The saying goes “there’s nothing more certain than death and taxes…”. However, I’ve found taxes always leave room for uncertainty and confusion.
With changes to tax rates and tax allowances at least annually, it’s important to keep up-to-date with how these changes may affect you and your financial plans.
Today, I just want to touch on the subject of ‘Capital Gains’.
Each individual has an annual Capital Gains Allowance; £11,300 in the current tax year 2017/18.
This means you can realise a gain of £11,300 and pay zero tax!
Above £11,300, how much you pay in Capital Gains Tax depends on whether the gains fall into the basic rate, higher rate or additional rate tax band:
- Basic Rate Taxpayer: 10% tax
- Higher & Additional Rate Taxpayers: 20% tax
As you can see, the Capital Gains Tax Rates are half that of Income Tax Rates. For an additional rate tax payer, 25% less than Income Tax!
So how can you ensure that you use this allowance effectively?
- Understand your Investment Portfolio and Tax Wrappers. Some investments produce ‘Income’ and some produce ‘Capital Gains’. Discuss with your advisor where your money is invested and which type of tax it is subject to.
- Regularly rebalance your investment portfolios. When some assets have outperformed others, it’s important to bring your asset mix back to your original risk profile. Your advisor will help you to do this. Read more about the importance of rebalancing.
- Spouses/civil partners can pass assets between them, if one has not yet used their tax-free allowance, or is in a lower tax bracket. The same asset could be taxed less if given to a partner, meaning as a household you are able to keep more of your profited money.
- If you plan to invest, do so while CGT rates are at their lowest. As at April 2016, Capital Gains Tax has dropped ten percent for both Basic Rate Taxpayers and Higher Rate Taxpayers. In fact, the UK has some of the lowest Capital Gains Tax rates in the world, so take advantage of them if investing is suitable for you.
- You can measure any capital loss against your annual gains to reduce your tax bill – indefinitely.
- Put it in an ISA or pension fund. If you realise some of your gains to utilise annual capital gains allowances and then you want to immediately buy them back, placing funds into an ISA or Pension will keep any future growth free of income and capital gains tax.
Why Open a ‘General Investment Account’?
Generally, when investing for the long term, Advisors will recommend ISA and Pensions ‘wrappers’ as they are the most tax efficient way to invest.
However, both have either annual or lifetime limits on how much you can invest in these ‘pots’.
The ‘General Investment Account’ is just another type of Investment Wrapper, where Growth Assets will be subject to Capital Gains Tax rather than Income Tax.
If your existing investments are all in ISAs and Pensions (which is great!) you will not be using your annual Capital Gains Tax Allowance. The General Investment Account is another way of investing tax efficiently.
For more information read my blog post, Dividend Tax Changes for Investors.
Second Property Issue
The rules are different when you make a profit on property.
Profit from your ‘Main Residence’ is free from Capital Gains Tax.
If you sell a ‘Second Property’ and the gain exceeds the tax-free allowance of £11,300, another 8% is added to the tax bills of both basic and higher rate taxpayers:
- Basic Rate Taxpayer: 18% tax
- Higher & Additional Rate Taxpayers: 28% tax
Knowing where you stand, what you are entitled to, and how you can reduce your overall tax bill is key to a long-term investment strategy that will produce great results and returns for you and your family.
At Quadrant, we believe in planning for everything that comes your way. We will help you to calculate everything from your tolerance of risk when investing to your personal, long-term goals for yourself and your family. If you feel you would like to have a better understanding of your Capital Gains Tax – maybe you’re selling a second property, or have acquired assets that have recently gone up in value – we’d love to sit down with you and ensure you are making the most of your profits.
This article does not constitute financial advice. Individuals must not rely on this information to make a financial or investment decision. Before making any decision, we recommend you consult your financial planner to take into account your particular investment objectives, financial situation and individual needs. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change. The FCA does not regulate tax planning advice.