How to Make the Most of Capital Gains Tax Exemptions

Whether you are saving or investing, tax efficiency is an important aspect to consider as it can make a significant difference to your overall wealth and minimize the tax burden. Capital Gains Tax (CGT) is levied on gains realized after the sale, transfer, gift or exchange of certain assets. CGT is the amount, which is the difference between the selling price and the buying price of any asset.

The tax generally applies to stocks, investment funds, secondary properties, sale of a business, inherited properties, valuable assets, assets transferred below market value and cryptocurrencies .

CGT in the UK depends on two things: whether the taxpayer is a base rate, top rate or additional rate taxpayer, and the type of asset being sold. If you are a higher or additional rate taxpayer, you must pay 28% on the gain from residential property and 20% on other taxable assets, and base rate taxpayers must pay 18% on residential property and 10% on other assets.

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Tax experts are urging Britons to make the most of the capital gains tax relief before the April 5 deadline as CGT bills are set to rise. Savers can choose to hold their stock market-linked investments in an Individual Savings Account (ISA) or in tax-exempt retirement accounts. For the 2021/22 tax year the capital gain deduction is £12,300 meaning that if your gain is less than this amount in that tax year no capital tax must be paid.

Here are five ways to make the most of capital gains tax exemptions.

  1. Compensated losses

You can minimize your CGT liability by using losses to offset your gains in the same tax year. As CGT is calculated on the gains you make from selling assets, you can deduct your gain from the losses you incurred from selling other assets that have depreciated in value.

Additionally, you can carry forward unused losses from previous tax years to bring your gains back under the exemption limit, provided they are reported to HM Revenue & Customs (HMRC) within four years of the end of the tax year. tax year in which the assets were sold. When calculating CGT liability, you can also offset certain transaction costs such as attorney fees or realtor fees.

  1. Transfer of assets

If you are married or in a civil partnership you can use two sets of allowances totaling £24,600 as it is exempt from CGT meaning you can transfer assets to your partner, known as transfer between spouses to take advantage of the CGT exemption. .

There are often no transfer fees. You can contact your broker, platform or advisor to facilitate the transfer.

Read also : What are the best lifetime ISAs right now?

Use annual allowances

If you invest in assets beyond the ISA or retirement packages and hold the asset long-term without selling it, you can accumulate a huge CGT liability that will be taxed when you sell all of your holdings. This is also known as pregnancy gain.

To avoid this, try to use your allocation each year by giving away a portion of the asset to reduce the risk of incurring a large CGT liability in the future. The CGT allowance cannot be carried over to the following tax year.

The CGT allowance cannot be carried over to the following tax year.

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  1. Using the ISA and Retirement Allowances

Profits made on assets held in ISA and retirement accounts are exempt from CGT, so it makes sense to use tax-advantaged retirement allowances and ISAs, especially for a higher-rate taxpayer. For the 2021/22 tax year the ISA allowance is £20,000 and for married couples and civil partners it is £40,000.

You may consider disposing of all of your assets to use the CGT exemption and then immediately redeeming the same assets inside the ISA account. This strategy is known as Bed and ISA or Bed and Pension.

Also read: 5 stock investing tips for female investors

  1. Invest in an Enterprise Investment Program (EIS)

You can consider reinvesting your capital gain in Enterprise Investment Scheme (EIS) companies which are exempt from CGT. EIS companies are small, unlisted and start-up companies and are therefore very risky and illiquid. In addition, investing in these companies comes with a 30% income tax credit. A CGT liability is only deferred when investing in EIS and recrystallizes when the ESI shares are sold, but it may be possible to continue to defer the liability.

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