Capital Gain Tax – What It Is? How To Reduce It?

Are you planning to sell your property? If yes, you may have to pay a significant amount as tax on the gains you will make by selling it. Welcome to the world of capital gains tax (CGT)! It is the tax you need to pay while selling some of your assets and making some profit on them. Anyway, speculations are high that there will be a hike in the CGT sooner or later. So, let us learn about it in detail and ways to reduce it.  

What is Capital Gain Tax?

In simple words, Capital Gains Tax is a tax that is levied on the gains you make when you dispose of your assets, and these assets include the following:

• Personal possessions worth £6,000 or more, apart from your car
• Property that’s not your primary residence, including
• Buy-to-let properties
• Business premises
• Land
• Inherited property
• Your main home
  • if you’ve let it out to a tenant
  • used it for any business
  • the total area is over 5000 square metres
• Shares that are not in an Individual Savings Account (ISA) or Personal Equity Plan (PEP)
• Business assets that include:
  • Land and buildings
  • Fixtures and fittings
  • Plant and machinery
  • Shares
  • Registered trademarks
  • Reputation of your business

Remember, all these are termed as chargeable assets. CGT will also apply when you sell crypto assets, but only when your gains exceed the tax-free allowance.

Ways to Reduce CGT

Here are several strategies by which it will become possible for you to reduce CGT. These are as follows:

Use Your CGT Exemption

 Use the annual CGT exemption that allows you to make gains without paying any tax. Currently, it is up to £3,000 in the 2024-2025 tax year. Remember, it can’t be carried forward into the next tax year.

Transfer Your Assets to a Spouse/Civil Partner/Charity

 
Doing this will exempt you from CGT, but the transfer must be a genuine gift. However, if you are separated and do not live together under one roof, this exemption will not apply.

Offset Gains with Your Losses

If you have some investments that you want to sell to gain profit, team it up with an investment whose value has been depreciated over time. Thus, your profit on one investment and loss on the sale of another investment cancel each other out or at least reduce the overall CGT liability.

Invest in an ISA

Invest up to £20,000 in an ISA, and there will be no CGT, as you can save tax-free with such an account. If you are married or have a civil partner, you can save a significant amount of up to £40,000.

Contribute to Pension

As an investment held within a pension pot can grow without paying any CGT, go for a long-term investment. This will allow the complete value of your investment to increase over time without being eroded by the capital gain tax.

Invest in an Enterprise Investment Scheme

 
Designed to help small companies, the Enterprise Investment Scheme is apt to save CGT as gains made on investments in an EIS are exempted from CGT if you can hold your EIS shares for a period of minimum three years.

It is vital to understand all about the capital gain tax and, of course, strategies to minimize your overall CGT liability so that you can have more money as savings. However, it is best to seek professional advice from an experienced accountant or a UK-based tax consultant to make the most of available allowances. With its offices in London and Crawley, CoreAdviz is an accounting firm having a robust team of skilled accountants and tax consultants available for personalized tax planning and other services.