BRITONS are set to waste over half a billion pounds this tax year in unnecessary capital gains tax (CGT) payments, research from unbiased.co.uk revealed earlier this week. The professional advice website said that UK taxpayers will waste £552m by not being CGT-efficient and warned that the capital gains tax rate rise to 28 per cent for higher-rate taxpayers will add £36m to the tax wastage mountain.
With all the recent changes to income tax and CGT, it is even more important for people to be aware of how the changes could affect them and to try to be as tax efficient as possible. Unbiased.co.uk’s Karen Barrett, says: “Even before the increase, we had seen far too many people making unnecessary CGT payments – simply by not making use of tax efficient ways when it comes to disposing of their assets.”
To be as efficient as possible, you need to look at the whole spectrum of your finances. Catherine Penney, vice president responsible for tax wrap at Barclays Stockbrokers, says: “Tax efficiency has to be looked at in the round because how you plan your investments really should reflect your whole portfolio.”
So how can you make sure you are not paying CGT unnecessarily? Higher rate taxpayers could look to reduce their taxable income to below £43,875 – the threshold for higher-rate tax. If this isn’t possible, then you need to minimise your net gains that are CGT liable. There are four ways in which you can do this. First, everybody in the UK, including children, gets a £10,100 annual allowance for CGT. If you have children, it may be worth passing on assets to them or to your spouse – but remember ownership will also be transferred.
Second, spread the sale of an asset over two tax years. If you divest half your shares before the end of this tax year and then sell the rest at the start of next, then you take advantage of two years’ allowances.
Third, you must think about your income tax liability alongside your CGT liability to make sure you use your allowances in a sensible way, Penney adds.
The Isa allowance recently increased to £10,200 per person per year and assets held within an Isa are protected from income tax and CGT. With share dividends and interest on corporate bonds subject to income tax, not CGT, you should wrap these into an Isa or Sipp. Penney says: “We have a handful of clients who have more than £1m in their Isa accounts. This brings home the value of the tax wraps – by tucking your money away and being shrewd, and perhaps lucky, in some of your investment decisions it is possible to amass that sort of value and it is completely protected from income and capital gains tax.”
Fourth, you may want to consider investing in structured products. Although these often provide defined annual returns, they are normally CGT-liable rather than income tax-liable. This means you can receive a regular income but only pay up to 28 per cent tax on it rather than as much as 50 per cent. For the more adventurous, venture capital trusts (VCT) and enterprise investment schemes (EIS) would be free from CGT and give you a tax rebate.
It is worth spending some time to make sure you aren’t throwing away your money unnecessarily. Like death, taxes are a certainty but there’s no point actively seeking either of them.
FAST FACTS | CAPITAL GAINS TAX EFFICIENCY
Assets liable for CGT include: property – but not your primary residence; shares; unit trusts; possessions worth more than £6,000; and business assets.
Use your full Isa allowance to avoid paying CGT and income tax. Sipps are also free of CGT and you get an income tax rebate.
Make additional payments into your company or personal pension. This cuts the amount of your income which is liable to income tax.
Give assets to your spouse so you both use your full annual CGT allowances worth £10,100. But you will transfer ownership.