(Bloomberg Opinion) -- With April 5, the end of the U.K. tax year, fast approaching, and many investors nursing significant losses in volatile markets, now is a good time to consider what can be done to mitigate any capital gains tax (CGT) liabilities you might have.
Gains in the stock market are especially amenable to careful tax planning. Unlike assets such as property, stocks are liquid and a holding can easily be divided to maximize the tax advantage. Selling sufficient stock to realize a gain of no more than the 12,300-pound ($16,000) annual capital gains tax allowance means that there would be no CGT to pay.
Losses too can serve a purpose. If you were to realize a loss in the same tax year, it can be offset against any gain, reducing and possibly even eliminating, a tax bill. It is also possible to offset a loss up to four years after the end of the tax year that you disposed of the asset. So it's helpful to report any capital losses even if you don't yet have a gain to set it off against — it could be useful in the future.
The approaching financial year-end offers other opportunities to save on tax. If you stagger a sale so that you sell some shares in the current tax year and some a few days later in the new tax year (i.e. after April 5), a gain of up to 24,600 pounds can be realized with no tax to pay. This is because a fresh annual CGT allowance becomes available from April 6.
Married couples or civil partners can double that allowance to 49,200 pounds since they can exchange their holdings to minimize their combined CGT bill. Assets passed between such partners do not attract capital gains tax, since they're passed on what's called a “no gain, no loss” basis. So, for instance, if one partner originally paid 5,000 pounds for some shares that are now worth 30,000 pounds, there is no CGT to pay if they simply transfer them to their partner. If the receiving partner were to then sell those same shares however, CGT would be calculated using the same base cost (i.e. 5,000 pounds). The advantage of transferring assets in this manner is that more than one person's CGT allowance can be offset against any gain.
This sort of exchange can be especially useful for couples who have separated during the tax year and are looking to divide their holdings. However, divorcing couples should know that legally, the ability to transfer assets free of CGT ceases at the end of the tax year in which they separate, not when the divorce is finalized.
Once a gain has been realized using your CGT allowances, future capital gains can be avoided by transferring the proceeds into more tax-efficient vehicles, such as Individual Savings Accounts (ISAs) or Self-Invested Personal Pensions (SIPPs). Capital gains made within both ISAs and SIPPs are exempt from CGT.
Realizing a gain on an investment property is a little more complicated. For a start, the rate of CGT is higher for residential property. If you pay the basic rate of income tax of 20%, property capital gains tax starts at 18%. For those paying 40% income tax, the CGT rate begins at 28%. For non-property assets, CGT rates are lower: 10% and 20% respectively.
One significant tax relief is that your principal residence is exempt from CGT if you sell it for a profit. Similarly, if you sell an investment property that was once your principal residence, you gain relief for those years in which you lived in the property, plus an additional nine months at the end of your ownership. These extra months are an allowance to account for the time it takes to buy and sell the home.
Bear in mind that any unused CGT allowances cannot be carried forward.
There are a couple other CGT issues worth remembering. Although inheritance tax may be liable when you die, any capital gains tax liabilities are expunged. However, if you gift an asset with a significant, unrealized capital gain in your lifetime, CGT is levied as if you had sold it for its full market value. This applies even if no money has changed hands.
The rules surrounding when a CGT bill must be paid have changed numerous times. Where property is concerned, generally speaking, CGT returns should be submitted, and tax paid, within 60 days of the sale. For transactions completed prior to Oct. 27, 2021, the limit was 30 days.
Looking ahead, it is common for tax allowances to increase in line with the cost of living, a not insignificant point with consumer inflation in the U.K. standing at 5.5% in February. The CGT allowance, though, has been frozen up to and including the tax year 2025-2026, so it will remain at 12,300 pounds regardless of inflation in the meantime.
One final capital gains tax issue that is often overlooked is that realized gains from cryptocurrencies are also subject to CGT. The good news is that many of the tax-mitigation strategies that are applied to less ethereal assets can also be applied to crypto. However, with Bitcoin currently 43% lower than last November's peak of $68,790, the digital currency is more likely to be a loss that can be offset against gains made in more conventional assets.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Stuart Trow is a credit strategist, pensions blogger, radio show host and member of numerous retirement, finance and audit committees.
©2022 Bloomberg L.P.
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