Capital Gains Tax (CGT) can be a complex topic, but it is crucial to have a good understanding of CGT to understand, manage and minimise your tax liability.
What is Capital Gains Tax?
CGT is a tax on the gains made when you sell or dispose of an asset that has increased in value. This includes transferring assets to another person or a business.
It applies to assets like shares, property (excluding your main residence), and personal possessions worth over £6000, except for cars.
Annual exemption allowance
Each individual has an annual CGT exemption allowance of £6,000 (previously £12,300 in 2022/23).
You only pay CGT on gains above this threshold.
The allowance cannot be carried forward, so utilise it effectively to reduce tax liability. Be aware that this exemption will be reduced further to £3,000 from April 2024.
Tax rates for Capital Gains
CGT rates depend on your income and asset type.
For basic-rate taxpayers, rates are 10 per cent on assets and 18 per cent on residential property.
For higher and additional-rate taxpayers, rates are 20 per cent on assets and 28 per cent on residential property.
Your main home will not usually be subject to CGT thanks to the Principal Private Residence Relief.
Knowing your tax bracket is an important part of planning accordingly.
Reducing your Capital Gains Tax liability
You can reduce CGT liability by:
· Utilising your annual exemption allowance
· Transferring assets to a spouse/civil partner to use their allowance
· Offsetting capital losses against gains
· Using additional allowances, such as Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief)
Understanding CGT is crucial for informed investment decisions, planning for succession and later life.
Stay aware of tax rates, allowances, and liability reduction strategies.
