Capital Gains Tax – the forgotten allowance

Capital Gains Tax is less known and less well understood than the headline-grabbing Income Tax, but using its annual allowance can be one of the most beneficial ways to create tax-free returns. In this article we look at the rules in more detail and show you how you can take advantage of this valuable allowance as part of your tax planning strategy.

What is Capital Gains Tax and how much is it?

Capital Gains Tax is a tax on your profits when you ‘dispose of’ an asset such as an investment, jewellery or a second home. A disposal could include selling the asset, swapping it for something else or giving it away to somebody other than your spouse.

The rate of Capital Gains Tax you pay depends on whether you are a basic-rate or higher-rate taxpayer. Usually basic-rate taxpayers pay 10% and higher-rate taxpayers pay 20%. However, these change to 18% and 28% for residential properties.

How much is the annual exemption?

Everybody gets an annual allowance for Capital Gains Tax. This is known as the annual exemption and it is the amount of profit you can make each tax year before you will have to pay Capital Gains Tax.

In the 2019/20 tax year the allowance is £12,000 per person. This means that married couples or civil partners can make up to £24,000 of profit on jointly owned assets this year before paying tax.

Making the most of your allowance

If you keep your investments or other assets for many years without selling, your allowance could go unused – and it doesn’t roll over between tax years. This could lead to a big tax bill further down the line when you eventually sell or give away the assets.

However, if you have a portfolio of investments you may be able to take advantage of your allowance by selling part of the portfolio each year. With careful planning you could sell enough of your investments to use up the allowance, and then either reinvest the cash in the same investments or choose others.

If you are married or in a civil partnership, you can also take advantage of the fact that transfers between spouses are exempt from Capital Gains Tax. This means that if one partner has more unused allowance or pays tax at a lower rate than the other, you could potentially save tax by transferring the assets to them before they are sold.

Need some help with tax planning?

At Tilney our financial planners spend their days helping people to structure their finances tax-efficiently and make the most of their allowances. If you need some help with tax planning please book an initial consultation today. There is no charge for the consultation – it’s simply a chance to find out how we could help you.

Book your consultation by filling out this short form or calling us on 020 7189 2400.

Find out more about your tax allowances

If you’d just like more information on the various options you have for saving tax, download our guide to tax-efficient investing. The guide covers everything from making ISA contributions to setting up trusts.

 

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