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The tax-free allocation for capital gains was cut in half in April 2023, which means investors and individuals who own a second home are being compelled to surrender a greater portion of their profits to the tax authorities.
Starting from April 6, 2023, the threshold for allowable capital gains will decrease from £12,300 to £6,000. It will then decrease once again to £3,000 from April 2024. This information was disclosed in the Autumn Statement on the multi-billion pound tax, which occurred during a takeover last year.
Any profit made beyond the threshold is subject to a standard tax rate of 18 percent, although in some cases a lower rate of 10 percent may apply. Higher tax rates of 28 percent and 20 percent are applicable to residential property.
Due to the decreased capital gains allowances, individuals who own second homes and landlords will face thousands of pounds in additional tax. To determine the amount you’ll owe to HMRC, you can use the calculator provided below.
Savers have also become concerned about potential changes to capital gains tax (CGT) under the new government after the next election. There are reports that the Labour Party is considering raising the rates to match income tax, which means the current rate could double to 40 percent for higher income earners.
This week, Telegraph Money reported on a legal ruling that could have significant implications for individuals who were prevented from claiming CGT relief even though they may have been eligible.
All of these factors make it more crucial than ever to take advantage of tax strategies that can help you retain a greater portion of your profits. Here, Telegraph Money explores five options available to savvy investors.
Maximize Your Allowance
One of the simplest solutions is to ensure that you fully utilize the tax-free allowance each year, as it cannot be applied retroactively, carried forward, or transferred to a spouse.
Nimesh Shah, an accountant at Blick Rothenberg, recommends a strategy known as “bed and breakfasting” to maximize the full annual exemption. This strategy involves selling shares on both sides of the new tax year to crystallize capital gains.
He added: “The tax rules for calculating capital gains prevent you from repurchasing the same shares within 30 days, but you can use your spouse’s account or ISA to buy the shares and legally circumvent the 30-day rule.”
Offsetting losses against any gains in the same tax year can also reduce your tax liability, and any excess losses can be carried forward to offset future tax obligations. Typically, investors will need to claim capital losses through self-assessment tax returns, and there is a four-year time limit.
Capital losses from the 2018-19 tax year must be claimed by April 5 this year.
Enterprise Investment Schemes
Some tax wrappers, such as investments in ISAs and offshore bonds, are not subject to CGT. Investors in Enterprise Investment Schemes (EIS), a type of high-risk venture capital investment, can also benefit from several tax breaks, including up to 30 percent income tax relief.
Mr. Shah said: “It is possible to defer capital gains in EIS investments, but this decision should be carefully considered, as the capital gains will be triggered when the investment is sold and taxed at the prevailing rate at that time.
“So it could be higher than the current CGT rate. Additionally, capital gains on the sale of EIS investments will be exempt from CGT if certain qualifying conditions are met, such as holding the shares for approximately three years.
Private Residence Relief
Individuals who sell a property should consider private residence relief, which is the most appealing tax benefit for taxpayers between 2021 and 2022 and has saved them £37.3 billion in capital gains tax. Under this relief, homeowners do not have to pay any tax on gains made from selling their primary residence, unlike when buying rental properties.
However, Chris Etherington from accountancy firm RSM cautioned that this tax break should not be taken lightly. Mr. Etherington said: “There are several ways in which a homeowner can suddenly find themselves facing a tax bill, as well as interest and penalties.
For example, individuals who work from home or run a business need to be careful not to inadvertently compromise the tax relief available to them.
Private residence relief cannot be claimed for parts of a property exclusively used for business purposes, although having a “temporary or occasional” home office is permitted. HMRC also does not allow relief to be claimed if the property is rented out, which can be complicated to navigate.
HMRC states that having a tenant does not disqualify a property owner from claiming private residence relief, although Mr. Etherington warned that Airbnb hosts and other short-term landlords may be excluded.
He added: “HMRC now has access to a wider range of data and can pursue the tax payable on the sale of a home.
“The annual exemption has been a safety net for those who unintentionally reduced the tax relief available when selling their home. However, it is going to be significantly lower, and more individuals, including homeowners, could face a higher tax bill as a result.”
Transfer Property to a Spouse or Civil Partner
In most cases, CGT is not levied on transfers made to a husband, wife, or civil partner, unless you are separated and do not live together at all during the tax year.
Mr. Shah said: “The transfer effectively doubles the annual capital gains exemption, which could be worth up to £3,444 in 2022/23.”
However, if your partner later sells the asset, they may be liable for tax, and the gain will be calculated based on the difference in value between when you first owned it and when they sold it.
‘Can I help my sons with their mortgages – and avoid a substantial capital gains tax bill?’