How to reduce your Capital Gains Tax bill

Brits paid more than £5bn of Capital Gains Tax in the last year, that’s more than the UK's total Inheritance Tax bill. But there are a number of steps you can take to reduce your CGT bill.

It’s easy to believe Capital Gains Tax (CGT) is a tax that only the wealthiest investors pay but, in fact, HMRC raises more money from it than from Inheritance Tax.

If you sell any investments that were not held in a pension fund or an ISA, you could be liable for CGT on the profits you earned. The same goes for sales of buy-to-let property or any property which is not your main residence. If you sell valuable belongings such as artworks, jewellery or furniture for £6,000 or more, those gains too might be liable to CGT.

It’s levied at the rate of 18% if you’re a basic rate taxpayer, and 28% for higher rate taxpayers. However, not all gains are taxed. Every individual can take the first £11,100 of any gains in the current tax year tax-free. If your spouse is not using their allowance, you can transfer assets to them. If both then sell assets before the end of the year, you can effectively double the allowance to £22,200.

You don’t necessarily have to part with the assets forever. In the past, investors could use a technique called ‘bed and breakfasting’ to create a disposal of an asset for CGT purposes (and therefore a gain or a loss), followed by the prompt repurchase of the same asset.

Today, however, HMRC carries out ‘share matching’ – if the same shares are bought back less than 30 days after they were sold, the sale does not give rise to a CGT profit or loss. Investors can wait 30 days before repurchasing the stocks, though the market may have moved, potentially forcing investors to pay a higher price. So before selling simply to realise a gain for tax purposes, consider whether running this ‘market risk’ would be worth the tax savings.

The ban on bed and breakfasting doesn’t apply to investments that are repurchased inside an ISA or a self-invested pension plan (SIPP). So for those selling specifically to realise tax gains, it might be worth buying them back inside one of these tax wrappers – in which case, this can be done immediately. This is known as ‘Bed and ISA’ or ‘Bed and SIPP’. There are costs involved, so investors should take advice.

Selling investments can lead to losses as well as gains, and these losses can be offset against gains. So, if the gains are going to exceed the annual allowance, investors could sell a losing investment. This would crystallise a loss that could bring the gains back down below the limit.

These are simple steps that can be taken to reduce the burden of CGT, but which also underline the value of wrappers such as ISAs, which offer a permanent shelter from the threat of tax.

Tony Mudd is a divisional director at wealth management firm St. James’s Place