What is capital gains tax?

Think of capital gains tax (CGT) as something you pay when you make money on  something that has increased in value when you sell it. This could be anything, from a house or even some jewellery. A typical situation that is getting more common is if you bought some shares for £1000 and sold them a month later for £2,000, the £1000 profit you made could be subject to CGT.

How much CGT you pay depends on a number of things. Firstly, it depends on what you are selling and how much profit you have made. It also depends on how much money you make overall in a year. For example, if you earn more, you might pay a higher rate of tax on your gains. The total amount of gain you make in a tax year is also reduced by the Annual Exempt Amount an allowance each individual is given in each tax year.

You need to know what CGT rules, exemptions and allowances are in force at the time you sell as not all gains are always taxed. For instance, if you cash in certain types of investments like ISAs, you might not have to pay any tax on the profit made.
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How to reduce the capital gains tax you pay

There are a few things you can do to reduce the amount of CGT you pay.

• The rate of tax you pay depends on how much money you make overall. If you can reduce the income you are taxed on, this might mean you can pay capital gains tax at a lower rate. One way to do this is to make increased pension contributions as these reduce your income for tax purposes.
• Where an asset can be separated, a portfolio of shares is a good example, you might be able to split the sale between two tax years. For example, you could sell one tranche of shares on 5th April, and then another on 6th April. This would give you two years’ worth of allowances to spread any gain against.
• If you have no plans to sell off shares during a tax year, you could change your mind and sell some of them to use up your Annual Exempt Amount. If you then buy them back within an ISA any future gains you make under the present rules will then be tax-free.
• The Annual Exempt Amount can be combined for jointly owned assets with your spouse or civil partner. You can also transfer assets between you without having to pay capital gains tax. If your spouse or civil partner pays income tax at a lower rate than you or perhaps has made a loss on selling other assets, this might be a way of reducing the capital gains tax you pay as a couple.

The reductions in Annual Exempt Amount mean that more of us could end up having to pay capital gains tax. However, there may be ways to reduce the amount you pay.

As experienced tax advisers, we can help you calculate what capital gains tax you might have to pay and can provide advice on the steps that may help you reduce that tax.

Why not talk to us to make sure you’re following the rules and not paying more tax than you need to.  If you need help with any aspect of your taxation, please do not hesitate to call us on 01482 772261 or email us. We will be very happy to help you with any query you may have.