Capital Gains Tax Allowance Changes: How To Protect Your Assets
Capital gains tax (CGT) is a tax on the profits made when certain assets are sold or disposed of. This includes assets like second homes, investment properties, shares, and businesses. There are steps investors can take to minimise their liability, even with the CGT rule changes which occurred in April 2023. This article explores practical strategies to legally reduce your CGT bill.
Time Asset Sales Strategically
With the CGT allowance being cut, timing the sale of your assets is crucial. Consider spreading disposals over several tax years to fully utilise current allowances. For example, you could sell half your shares in one year and the remainder the following year.
Additionally, if you have any losses on assets, realise these by the end of the tax year. Loss offsets can be used to reduce your capital gains, minimising tax.
Transfer Assets to Your Spouse
Married couples and civil partners can make use of each other’s CGT allowances. If your partner pays a lower income tax rate, transferring assets to them before selling can reduce your CGT bill.
For instance, you could put your buy-to-let property fully or partly in your spouse’s name. When sold, you can both claim the annual exemption, doubling the tax-free allowance.
Use Your ISA and Pension Allowances
Making use of your ISA and pension allowances is another way to shelter assets from CGT.
You can invest up to £20,000 annually into an ISA without paying tax on gains. Pension contributions up to £40,000, depending on your circumstances, also escape CGT.
While this may mean sacrificing investment flexibility, it does eliminate tax on profits.
Utilise Your Annual CGT Allowance
The annual CGT allowance was £12,300 per person until the end of the 2022/23 tax year. From now on, you have an allowance of up to £6,000 per tax year.
Also, note that any unused allowance cannot be carried forward.
Invest In Tax-Efficient Schemes
Specialised investment schemes like VCTs (venture capital trusts) and EIS (enterprise investment schemes) offer CGT reduction options.
VCTs let you invest up to £200,000 annually and provide 30% income tax relief. Gains and dividends are tax-free, making them very tax-efficient.
With EIS investments, you can defer CGT liabilities until you sell your shares. This could save thousands if you reinvest large gains. You also get 30% income tax relief.
The EIS allowance is £2 million if investing in knowledge-intensive companies.
Seek Professional Advice
With complex tax rules, it’s always worth consulting an advisor or consultant about minimising CGT. They can assess your unique circumstances and recommend tailored solutions.
The key is planning well ahead of time, as some strategies require preparation. Act now before the April 2023 CGT changes kick in.
Speak to an advisor today about tax-efficient investing and CGT planning. It’s also wise to explore specialist schemes like VCTs or an EIS investment platform as an option. With the right strategy, you can continue to invest profitably while reducing your capital gains tax liability.