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Capital gains taxes and losses for individuals (03/2021)

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How gains arise

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:

  • Individual asset gains and losses are aggregated to produce an overall gain or loss for the year
  • Overall losses can be carried forward indefinitely
  • If there’s an overall gain, it may be reduced to the tax free allowance by using losses brought forward from previous years
  • After adjusting for such losses, any amount above the tax free limit is added to other sources of income and taxed at the rates listed below

Capital gains tax rates

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.

Legal ways to minimize capital gains tax

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.

Finally

There are special rules that apply to how losses are utilised, when asset owners die and for overseas based residents.

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