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Capital gains tax (CGT) is commonly misunderstood amongst taxpayers. Yet it’s important to spend a few minutes grasping the essentials, as it could not only open up new streams of income for your family but also help you save on your wider tax bill. Here at Cedar House, our financial advisers offer this short guide on CGT for 2020, which we hope you find helpful. If you have any questions then please do get in touch. If you’d like to discuss your own financial plan with a financial planner here at Cedar House, then please arrange a free consultation via:
020 8366 4400 or firstname.lastname@example.org
Capital Gains Tax (CGT): A Brief Overview
A capital gain refers to any increase in value on an asset you hold. For many people, this can happen to their house as it goes up in price over the years. When you eventually look to sell your property, therefore, most people hope to make a profit; possibly using the proceeds to buy a better property elsewhere, or perhaps to help fund their future retirement.
In 2019-20, the good news is that you do not need to pay any tax (i.e. capital gains tax) on any profit you make when selling your family home. Other assets, however, will often be subject to CGT when you sell them. Company shares, for instance, typically face CGT if you sell them after these have appreciated in value.
Why Consider Leveraging Capital Gains?
Some people at this stage might ask what the point of capital gains are. After all, the profits are likely to be taxed, and it brings another layer to your wealth and finances to think about. Yet it can be incredibly worthwhile, particularly for higher earners looking to lower their tax bill.
Consider the CGT bands in 2019-20. If you’re a higher or additional rate taxpayer, then you are likely to pay 20% on any gains from assets which are not deemed to be residential property. Compared to other tax rates paid by higher earners this CGT rate is quite attractive (think of the 45% income tax on those paying the additional rate!). When it comes to capital gains on any property you sell (which is not your home), higher earners will likely pay 28% CGT.
The other important aspect of CGT in 2019-20 is your capital gain allowance, which allows you to earn up to £12,000 per tax year through capital gains without facing tax. There is also a £6,000 annual allowance for trusts, which can be a very helpful tax-mitigation tool when it comes to planning your estate for inheritance tax purposes.
Another great tool to consider leveraging for CGT is your individual savings accounts (ISAs). In 2019-20, you are allowed to contribute up to £20,000 per tax year to your ISAs, and any capital gains you make on these investments will be tax-free. There are also other, niche investment opportunities which many higher-earning investors might want to consider which offer generous CGT benefits. The Enterprise Investment Scheme (EIS), for instance, allows you to earn capital gains on your EIS shares, tax-free, provided you hold them for at least three years. Bear in mind, however, that schemes such as EIS are widely regarded as higher-risk investment opportunities, and you should consult a financial adviser before committing capital.
For many people, they are likely to think about CGT when it comes to selling property. As noted above, you do not pay CGT on the proceeds from selling your own home in 2019-20. However, if you have a property portfolio and wish to sell some of them, you will need to do some careful tax planning (ideally with the help of an experienced professional).
First of all, if you will need to pay CGT on your property then it’s important to be aware of when you will need to pay. Usually, you will need to report the sale via a Self-Assessment form as the next tax year approaches. For instance, if you sell a property in May 2020 then the transaction will have happened in the 2020-21 tax year. Therefore, you would have to declare your CGT liability and pay the bill by 31 January 2022.
Secondly, if you sell multiple assets in a given tax year then it’s important to bear in mind how the capital gains system works. For instance, if you sell a second home then you can mitigate your CGT by deducting legitimate costs involved during the transaction, such as legal fees. It’s also important to note that losses from the sale of certain assets can be offset against the gains made on other ones.
Imagine, for example, that you sell one property in your portfolio and it makes a £40,000 loss. You also sell another for a profit, then the loss on the first property can be used to increase your tax-free gain on the second. This can have important tax-planning implications, as it might influence which assets you choose to sell in a given tax year to mitigate your overall CGT. Again, here we recommend you seek professional financial advice to ensure you have all the information you need to make a decision you are happy with over the long run.
If you would like to discuss your financial plan with a member of our team, then get in touch today to arrange a free consultation: 020 8366 4400 or email@example.com.