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Capital gains arise when “chargeable assets” such as shares, property or other durable assets are disposed of at a price that exceeds their cost.
Specific assets are excluded such as plant and machinery, cars or government gilts.
In any one year, capital gains tax is calculated using a four step process:
The forthcoming 2022/23 tax free limit for capital gains is £12,300 with any gains above this amount taxed as follows:
Type of asset | Rate if basic rate taxpayer | Rate if higher rate taxpayer |
Land and residential property | 18% | 28% |
Shares and personal assets worth more than £6k | 10% | 20% |
Business Asset | 10% | 10% |
ISAs and PEPs | 0% | 0% |
Note that a basic tax rate payer has a total income of up to £52,270 in the year, beyond that then the individual is classified as a higher rate tax payer.
Maximise use of assets not subject to capital gains tax
The best way to minimise capital gains is to acquire assets not subject to capital gains tax at all. A house – providing it’s your main principal residence – is the best example of this.
Additionally, each year, any UK adult can contribute £20k to an ISA and £40k to a pension fund and again no capital gains tax arises on such investments.
Don’t hold onto assets for too long
Since no inflation allowance is applied to capital gains tax calculations, most enduring assets will steadily appreciate over time and thus potentially give rise to large gains. One way to avoid this is to occasionally sell some of them before the gain becomes too big. You can rebuy them later providing there is a delay of at least 1 month between the sale and subsequent purchase (to ensure an exposure to market risk).
Offset gains with losses
You may be forced to sell some assets (eg if shares are compulsorily acquired by a third party through a merger or acquisition). Identifying other loss-making assets and selling those may reduce the overall gain back down to the tax-free threshold.
Transfer assets to spouse
Assets can be transferred from one spouse to another at no gain/no loss so that both parties can fully use their annual tax-free allowance.
There are special rules that apply to how losses are utilised, when asset owners die and for overseas based residents.
In 2017, our review of various studies by accounting bodies and s/w suppliers indicated that only a very small minority – approximately 20% – of SMEs were using online or cloud accounting systems (also known as Digital Accounting).
Most sole traders adopt a 5 April year end which is the simplest approach and avoids having to allocate one year’s worth of results over two different tax years. Note that a tax year end of 31 March is treated in exactly the same way and is thus probably the best date to use.
The basic tax benefit is that rather than getting the usual 19% tax relief on operating costs, activities classified as R&D get 44% tax relief.
A specific problem, a desire to reduce accounting costs or you just want some general financial advice from qualified experts? Then call us NOW
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