Record capital gains tax grab: how to reduce your bill – Interactive Investor

11th August 2022 10:58
Alice Guy from interactive investor
With capital gains tax at its highest level on record, Alice Guy looks at how the tax works and ways to cut your bill.
2020-21 was a record-breaking year for the taxman. Capital gains tax (CGT) raised £14 billion in total, 42% more than the previous year. And more taxpayers footed the bill, 323,000 paying CGT during 2020-21, an increase of 53,000 from 2019-20.
Alex Davies, chief executive of Wealth Club, commented that “this is a steep increase on the amount received in the previous year, which is put down to media speculation about changes to CGT rules, policy changes affecting eligibility for certain reliefs, and also to a lesser extent, an increase in the number of buy-to-let disposals as a result of the change in tax rules”.  
Capital gains tax is charged on the profit from the sale of shares, investments, second properties and businesses. Each tax year, taxpayers get a CGT annual allowance of £12,300, after which CGT is due. If you don’t use your allowance, it cannot be carried over to the following year.
For example, if you bought a buy-to-let property in 1990 for £100,000 and sold it in 2022 for £450,000, your initial capital gain would be £350,000. Let’s assume you spent £50,000 improving the property by building an extension and £20,000 on legal, estate agent and other fees when you bought and sold the property. Your total capital gain would be £280,000 and your taxable gain would be £267,700 (£280,000 minus £12,300 annual exemption). Assuming you are a higher-rate taxpayer, the tax due would be £74,956 (28% of £267,700).
Complicated rules mean that it’s possible to become caught in the capital gains tax net unintentionally.
For example, homeowners normally get a CGT exemption for their main home, but they may lose out if they move house and hold on to their old home for more than 18 months. That means if you moved and didn’t sell your house for two years, you might have a CGT charge for the extra six months.
Taxpayers also sometimes forget that gifting an asset is the same as selling it, as far as the taxman is concerned. That means if you gift a rental property to your child, you’ll have a CGT bill to pay on the difference between your selling price (HMRC uses market rate if you gift a property or sell it for less than the market value) and purchase price.
The good news is there are still several steps you can take to minimise your tax bill. Here are some possible ideas:
To encourage investment, there are also a range of schemes – some risky – that investors could consider.
Alex Davies comments that, “Pensions and ISAs are great, but the allowances can be restrictive for some. To mitigate this, if you’re prepared to take extra risk, you could look to the government’s venture capital schemes. Each offers a different mix of tax benefits. Which you go for will largely depend on circumstances and how much risk you’re prepared to take. As a rule of thumb, the greater the tax benefits, the higher the risk.
“Venture Capital Trusts (VCTs) offer up to 30% income tax relief. Returns are paid through regular tax-free dividends, which is a nice bonus, and any gains are CGT free. The allowance is a very respectable £200,000 a year.
“Enterprise Investment Scheme (EIS) investments also offer up to 30% income tax relief. There are no tax-free dividends, but one bonus here is that you can also defer capital gains. For as long as you stay invested in any EIS, you can forget about the CGT bill. It will only become payable once you come out of the EIS, unless you re-invest the money into another. The EIS allowance is a whopping £1 million a year or £2 million if you invest at least £1 million into “knowledge intensive” companies. 
“The Seed Enterprise Investment Scheme (SEIS) is the most generous when it comes to tax savings. When you invest, you can get up to 50% income tax relief and 50% capital gains tax reinvestment relief. The allowance is more modest but still sizeable at £100,000. Nonetheless it means a £100,000 investment could save you up to £50,000 income tax plus £14,000 capital gains tax (assuming you have paid 28% CGT on the sale of a property).”
If you’re thinking about investing in one of these schemes, then it’s a good idea to get financial advice. The rules are complicated and if the schemes are right for you will depend on your circumstances.
These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company’s or index name highlighted in the article.
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