Capital Gains Tax (CGT) is a tax levied on the profit you make from selling assets, such as stocks, shares, and other investments. In England & Wales, the profit is broadly calculated as the sale price minus the purchase price and any relevant costs. The CGT rate depends on the amount of income you have in a tax year, including the gain made on the asset. Gains below the annual allowance, which is currently £12,300, are tax-free. For gains above the annual allowance, basic rate taxpayers pay CGT at 10%, while higher or additional rate taxpayers pay 20%.
The capital gains tax annual allowance is halving this coming year and the next until it is only £3,000.
Most investors do not use their full CGT annual allowance each year. This means they are missing out on a tax-free allowance. The CGT annual allowance is similar to the personal allowance, but as more people have income than capital gains the latter is more widely known about and used.
We believe that CGT and the CGT annual allowance is important in planning, and we do consider how our clients can make the most of this, and other, “tax breaks”.
For some, the idea of paying tax may be unappealing, but it’s important to remember that CGT typically only applies when you’ve made a profit from selling an asset. This profit is a sign that your investments have grown and increased in value. I like to think that the government incentivises investment by offering lower CGT rates compared to income tax rates. This may or may not be true, but it certainly does make CGT an more attractive tax than others for most taxpayers, as it allows them to realise profits from investments at a lower tax rate than other “profits”.
It is worth noting that property investments have different CGT rates compared to other investments. Residential property investments are taxed at 18% for basic rate taxpayers and 28% for higher or additional rate taxpayers, taking into account their income tax and the annual CGT allowance. This is a higher rate compared to other investments, and is more difficult to reduce or even eliminate the amount of CGT you have to pay on property investments, due to the illiquid nature of property. There is a principal primary residence exemption for the home you live in, but you cannot sell a portion of a property investment, as you can with most other investments.
The benefits of investing are clear, particularly in tax privileged “wrappers” like Pensions and ISAs. However, where this is not possible, it’s important to consider the tax implications of your investments and make informed decisions to minimise your tax liability. This could include changing ownership between spouses or civil partners, but it can also include understanding CGT, using your annual allowance wisely and the other tax strategies legitimately available to investors.
Good planning can make the most of your investments, and maximise your returns – without taking additional investment risk.
In conclusion, paying CGT is not a bad thing. It’s a natural consequence of making a profit on your investments and the rates of CGT are generally lower than the rates of income tax. So, next time you’re faced with a CGT bill, take a moment to celebrate the success of your investments and remember that paying CGT is a sign that you’ve made a profit!