This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice please consult us here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Capital gains tax refers to the levy on certain investments, property or possessions when you sell them for a profit. If you buy a second house for £100,000, for instance, and later sell it for £150,000, then you have made a capital gain (profit) which will likely be taxed. Yet how does capital gains tax (CGT) work, exactly, in the UK in 2021?
Here at Elmfield Financial Planning in Padiham, Burnley, Lancashire, our team offers this guide to CGT to help inform your investment decisions in the coming months.
We hope you find this content useful. If you’d like to speak to an independent financial adviser then you can reach us via:
T: 01282 772938
CGT: an overview
Where there is a profit to be made, there is usually a government not too far away trying to tax it. With CGT, the tax only applies when you sell an asset (e.g. a stock). This allows you to keep some control over how and when you are taxed, potentially allowing you to mitigate the bill.
One strategy where this can apply concerns your capital gains allowance. Each financial year, in 2020-21 you are entitled to make £12,300 in capital gains before any tax applies to it. When the 6th April comes, any unused allowances are wiped out and your £12,300 tax-free allowance for the new tax year comes into force. For someone looking to slowly sell stock assets, therefore, it may be imprudent to sell everything in a single tax year (where the gains might dramatically go over your allowance). Instead, the investor could sell just up to their CGT allowance each tax year over, say, three or four years – assuming you are prepared to accept the risk that the stocks may fall in value during that time (e.g. in a bear market).
For property investments, of course, it is often harder to spread out capital gains like this since you usually sell these all at once (unless you are invested in a fund like a REIT – i.e. real estate investment trust). Of course, one important exception to CGT is your residential property. If you sell your home for a sizable gain, then this “profit” is not usually taxed. As such, if you want to move house and sell other assets in a given tax year, you do not usually need to worry about the former taking you over your CGT allowance.
ISAs are another useful tool for capital gains tax planning (individual savings accounts). Here, it is important to remember that any gains you make from your investments within an ISA (e.g. a stocks & shares ISA) are exempt from CGT. In 2020-21, moreover, you can also commit up to £20,000 per tax year into your ISA, allowing you to build up a sizable portfolio over time which is shielded from CGT, dividend tax and tax on interest.
However, only certain assets can be placed within an ISA “wrapper” for this CGT-free benefit. Buy To Let properties, for instance, cannot be placed here. So any gain you make on selling one would likely be subject to CGT on residential property (after your CGT allowance is taken into account), which sits at 18% or 28% for basic rate and higher rate taxpayers in 2020-21. Bitcoin and other cryptocurrency investments, moreover, at the time of writing are also largely excluded from ISAs (although this may be changing). As such, any crypto gain which you sell is likely to count towards your CGT allowance – although this will probably be charged at the lower rate for non-property assets, which is 10% and 20% for basic rate and higher rate taxpayers.
Why capital gains matter
CGT is important to factor into your investment strategy for your own personal interest, since it eats into your returns. However, it also affects your loved ones and family – since capital gains affect how large your estate will eventually be and, therefore, how much inheritance tax (IHT) it will be subject to when you die and pass it all on. Here, a financial planner can offer some ideas to help mitigate unnecessary liability and keep more of your hard-earned money “in the family”:
- Pension planning. Assets which you sell within an ISA are free from CGT. Yet investment growth also occurs on investments within a pension portfolio. Assets within a pension scheme which you sell are exempt from CGT. Defined contribution pensions are also not subject to IHT when you pass them to loved ones after you die. As such, pensions are not simply useful for generating a retirement income. They can also be a powerful estate planning tool.
- CGT-exempt investments. For people willing to take on a bit more investment risk (and possibly access higher returns), you can invest in companies which qualify for schemes such as the Enterprise Investment Scheme (EIS). Shares which you hold in the EIS businesses are exempt from CGT and IHT provided you hold them for a minimum amount of time.
If you are interested in starting a conversation about your own financial plan or investments, then we’d love to hear from you. Please contact us to arrange a free, no-commitment consultation with a member of our team here at Elmfield Financial Planning in Padiham, Burnley, Lancashire.
Reach us via:
T: 01282 772938