Should you care about Capital Gains Tax (CGT)?

Why should you care about Capital Gains Tax (CGT)?

Unless you’ve sold a property or a business in the last few years, Capital Gains Tax might not have impacted you too much so far.

Are most of your investments held in a pension or ISA? If so, then the good news is both are free of CGT.

And even if you’ve paid some tax, rates for investment gains are pretty low at the moment compared to income tax rates. 10% for basic rate and a top rate of 20%.

Gains relating to residential property (other than your principal residence) are higher though. They’re taxed at 18% and 28%.

And for retiring business owners Entrepreneurs Relief CGT is 10% for the first £1million of gains in your lifetime and 20% for gains above this.

So according to the recent OTS report, a relatively small number of people, around 1.5 million over the last 10 years, have paid CGT.

What’s all the fuss about then?

We all know it’s only a matter of time before the Government will have to start the clawback of the multi-billion pound support given to workers and businesses in the last eight months.

Tax rises are one of the main ways they can do this.

Capital Gains Tax (CGT) has been on their agenda for some time now.

In July, Rishi Sunak asked for a review of Capital Gains Tax. And the OTS (Office of Tax Simplification) has now published the first of two reports.

If some of the OTS recommendations are accepted by the Government it’s likely more people will care about CGT…

Here are four possible changes that will have an impact:

  1. The annual exemption currently £12,300 could be reduced to between £2,000 and £4,000.
  2. CGT rates could be aligned with income tax so 20% for basic rate and 45% top rate.
  3. Scrapping the CGT uplift on death, particularly relevant if passing on IHT exempt assets (e.g. own company shares).
  4. Entrepreneurs’ relief, available to business owners on selling at retirement, could be abolished.

What should you be doing?

2020 is rapidly approaching. It feels like now is the right time to be planning for 2021.

Financially this is a particularly good time to check you’re making the most of the tax breaks available before the end of the tax year.

We all know tax alone shouldn’t drive financial decisions and planning.

But this tax year in particular, taking advantage of the allowances available such as the Stocks and Shares ISA subscription and maximising pension contributions seems a ‘no brainer’. And rebalancing your investment portfolio if you’ve got some gains might be worth considering as well.

More Reading…

Pension Contributions for Business Owners

Company or Personal Pension Contributions?

 

Photo by Markus Winkler

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Risk Warnings

This article and the information on this website is not personal advice. It’s only intended to give you a brief summary or highlight a particular issue for you to investigate further. It is based on our current understanding of legislation and HMRC guidance which can change and is correct as of the date of the post.

If you’re in any doubt whether a particular course of action is suitable for your circumstances, you should seek professional advice. Tax rules can change and any benefits depend on individual circumstances. And, if you are unsure any reliefs are applicable to you, you should consult your accountant or HMRC.

The value of investments and any income from them can fall as well as rise, so you could get back less that you put in. Past performance is not a guide to the future. It cannot provide a guarantee of the future returns of a fund.

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