How to Avoid Capital Gains Tax: Key Considerations and Strategies

Understanding the various rates and regulations governing capital gains tax (CGT) in the UK might help you minimise or even completely avoid the amount of tax owed on your earnings.

We provide some insight into some of the most important tactics people might use to reduce or possibly completely avoid capital gains tax liabilities after selling specific assets in this post.

What is the tax on Capital Gains?

Any profit released upon the sale of specific assets is subject to capital gains tax. Donating, Selling or exchanging for something else, receiving recompense (in the event that the asset is lost or damaged, or giving it away as a present to someone other than your spouse or a charity) are all considered ways to dispose of an asset.United Kingdom has four primary rates of capital gains tax that are 28%, 20%, 18%, and 10%. The kind of asset for which you are reporting the applicable rate is contingent upon your income tax bracket.

Only when your gains in a given tax year surpass the annual exempt amount (AEA) are subject to capital gains tax. This amount was £12,300 in the 2022–2023 tax year, halved to £6,000 in the 2023–2024 tax year, and anticipated to further decrease to £3,000 in the 2024–2025 tax year.

Understanding your alternatives to lower your capital gains tax bill and stop an increasing amount of your gains from being eroded can be vital, especially given the UK’s constantly declining capital gains tax limit.

7 Key Steps to Avoid Capital Gains Tax:

Check the timing of your investment:

A fairly easy, but effective, strategy to make sure you maximise the benefit of the annual exempt amount is to plan when to sell your capital gains. This is so that you are not able to roll over any portion of the yearly CGT limit into subsequent tax years due to the “use it or lose it” rule.

Instead, of one asset you can utilise two sets for annual exemption amounts. For instance, you anticipate to release certain capital gains in one tax year and a separate set of capital gains in the subsequent tax year.

However, with the recent changes to the AEA, some investors may find it less attractive than before to postpone a capital gain by spreading it over two tax years, for example, selling half of the assets on April 5 and the other half on April 6.

Utilise Tax Efficient Wrappers:

The best way to reduce capital gains tax obligations in the UK is through investment wrappers. Investment wrapper include Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS), Social Investment Tax Relief (SITR), and Individual Savings Accounts (ISAs). They also help to make sure that your wealth is shielded from CGT as much as possible.

Relief from disposal:

Get any investment gains made under the schemes totally tax-free.

Relief from deferral:

If you deposit capital gains from the sale of any other chargeable asset into an EIS or SITR, you are able to postpone paying the corresponding CGT bill for the duration of your investment in the SITR or EIS.

Reinvestment relief:

You can cut the amount of capital gains taxes owed on any gains you make by up to half by investing capital gains from the sale of any other chargeable asset into the SEIS.

Loss relief:

You can deduct a loss on an eligible investment from your capital gains tax liability (or income tax liability) if unanticipated events occur.

Bed and ISA, Bed and SIPP:

Through a two-step process called as “Bed and ISA” or “Bed and SIPP,” respectively, you can top up your ISA and/or SIPP (Self-Invested Personal Pension) with any proceeds from the sale of current investments as opposed to adding new cash.

Even while the first sale would deplete your yearly CGT limit, using this money to cover unused pension or ISA allowances might later shift your investments into a more advantageous tax position.

Since this money will be included in your yearly tax-free pension allowance, which is restricted at 100% of your gross earnings (up to a maximum of £40,000) and can be carried forward for three tax years, you may even be eligible for tax relief on it.

The regulations pertaining to bed and ISAs and bed and SIPPs can be intricate, therefore investors are best served by first consulting with a financial advisor.

Maximise the losses you incur:

In the event that unforeseen circumstances lead to a loss on an investment, you may benefit from this from the standpoint of capital gains tax. Since capital gains are the only thing that are subject to CGT, you can lower your potential tax liability by balancing any capital losses against your capital gains each tax year.

Furthermore, you can defer capital losses on your assets to subsequent tax years. In the event that you incur a loss in a given year, you may decide to plan ahead and determine if it would be more advantageous to carry the loss over to the subsequent tax year.

Transfers to your spouse that are tax-free:

One way to lower a CGT bill is to share the financial gain when transferring assets to a spouse or civil partner. This strategy may be especially useful if one partner hasn’t used up their entire annual CGT allowance or is in a lower income tax bracket.

It is also typically tax-free to transfer money between spouses or civil partners. Moreover, as each person has a separate CGT allowance (£6,000 for 2023–2024), a married couple may release tax-free capital gains of up to twice the yearly exemption amount.

Manage taxable income levels:

Controlling your taxable income levels could have a direct positive impact on controlling your capital gains tax payment, as the rate at which you pay CGT is determined by your income tax band.

There are two ways to lower your taxable income: either you increase your pension contribution or you give to charities. Moreover, if you’re a higher-rate income taxpayer and your spouse pays a lower income tax rate than you, the rate of capital gains tax (CGT) owed on an asset can be reduced from 28% to 18% by transferring it to your partner, or from 20% to 10%, depending on the type of asset.

Consider Tax Inheritance Implications:

It is crucial to remember that inheritance tax may add to your burden and result in double taxation of your capital gain. When you sell assets later in life, you may be required to pay capital gains tax (CGT), which can range from 10% to 28%. In addition, if the entire value of your estate is greater than £325,000, your beneficiaries may have to pay 40% inheritance tax upon your death. This sum would include the asset you sold later in life, which would essentially mean paying tax on the same thing twice.

In turn, for those who want to avoid paying extra capital gains taxes, when to sell assets may prove to be a crucial factor.

A capital gains tax guide:

By using above discussed tactics through capital gains tax you can drastically lower the value of your overall wealth and investment returns. For personal tax you can minimise your current CGT payments and avoid future CGT expenses. To know more about personal tax you can read our blog Guide about Personal Tax Account.

You can increase your chances of keeping as much of your money as possible by being aware of the CGT regulations and implementing the appropriate preventative measures listed above to safeguard your earnings.

Capital gains tax is a complicated topic so it may be helpful to discuss or take advice from the financial advisor or the company who provide personal tax services. They can guide you through the process and explain ways to avoid paying unnecessary CGT.

Disclaimer: Kindly note this blog provides general information and should not be considered financial advice. We recommend consulting a qualified financial advisor for personalised guidance. We are not responsible for any actions taken based on this content.