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If you are an investor, own a second home or regularly sell high-value assets, you could soon have to pay a lot more tax.
Advisers to the Government have recommended hiking and reforming Capital Gains Tax (CGT) in a move that could raise billions to pay for the spiraling economic cost of coronavirus.
If the Government accepts those recommendations, it could see many investors pay considerably more tax when they sell certain assets.
But what is happening exactly and how can you minimise the impact on your finances?
What is CGT?
Capital Gains Tax, or CGT as it is often known, is a tax you pay on the profits you make when you sell investments, a second home or personal possessions such as art or jewellery.
It’s worth noting that you don’t have to pay CGT on gifts to a partner or a charity, Premium Bonds, UK gilts, lottery or betting winnings, and any investments in an Individual Savings Account (ISA), Personal Equity Plan (PEP) or a personal pension.
How much do you have to pay at the moment?
This depends on how much you earn and how much profit you make from the sale of your assets.
At present, everyone has a CGT-free allowance of £12,300 a year, meaning you will not have to pay anything if your annual profits from the sale of your assets is less than this.
However, after that you will pay 18% on residential property and 10% on the profit of other assets if you earn less than £50,000.
If you earn more than £50,000, you will pay 28% tax on residential property and 20% on other assets.
What changes have been proposed and how will I be affected?
The Office for Tax Simplification (OTS) has advised to reform three key elements of the tax.
Firstly, it has suggested lowering the threshold at which CGT kicks in from its current level of £12,300 to £5,000 or even as low £1,000.
Secondly, the OTS has suggested aligning CGT with income tax. For example, that means higher rate taxpayers will have to pay a potential rate of 40% or even 45%, rather than between 20% and 28% at present.
Finally, it has also recommended that the Government scrap the CGT “uplift”, which usually means CGT is waved when a beneficiary inherits an asset that has gone up in value since it was first purchased.
Ok, if the Government presses ahead with the recommendations, what can I do to minimise my tax bill?
Before we go on, it’s worth making the point that tax is a highly complex area and so it’s always best to seek professional advice before acting.
However, here is an idea of the types of things you can do to ensure you keep hold of as much of your profits as you can.
- Spread your gains over several tax years
- Offset your losses against your gains
- Max out your ISA
- Take advantage of Bed and ISA
- Contribute to a pension
When do I have to act?
That’s the thing, at the moment, we don’t know for sure whether or not the Government will make any changes to CGT or, if it does, what those changes will be exactly.
However, it’s good practice to ensure that your investments are always as tax efficient as they can be, so it’s worth exploring your options sooner rather than later.