As you begin to accrue gains on certain capital assets (such as shares, exchange-traded funds, and mutual funds), you may be required to pay capital tax gains (CGT) on your earnings. This tax will be at the rate of 10% for basic-rate tax payers, or 20% for higher and tax additional-rate taxpayers.
CGT is also charged on profits gotten from the sale of a second home. This will be charged at the rate of 18% for basic-rate taxpayers, and 28% for higher rate taxpayers. While it is illegal to avoid making payments when you are liable for capital gains tax, it’s important to make sure you take every possible step to reduce the amount you owe.
Take advantage of your annual allowance
Every year, each individual, even kids, are entitled to an annual allowance of £11,300 which cannot be carried forward. The implication is that you can make profits to the tune of £11,300 without any CGT obligations. Married couples as well as civil partners can unconditionally transfer assets between themselves at no cost, allowing you double your annual allowance up to £22,600.
Match your costs
CGT is to be paid only on net profits. Gains and losses from the same year should be matched up so that they offset each other. With every cost, from transaction charges to fees and commissions, factored in, you can considerably reduce your capital gains tax. If your costs and losses outweigh your total profit, the balance can be carried forward to future years.
Reduce your taxable income
Your CGT rate is variable, depending on your income tax. By managing your income tax rate, you can successfully reduce your CGT rate. Without cutting corners, simple actions such as contributing to a pension fund or making charitable donations can reduce your income tax rate.
Take advantage of exemptions
CGT rules allow for the exemption of certain assets. Assets termed “chattels” by HMRC which are sold below the £6,000-mark can be excluded from your calculations. Similarly, assets judged to have a lifespan of 50 years or less – usually termed “wasting assets” can also be excluded. Unlike second homes or beyond, private residences (first homes) are exempt from CGT under the private residence relief (PRR) status. Indeed, you can also claim PRR for the period you lived in a home, and up to 18 months after. These 18 months are added to the total number of years for which you occupied the home, and can cut your CGT on the property by half.
Capital gains tax 2018 rates are at markedly low levels compared to the recent past. As you aim to lower your tax payment, also keep in mind that now will be a good time to declare. If there are any long standing gains which are as yet undeclared, you can take advantage of this time and do so. Although you cannot escape paying your CGT when due, you can cut down the cost with careful, sensible planning.