Discover Strategies for Minimising Your Capital Gains Tax (CGT) Liability

Capital gains tax is a tax on the profit made when selling an asset that has increased in value. In the UK, capital gains tax is payable on selling second homes and buy-to-let properties.

Capital gains tax is one of the significant taxes all property owners have to pay.

What is the Capital gains Tax Rate In the UK?

The CGT rate solely depends on your income. For the tax year 2023/24, the capital gains tax rate is given below.

Gains on the sale of residential property are subject to a higher capital gains tax rate. This is one of the measures taken by the British government to reduce the participation of foreign investors in the residential property market.

Strategies for Minimising Your Tax Liability

It is essential to know about Capital Gains Tax (CGT) and explore legitimate ways to reduce your tax liability. Here are some practical tips to help you keep more of your property gains:

1.???? Annual Exemption

In the UK, each individual has an annual CGT exemption threshold. For the current tax year (2023/24), it stands at ￡12,300. Anything below this threshold is CGT-free. So, consider timing your property sales wisely to make the most of this allowance.

2.???? Private Residence Relief (PRR)

Private Residence Relief (PRR) is an exemption relief that reduces capital gains rather than deferring them to a later date. It allows you to replace your existing home with another of a similar value while ensuring that the gain on the sale of the old home is not subject to capital gains tax.

However, there may be restrictions if you've used any part of your property for business or rentals.

“Explore more about Private Residence Relief (PRR) Here ”

3.???? Transfers Between Spouses/Civil Partners

Transferring property between spouses or civil partners can reduce CGT bill by sharing the financial gain. Transfers between spouses and civil partners are also usually tax-free.

Furthermore, as every individual has their own CGT allowance (￡6,000 for 2023/24), a married couple could realise tax-free capital gains up to double the annual exempt amount.

4.???? Offsetting Losses

You can lower your CGT bill by balancing losses against gains in the same tax year. If your losses are more than your gains, you can carry them forward indefinitely to set them off against future gains, as long as you have appropriately reported them to HMRC.

5.???? Invest in ISA

It is a wise move, especially for individuals in the higher and additional tax brackets, to utilise their annual Individual Saving Accounts (ISA) allowance fully. In the tax year 2023/24, you can invest a maximum of ￡20,000 in an ISA. For married couples and civil partners, the ISA allowance effectively doubles to ￡40,000.

Additionally, there exists a strategic approach known as 'bed and ISA.' This tactic involves selling assets to realise a capital gain and subsequently repurchasing the same assets within an ISA. By doing so, all future gains on those assets become exempt from Capital Gains Tax.

6.???? Pension Contribution

Contributing to a pension from your relevant earnings is a strategic move to reducing CGT liability because it effectively expands the upper limit of your income tax bracket.

For instance, your total income is ￡55,270, with ￡5,000 of it falling into the 40% higher-rate tax bracket. Now, if you make a ￡5,000 gross pension contribution (which effectively becomes ￡4,000 after receiving ￡1,000 in tax relief), your 'adjusted net income' decreases to ￡50,270, potentially enabling you to avoid the higher-rate tax.

7.???? Business Asset Disposal Relief

Through Business Asset Disposal Relief (BADR), individuals are subject to a Capital Gains Tax (CGT) rate of only 10% on profits generated from the sale of eligible business assets. This represents a substantial decrease, particularly beneficial for higher-rate taxpayers, as it reduces the CGT rate from the standard 20% to a mere 10%.

8.???? Consult a Tax Professional

Tax laws can be complex and change over time. Seeking advice from a tax professional is a smart move to navigate the rules and develop a tailored strategy.

Conclusion

Navigating Capital Gains Tax (CGT) on property in the UK requires careful planning and awareness of available strategies. Leveraging annual exemptions, exploring reliefs like Private Residence Relief (PRR), offsetting losses, utilising ISAs, and making pension contributions can all significantly reduce your tax liability. It's vital to keep records, use tax-efficient structures, and consult tax professionals to stay ahead of changing tax laws.

By implementing these measures, you can maximise your property gains while minimising CGT payments, securing a stronger financial future.