These are critical questions for business owners and individuals with high-value assets to understand to maximise tax reliefs and avoid making unnecessary payments.
In this article, we’ll examine what CGT is and how you can reduce your liability with losses and timely asset disposal.
Understanding Capital Gains Tax
CGT is charged on the gains you make when selling assets such as property, shares, or valuable antiques.
It’s not the total amount received from the sale that is taxed, but rather the gain (profit) made over the asset’s original purchase cost.
For example, if you sell a piece of jewellery for £10,000 that you purchased for £8,500, you will be taxed on the £1,500 profit that you made.
The rates of CGT vary based on the asset type and the seller’s income tax band.
However, not all asset disposals result in profits; some may incur losses, and these losses play a pivotal role in calculating CGT.
How losses affect capital gains
When you sell an asset for less than what you paid for it, you make a ‘capital loss.’ Rather than simply being an unfortunate financial outcome, these losses can be strategically used to reduce your CGT on other gains.
- Offsetting losses against gains: The most direct way a loss impacts CGT is through offsetting. If in the same tax year, you’ve sold another asset at a gain, you can offset your losses against these gains. This reduces the total taxable gain. For instance, if you made a £20,000 gain selling shares but also a £5,000 loss on a piece of art, you can offset the loss against the gain, leaving you with a taxable gain of £15,000.
- Carrying losses forward: If your losses exceed your gains in a tax year, or if you have no gains to offset them against, you can carry forward these losses to future tax years. This can be particularly advantageous if you anticipate making substantial gains in the future. There’s no time limit on how long you can carry forward these losses.
Reporting losses
To make use of these losses, they must be reported to HM Revenue & Customs (HMRC) through a Self-Assessment tax return.
It is important to keep accurate records of the purchase and sale of assets, as well as calculations of gains or losses. These records are crucial not only for current tax filing but for future reference when carrying forward losses.
Strategic reduction of CGT
Aside from balancing gains with losses, timing is everything when it comes to reducing the amount of CGT that you have to pay. To make your gains tax-efficient, consider taking the following precautions:
- Timing of asset disposal: Consider the timing of selling assets. If you anticipate a high-income year with potential capital gains, it might be wise to also dispose of any loss-making assets in the same year to offset the gains.
- Selective disposal: If you hold multiple assets, some at a loss and some at a gain, carefully plan which assets to sell and when. This strategic disposal can optimise your tax position.
- Long-term planning: Incorporate your capital assets and potential losses into your long-term financial planning. This includes considering the CGT implications for your investment strategy.
Special circumstances
There are certain assets and situations where CGT and losses are treated differently. For example, losses on assets held in an ISA or pension are not subject to CGT and hence cannot be used to offset gains.
In addition, losses on gambling or lottery winnings are not recognised for CGT purposes.
Capitalising on advice
Managing CGT efficiently requires a comprehensive understanding of how gains and losses on assets interact.
By effectively using losses to offset gains, you can significantly reduce your CGT liability.
This aspect of tax planning is often overlooked but can make a considerable difference in your overall tax strategy – particularly in tandem with timely disposal of assets and long-term planning.
Engaging with a tax professional can provide tailored advice and ensure that you are maximising your tax efficiency in line with current tax laws and regulations.
Please contact us today for expert advice on reducing your Capital Gains Tax liability.