What is Capital Gains Tax?

Sometimes people confuse Capital Gains Tax with Inheritance Tax. Capital Gains Tax (CGT) is applied when you sell something for more than you bought it for, although there are some exceptions (e.g., your main residence).

Some investments can be structured to provide benefits that arise from dividend or interest payments rather than from capital growth. Some assets are ‘pregnant’ with capital gains – your options will depend on circumstances, and timing can be crucial.

As individuals, we can gain a greatly reduced £6,000 without paying tax (the previous tax year was £12,300). Everyone has an allowance, so a jointly owned asset can benefit from two allowances. However, when all the allowances have been used, the following calculation will depend on what the asset was, and at what rate you pay income tax because it (the gain) is, in effect, added to your income. And gains from property, such as a buy to let, are taxed higher than gains from many other things.

So how can CGT be avoided? Gains occurring within an ISA or Pension are not burdened by CGT, so investment in an ISA will be potentially more tax efficient than a general portfolio and rises in pension asset values remain tax efficient.

If an asset can be disposed of over more than one tax year, there is room to reduce exposure to taxation. Some assets, however, are not suitable to sell at different times, property for example. When setting up an investment carefully consider ownership not only for tax efficiency, but whether ownership issues may arise later or when assets might be included in a financial assessment.

Trusts can also be subject to CGT. Trusts are governed by Trustees, and their CGT allowances differ from individuals; and the underlying investments need to take this into account.

Don’t let yourself be caught out paying more tax than you need to, speak with an independent financial adviser.

Eamonn Dorling Dip PFS
Senior Independent Financial Adviser
Brooks Wealth Management
Tel: 01733 314553 or 07767 795816
Email: Eamonn@brookswealth.co.uk