreaves Lansdown.
British ‘buy to regret’ landlords continue to suffer the worse combination of the capital and income tax regime.
139,000 taxpayers reported 151,000 disposals of residential property in the 2022 to 2023 tax year with a total liability of £1.8 billion. This is similar to the previous year but is a 56% and 60% increase from the 2020 to 2021 tax year which reflects the increase in activity seen in the property market following the first year of the pandemic.”
Five CGT trap beaters
#1. Make use of your CGT allowance every year, before you lose it
Higher rate taxpayers pay 20% on capital gains on investments and 28% on gains from property. In the current tax year, you can make gains of £6,000 before you pay tax on them.
#2. Offset losses against gains
Don’t forget, you can offset any capital losses you make during the tax year against gains. If your total taxable gain is still over the tax-free allowance, you may be able to deduct any unused losses from previous tax years. If just some of your losses reduce your gain to below the tax-free allowance, you can carry forward the remaining losses to a future tax year.
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#3. Shelter as much of your portfolio in ISAs as possible
If you have investments outside an ISA use the Bed and ISA process (also known as Share Exchange) to move these assets into an ISA.
Once in an ISA you won’t pay tax on either gains or income. Because the dividend tax rate is generally paid at a higher rate than the capital gains tax rate, it’s often worth prioritising income producing investments when making decisions about how to use your ISA allowance.
#4. Plan as a couple
If you’re married or in a civil partnership you can transfer investments into their name without triggering CGT, so you can both take advantage of your allowances. And if your spouse or partner can realise gains within the basic rate band they will pay 10% on gains (or 18% on residential property).
#5. Consider a Venture Capital Trust
Venture Capital Trusts aren’t right for everyone, because they are very high risk, so should only ever be considered as a small part of a large and diverse portfolio. However, if you use these schemes, they are CGT free and you can get up to 30% income tax relief on the amount you invest – which can reduce your overall tax bill.
