A five-minute guide to often-overlooked capital gains tax

money

One levy that is often overlooked is capital gains tax, which Osborne barely mentioned in his emergency Budget two weeks ago. HM Revenue & Customs actually raises more money from CGT than inheritance tax. It collected a hefty £3.9billion from CGT in 2013-14, against £3.4billion from IHT.

If you do not tread carefully, you could end up handing 28 per cent of your capital gains to the taxman. Could your family’s wealth be at risk from Britain’s forgotten tax?

Hidden danger:

If you hold shares or investment funds outside of a pension plan or tax-free Individual Savings Account, you may be liable on your gains when you sell. You could also face a demand if you sell expensive belongings such as jewellery, paintings or antiques for £6,000 or more. The growing number of Britons who own buy-to-let properties or second homes could suffer a major CGT shock.

Jeremy Edwards, associate partner at advisers Martin-Redman Partners, says: “The big danger comes when you sell several assets in the same tax year, as all your gains are added together.” CGT is charged at 18 per cent if you are a basic-rate taxpayer, rising to a whopping 28 per cent for higher-rate taxpayers. Remember, this is only charged on the profits after the cost has been deducted. If a capital gain lifts you into the 40 per cent tax band for that year, you will pay 28 per cent on the proportion of your profit that falls above that threshold.

Fortunately, everybody can make profits of £11,100 in the current tax year before paying CGT, £22,200 for couples. But the bills can still be severe for large capital gains. Financial planner Graeme McColgan of MillionPlus Financial Planning says: “A higher rate taxpayer who makes a gain of £100,000 would pay CGT at 28 per cent on £88,900, giving a liability of £24,892.”

Great escape:

The good news is that there is plenty you can do to head off the CGT threat.

Iain Murray, financial adviser at True Potential in Poole, Dorset, urges investors to use their annual tax-free Isa allowance. He says: “You can save up to £15,240 in the current tax year and won’t pay any CGT on future gains.” You can shift existing stocks or funds into an Isa or Self-Invested Personal Pension but have to sell them first. As this could trigger a CGT charge, spread the sales to avoid exceeding your £11,100 allowance in any year.

You can also offset any losses against your profits. Swallow Financial Planning founder Andrew Swallow says there is no CGT for asset transfers between spouses or civil partners. He said: “Married couples who hold assets in joint names will benefit from both partners’ annual CGT allowance.” They should also consider shifting assets into the name of the partner who pays less income tax. Donations to charities are also free of CGT.

Buy-to-let:

The boom in buy-to-let and holiday-home ownership means that hundreds of thousands of Britons risk a major CGT bill. Karen Barrett, head of find-an-adviser service Unbiased.co.uk says: “Huge numbers of first-time landlords could be in for an unwelcome surprise because they haven’t considered the dangers.” You can offset some of your expenses, such as stamp duty, professionals’ fees and certain refurbishment costs.

Make sure you keep clear records and proof of payment. You don’t pay CGT selling your own home. Act now Too many Britons pay thousands in tax by failing to act – £154million in unnecessary CGT last year, according to Unbiased and insurer Prudential.

Graeme Robb, technical manager at Prudential, says: “A good adviser can save you significant amounts by simple planning and tax breaks.”

[“source – express.co.uk”]