Q: I have a share portfolio and I’m feeling increasingly nervous that the markets are going to fall so I’m considering selling my shares and waiting until the markets stabilises before going back into the market. I know I will incur a Capital Gains Tax liability of approximately £25,000 but is there anything I can do to mitigate the CGT?
A: Capital Gains Tax is paid when you sell or dispose of assets such as personal possessions worth more than £6,000, property that is not your main home, shares or business assets. It’s important to note that capital gains tax is only due on the profit – the money you make minus the original cost. How much you pay will depend on the type of asset you’ve made a gain on and your tax band. The sale of some assets are free from tax, the CGT rate is different on property and everybody has a capital gains tax annual allowance for 2019/20 it is £12,000.
Here are our top 5 tips for reducing Capital Gains Tax:
1. Understand your tax-free allowance
The first £12,000 (2019/20) per person, per tax year of gains are tax-free.
2. Use the tax year to your advantage
As the £12,000 tax-free allowance only applies to each tax year, splitting asset sales across different tax years (for example, selling one batch of shares in March and another batch in late April) can reduce the amount of tax you need to pay.
3. Reduce your taxable income
As the rate of CGT is charged based on your rate of income tax paid. If you can reduce your taxable income you could reduce the CGT rate from 20% to 10% or 28% to 18% if your selling property. You can do this if you are retiring and switching from earned income to pension income.
4. Spread your assets between you and your spouse
As the tax-free personal allowance for capital gains is £12,000 per person, spreading ownership between you and your spouse effectively doubles the tax-free allowance to £24,000 per tax year.
5. Don't forget your losses
You can offset your losses (such as costs incurred maintaining a property or money lost on shares) against your sale profit, potentially reducing the taxable amount.
A discussion with an independent financial adviser is essential to better understand whether selling shares fits with your long-term plan and to advise you on any potential capital gains tax that may be due.
Search for your local qualified IFA here.