Avoiding Capital Gains Tax
If you own assets such as property, business premises, shares or securities, and decide to dispose of them by selling, transferring or exchanging them, you will, in almost all cases, have to pay capital gains tax on any gains above the Annual Exempt Amount of £10,900. For those whose income tax makes them a basic taxpayer, they will pay their capital gains tax at a rate of 18%, whilst those who earn more, and are therefore a higher income taxpayer, will pay it at a rate of 28%. This can add up to quite a hefty tax bill, particularly if you sell off multiple assets in a single year. However, there are steps which you can take to reduce the capital gains tax you owe. If you’re interested in avoiding capital gains tax (without breaking the law!), then read on.
The first tip for avoiding capital gains tax is to make use of your losses; for instance, if you decide to sell off the assets which are held in a trust and end up making a loss, you can then offset this loss against the gains you make from selling another asset. Bear in mind however, that depending on the type of assets you have sold, there may be anti-avoidance rules which prevent offsetting. However, in cases where offsetting is permitted, it’s worth noting that you can not only offset current tax year losses, but can also carry over losses from the previous year and use them to offset this year’s gains.
If you own shares, it may be worth your while putting them in an Individual Savings Account (ISA). Any capital gains earned from shares in an ISA are completely exempt from capital gains tax. You are allowed to put a total amount of £11,280 into an ISA every year. Setting up an ISA is very easy to do and could save you a lot of money over the course of a few years.
Although it might seem obvious, one of the best ways to avoid capital gains tax is to hold onto your asset. You are only ever liable for capital gains tax after its sale or transfer. Whilst you might make a tidy sum from selling it, this amount could be dramatically reduced by the tax you owe, even when your AEA is taken into account. Instead, you could opt for assets which allow you to make money from them whilst you own them. Examples of this might include a second home which you rent out (this will also allow you to qualify for Letting Relief), or keeping your shares in a shareholding, which would not only provide a dividend income, but would also allow the value of the shares to grow.
Under normal circumstances, capital gains tax would be payable when assets are transferred into a trust. However, the settlor - that is, the person making the transfer – will not have to pay tax if they make a claim for hold-over relief. This isn’t a permanent way to avoid paying capital gains tax, but it does allow you to defer the charge until the asset is eventually taken out of the trust and sold, which can be useful in instances where you can’t afford to pay the tax straightaway.
Up until a few years ago, one very simple and effective way of avoiding capital gains tax on shares, was to sell off the shares up to the AEA, and therefore make use of your capital gains tax allowance, and then immediately buy those shares back from the same company. This technique was referred to as ‘bed and breakfasting’; however you are no longer allowed to do this, as the HRMC does not permit people to buy their shares back for at least a month after selling them. But, if you are married, you can sidestep this restriction by having your husband or wife purchase those shares instead of you.
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