How to swerve a big CGT bill

If you’ve got any investments that aren’t held in an individual savings account (ISA) or pension, or have significant assets that you might want to sell, you could be liable to pay tax on your gains.

You might think that capital gains tax (CGT) is the preserve of the very wealthy, but swingeing cuts to the CGT allowance mean more novice investors are likely to be affected, while those that are already coughing up for CGT may see big hikes to their bills.

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After being cut from £12,300 to £6,000 in April 2023, the CGT allowance is scheduled to be halved again to just £3,000 at the start of the new tax year on 6 April. And, according to government forecasts, more than half a million individuals and trusts will likely be affected over the coming year.

But while the cuts might be deep, there are plenty of ways for savvy investors to (legally) dodge CGT.

So what is CGT and how does it work?

CGT is charged when you sell – or to use the taxman’s words – “dispose” of an asset. That could be anything from an investment account or shareholding to antique furniture, jewellery or art.

You might also need to pay CGT when you sell a property, but importantly your main home will be exempt. CGT would only be payable on any additional properties you own such as buy to lets or holiday homes.

Just how much CGT you pay depends on your rate of income tax and the asset you are getting rid of. Basic rate taxpayers, for example, pay 10% (rising to 18% on property), while higher and additional rate tax payers, will be charged 20% (or 28% on property).

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To qualify for the lower rate of CGT, your income will still need to fall within the basic rate tax bracket once your gain has been added to your overall income for the year.

However, it’s important to note that tax is only payable on the gain you have made on the asset since you have owned it – not it’s total value.

Your gains need to be declared either in your tax return, or using HMRC’s real time service.

How to cut your tax bill

Savvy investors have plenty of weapons in their armoury to call on in the fight against an impending CGT bill.

The key is to be aware of potential problems ahead of time and get planning.

Here’s a few ways you can do it:

Work your ISAs and pensions to the max: money invested in individual savings accounts (ISA) and self-invested personal pensions (SIPP) are sheltered from income tax, dividend, and CGT – so make the most of these tax wrappers where you can.

Each year you can invest up to £20,000 in an ISA and 100% of your income up to £60,000 in pensions – any unused pension allowance from the last three tax years can also be carried forward to the current tax year.

Everyone has their own ISA and pension allowance too, so couples can effectively double these allowances between them.

Use your CGT allowance every year: it’s not easy to sell part of a property or antique vase, but you can gradually sell off investments such as funds or shares. By selling gains up to the value of the allowance – so £6,000 until 5 April or £3,000 afterwards – you can reduce the amount you could eventually be liable to pay tax on.

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You cannot re-buy the same investments within the next 30 days but, if you don’t want to stay out of the market, there’s nothing to stop you buying equivalent investments. Taking money out of one FTSE 100 tracker and reinvesting in one from another asset manager, for example.

However, if you have any remaining ISA or pension allowance for the current tax year, you can avoid the 30-day rule by taking advantage of a so-called Bed & ISA or Bed & SIPP rules.

This process allows you to sell investment gains that are outside a tax wrapper and immediately buy back the identical holdings in either your ISA or your SIPP.

You just need to make sure that all the accounts you are transferring investments between are held on the same platform. You also have to be careful not to sell gains worth more than your CGT allowance, otherwise you could trigger a tax bill on your gains.

Both Bed & ISA and Bed & SIPP offer a double whammy; not only are you spared the pain of a CGT bill in the short term, but it also means that more of your money remains sheltered from tax in the future.

Working out whether to top up a pension or an ISA is a personal decision and will depend on your financial priorities.

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Both approaches have benefits – paying the money into an ISA means you can access it at any time and the money will be paid tax free when you eventually withdraw it. On the other hand, pension income is taxable, and you won’t be able to access it until you are 55 (rising to 57 in 2028), but your contributions will get the benefit of tax relief, giving your retirement savings an immediate boost.

Offset your losses: you might want to forget about your investment losses and consign them to history, but if you are facing a CGT bill, you should be eager to resuscitate them. That’s because you can use any losses that you have incurred to offset your gains. If you have any losses from previous tax years – that have not already been used in this way – you can offset those against your gains as well, so long as they were reported to HMRC within four years.

Give money to your other half – if you are married: you don’t need to pay any CGT when you give an asset to a spouse or a civil partner. That means if you’ve used up your own CGT allowance and they haven’t, you can make tax savings by transferring some of your wealth over to them. This can be particularly beneficial if they can then shelter that wealth from tax in the future, by paying it into their own ISA or SIPP.

Even if your spouse has used up their CGT allowance, there may still be a tax saving to be made by giving your wealth to them, if they pay a lower rate of income tax than you.

But any gift you make must be outright – you cannot temporarily park the asset with your spouse and then request it back further down the line. The asset will legally belong to them, as soon as you have transferred it.

Take advice: there are plenty of steps you can take yourself to cut your CGT bill. However, if you have multiple assets or are facing a significant bill, it might make sense to get some professional advice – to ensure you don’t pay more than you need and that there aren’t any unintended consequences.