Capital Gains tax: how to reduce it?

How to Reduce your Capital Gains Tax Bill

Investors dedicate a lot of time and energy to picking investments that perform well and bring them a good return. But the tax consequences of those investments often aren’t given so much care, although they can significantly impact an investor’s portfolio and ROI.

One of the key taxes on investors’ profits is capital gains tax. A capital gain is an increase in value when you sell an asset compared to what it was worth when you purchased it. So, if you buy shares of stock worth $10,000 and sell them at $12,000, your capital gains are $2000. The capital gains tax will then take a percentage of that $2000 profit (10% to 20%, depending on your income tax band).

How to avoid capital gains on stocks, shares, and other capital assets? Here you can find many tips.

Max out your allowances

The single best step you can take to slash your capital gains tax bill is to use your allowances to their fullest extent. These allowances include the capital gains allowance, which exempts you from tax on the first £12,300 of capital gains each year. Also, exempt from capital gains tax are any profits you have made in Individual Savings Account (ISA account).

You can invest up to £20,000 per year through an ISA, and there is a type of ISA that allows you to trade stocks and shares, among other assets. This arrangement makes ISAs extremely tax-efficient vehicles that should be used to their fullest extent.

Make long-term investments

Capital gains tax only applies to realized gains. This means that if the price of shares you are holding has shot up, but you don’t sell those shares, you won’t owe any taxes on that gain. You would only be hit with a tax bill if you sold the shares and pocketed your profit.

Use losses to offset your gains

If you sold some capital assets at a loss, you could actually use that loss to reduce your gains, and therefore the total amount subject to capital gains tax. In the UK, you can also apply losses from previous years to set off the current year’s gains, going back as much as four years. This is useful if you made a loss, but your gains didn’t exceed your capital gains allowance in a given year.

Transfer assets to a spouse or civil partner

Under UK tax law, each individual person has a capital gains allowance (for 2021-2022) of £12,300. If you have reached the limit of your capital gains allowance, but your spouse has not, consider transferring assets to him or her, which can be done tax-free in most cases. Also, since your income band can affect the rate at which your capital gains are taxed, it may make sense to transfer assets to your significant other if they are in a lower tax band than you.

Buy multi-asset funds

Multi-asset funds can buy and sell shares and other assets during a year without you having to pay the capital gains tax you would have had if you had bought and sold those shares directly. If you sell your share in the fund, you are then subject to the capital gains tax on any gains you are realized from that sale, but funds can provide a more dynamic way to invest without constantly realizing gains.

Use your capital gains allowance each year to avoid accumulating a large capital gains tax bill over time

If you buy and hold an investment for a long period of time, when you go to sell it, you could be hit with a huge tax bill on your gains. This can be reduced by selling some assets each year to use up your capital gains allowance and buying them 30 days later. This “resets” the starting point for calculating your gains.

Manage your income band through pension contributions and charitable donations

If you are right on the cusp of having to pay a 20 percent tax on your gains versus a 10 percent one, it may make sense to make pension contributions or donations to bump you down to a lower band.
For more information about investing or taxes, contact Fineco on 0800 640 6465 or by chat or get a tax professional.