Capital gains: three ways to reduce your tax bill
Reports from the Office for Budget Responsibility indicate receipts from capital gains tax (CGT) are set to surge to almost £10bn this year. This continues a trend of almost double digit growth experienced in recent years. CGT is charged on profits from the sale of various assets. These could include: funds, shares, buy-to-let properties, or paintings and antiques worth over £6,000. The rate varies with income and the type of asset sold.
We’ve gathered some of the best ways for you to maximise your tax efficiency and avoid soaking up any unnecessary costs:
1. Max out your pension contributions
A prudent step is to max out any contributions towards your pension. Why? Because neither income from any investments or capital gains if put into a pension is liable to taxation and as such any investments made inside the pension wrapper are CGT free.
Another bonus towards employing this strategy if you earn close to the higher rate threshold is that putting money into your pension provides has the potential to raise your higher-rate threshold, which reduces your income tax and means that some of the tax you pay on capital gains is limited to 18%.
2. Invest in early stage startups with the ‘Seed Enterprise Investment Scheme’ (SEIS)
SEIS are focused on the smallest start-up businesses – to reflect the additional riskiness of these type of investments, income tax relief of 50% is up for grabs. On top of this, any gain rolled into an SEIS is 50% deferred and 50% exempt, wiping out half your CGT.
If the project is successful there is no CGT to pay on the sale of SEIS shares, although they must be held for at least three years. A maximum of £100,000 a year can be invested in these schemes. Although a word of warning: startup investing is extremely risky and volatile, and should only be undertaken if your investment portfolio is already sufficiently diversified and you can afford to lose the investment. Although I do have to add that the loss is tax deductible against your income…
3. Carry your losses forward
Nobody likes to lose money on an investment. But, every cloud has a silver lining. At least you can ‘crystallise’ your losses in any of your poorly performing shares or funds, and set these capital losses against your future gains. You must enter capital losses on your tax return, however. As soon as you’ve done that, these can be called upon as you deem necessary at any point in future.
With proper planning, it’s often possible to structure projects in low tax vehicles both in the UK and offshore. If you’re likely to make a substantial capital gain in the future and would like advice on what to do, please get in touch.