5 Tips to Keep Your Capital Gains Tax as Low as Legally Possible
There are a lot of different taxes in the UK, and it’s important that you’re aware not only of what affects you – but how it does, and whether there’s any actions you can take to minimise the impact, legally.
Capital Gains Tax (CGT) is a tax that is applied to the profit of an item that has been disposed of (sold) that has increased in value – so it’s not necessarily applied to the entire amount of money you’ve received, rather the amount you’ve gained in profit from it.
No one likes to pay more tax than they have to, so we’ve put together 5 handy tips to keep in mind when you’re handling your CGT, in order to keep the amount as low as possible!
1. Know Your Assets: Is It Personal or Business?
Before you make the disposal, consider carefully whether the asset is a business asset or a personal one. For personal sales, if the item (excluding vehicles and property) is under £6,000 then you will need to pay CGT on it, but if it’s under this threshold then you may not need to pay any CGT on it.
So, if you’re selling furniture or fittings, that were originally provided from your home, or personal property, and your small business did not provide a payment for their use or ownership, then selling them can be considered a personal expense and the money from the sale would not need to be calculated for CGT.
2. Make Use of Your Allowances and Dispose of Assets on Schedule
The allowances for CGT are being reduced over the next few years, so if you’re planning on selling some high profit assets, it may be better to do so sooner than later.
For the 2022/23 tax year the allowance is £12,300 – but in 23/24 this drops to £6,000 and for 24/25 it falls further to £3,000. This of course may be subject to change (depending on yearly budgets) but it should be considered accurate unless otherwise announced.
Prioritise your disposals, so high value items are sold when there is still a larger tax free allowance that can be applied against it, and work down to the less profitable disposals once the allowance is smaller.
3. Keep an Eye on Costs and Deduct Them as Appropriate
What costs are related to the asset and its disposal? Keep a careful track on what is being spent out and where, and make sure you have the receipts, invoices, and other relevant communications – because you can deduct allowable costs from the profit of the disposal, which will reduce your CGT liability.
For example, if you are selling a rental property, you may incur solicitor’s fees, maintenance and cleaning costs, stamp duty paid on the property, etc – these are all acceptable expenses which can be deducted and will reduce the amount of profit that the CG is calculated against.
4. Make Smart Investments with an ISA or Pension
A simple, and fairly straightforward way to avoid needing to pay CGT is investing within a tax-efficient account, where the gains are tax-free.
It is also helped by the annual ISA allowance of £20,000 which means you can save up to £20,000 before being required to pay tax. This allowance is flexible and can be used on one account, or split across different ones – so if you do have multiple savings options, you need to carefully consider how best to use your allowance in order to reduce your tax liabilities effectively.
Pensions are also another investment which can reduce CGT liabilities as these accounts can be tax-free, and the income earned from these investments are exempt from CGT. This not only helps you reduce your tax bill at the time, but it’s a great way of preparing for the future.
5. Know What Reliefs and Schemes You Can Benefit From
There are reliefs and schemes available to individuals and businesses, which can help reduce CGT liabilities, but it’s vital that you know how they work – and when you should be applying them.
Business Asset Disposal Relief (formally known as Entrepreneur’s Relief) can reduce CGT down to paying 10% on the gains qualifying assets, so it’s well worth checking your eligibility. In order to make a claim for this relief, you will need to either do so through your Self-Assessment Tax Return, or by filling in Section A of the Business Asset Disposal Relief help sheet.
Gift Hold-Over relief is another option where you are not required to pay CGT, this is where you give away business assets (this includes certain qualifying shares) or sell them for less than they’re worth in order to help the buyer.
In order to qualify for this relief when giving away business assets, you must be:
- A sole trader
- A business partner
- Have at least 5% of voting rights in the company
And you must use the assets in your business or personal company. There will be no CGT to pay on the assets given away, however you may have to pay tax if you sell the asset for less than it’s worth to help the buyer, or if you make a gain on what you paid for it – we recommend that you investigate this option carefully before making use of it.
Plan Ahead and Make Informed Choices
Handling the disposal of assets isn’t just about deciding to sell something and being done with it; you really need to consider your timing, what reliefs or reductions you can benefit from, and how best to use your financial situation to your advantage.
It does take time and effort, and if you’re not used to it, then it can be difficult – even if you are a dab hand, it’s still complex because there may be different considerations or circumstances to consider each time.
If you’re planning on disposing of your assets, or have Capital Gains Tax concerns that you want addressed, get in touch with our team of experts – we’re here to provide you with tools and tips to help you manage, or take control for you, so you’re getting the most from your money on every disposal, and your accounts are fully accounted for.
Contact us now for a quick chat or a no-obligation quote, and let’s work together today.
