You might be wondering how to reduce your Capital Gains Tax (CGT) liability. Fortunately – it is possible. There are several ways to reduce your CGT liability, depending on your circumstances.
CGT is a type of tax on profits from certain assets. Knowing exactly what to do while trying to minimise your CGT liability isn’t always easy – but we’re here to explain what you could do. Read on to learn more about CGT and how to reduce liability.
What is CGT?
Capital Gains Tax (CGT), is a tax on the profit you make from selling or disposing of an asset. This could be a house, shares in a company, or something else.
It’s important to note that you’re only taxed on the amount of profit from selling the asset, not the whole amount of money that you receive.
For example, if you bought something for £10,000 and later sold it for £20,000, you’ve made a gain of £10,000 – and this is what you’ll pay CGT on.
You’ll only be required to pay CGT when the profit you’ve made on an asset is above your annual tax-free allowance, which is:
- £3,000
- £1,500 for trusts in the UK
You also don’t need to pay CGT on certain assets, such as gains from ISAs or PEPs, lottery or winnings, and UK government gilts and Premium Bonds betting. However, if you do need to pay CGT, you must:
- Report by 31st December within the tax year after making your gain
- Pay any CGT due by 31st of January
CGT is paid directly to HMRC. You can report and pay through your Self Assessment tax return, or alternatively use bank transfer or cheques to complete your payment successfully.
Reducing Your CGT Liability
As discussed, the CGT allowance means that you can make tax-free gains of £3,000. However, this also means that you’ll need to pay CGT on anything above this amount.
Dealing with CGT can be a little confusing, especially when you’re looking to reduce your tax liability as much as possible. But not to worry, there are plenty of ways you could reduce your CGT liability – and we’re here to tell you how.
1 – Use Your Allowance
Everyone is entitled to an annual allowance of £3,000. Many people are unaware that this amount can’t be carried forward into the coming year.
So, although the allowance amount isn’t a huge sum, you should take advantage of it and make use of it to prevent CGT liability in the near future.
2 – Transfer Assets to Your Partner
Did you know that civil partners or married couples can combine their annual allowances? Essentially, this means that they can double their tax-free allowance, bringing it up to £6,000.
This provides an easy way for couples to reduce their tax liability – although the transfer must be a genuine gift.
3 – Making Use of Losses
There’s a likely chance of being able to reduce your CGT liability by using losses to help reduce your gain. Don’t worry if you’re still feeling confused – we will break it down.
In simple terms, if you have gains and losses, you’re able to subtract any losses from your gains, which then reduces the overall amount of gains that are subject to CGT. This is essentially using your losses to offset gains.
4 – Consider Investing in an ISA
Both gains and losses within an ISA are fully exempt from CGT. This means to reduce your CGT liability, we should be using our ISA allowance each year.
In the current 2024/25 tax year, you can invest anywhere up to £20,000 in an ISA. Both higher and additional rate taxpayers should particularly utilise their annual ISA allowance.
5 – Contribute to a Pension
A popular and effective way to reduce your CGT liability is by contributing to a pension. Again, this method is especially useful for those higher taxpayers.
By paying into a pension fund, you will receive tax relief – which in turn extends your income tax band, meaning your capital gains could then be taxed at a much lower rate.
By paying into a pension fund, you will receive tax relief – which in turn extends your income tax band, meaning your capital gains could then be taxed at a much lower rate.
6 – Donate to a Charity
Both income tax relief and CGT relief are available when you donate to charity. By making charitable donations, you can lower the amount that your gains are going to be taxed.
Reducing Your CGT With Help From an Accountant
Working alongside a trusted and reputable accountant is most beneficial while trying to reduce CGT liability. Here at DH Business Support, we work closely with clients who are trying to minimise their CGT liability.
Our team provides a range of services beneficial for everyone, including those trying to reduce their CGT liability. We offer knowledgeable tax advice, guidance, and support.
With years of experience, we encourage you to consider working with our team of friendly accountants to ensure your taxes are being handled correctly and obligations are being met.
To find out more about how we can help you, contact us today.