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Capital Gains Tax Fact Sheet

Indexation allowance

If you owned the asset on or before 5 April 1998 you can reduce the taxable gain by claiming indexation allowance. This strips out the effect of inflation over the years since you bought the asset.

The issue of indexation is very complicated. Possibly the best explanation is available on the HM Revenue & Customs website.

Tax-free gains

Profits on some non-business assets are exempt from CGT. The main exemptions are for:

• Your home
• Private cars
• Personal belongings sold for less than £6,000, for example furniture, paintings or silver.
• Betting, pools or lottery winnings
• Government gilts
• Various savings and investment schemes, including National Savings Certificates, PEPs, ISAs, venture capital trusts (VCTs) and enterprise investment schemes (EIS)

How to cut your CGT bill

Offset losses against gains: if you hold a range of assets, such as shares, there is a possibility that you may have recorded losses on some of them. In this case, consider disposing of assets that have shown a loss at the same time. You can set that loss against a taxable gain.

Maximise tax-free gains: Everyone, including children, has the same CGT allowance. Spread ownership of your investments to maximise your tax-free gains.

Transfer assets to your spouse: CGT allowances apply to individuals: therefore spouses receive a double allowance. You can effectively double your tax-free allowance, if you are married, by giving assets to your spouse to dispose of. Gifts between a husband and wife who are living together are deemed to take place at initial cost rather than the current price, and are ignored for the purposes of CGT.

Use lower rate tax bands: Since CGT is aggregated with income to determine the level at which it should be paid, gains should be realised by the spouse with the lower rate of tax.

Make best use of exemptions: If you own two homes, within two years of acquiring the second one decide which one you want to treat as your primary residence for tax purposes. Choose the one likely to show the greatest increase in value. There are many other rules in relation to CGT and second properties, so you may need specialist advice in this area.

Defer the gain: If there are no losses or reliefs you can use to cut your tax bill, you can defer it by reinvesting the gain in venture capital trusts or in the shares of certain small companies.

Bed-and-breakfasting: Where you sell assets and buy them back to avoid CGT on long-term investments. For example, if you have £10,000 of profits on assets of £50,000, you sell them, pay CGT on the £800 and buy the assets all over again.

You used to be able to sell one day and buy the next. This is now outlawed within 30 days of the original sale.

But you can still sell the assets and:

• Get your spouse to buy an identical holding
• Immediately buy something similar (for example, sell Barclays shares and buy Lloyds TSB or Halifax Bank of Scotland ones instead – assuming they fit in with the rest of your portfolio, of course)
• Buy an “option” to protect against a price increase over that 30-day period. This involves speaking to a specialist financial adviser

As we have already mentioned, CGT is a very complicated area. If you believe you are likely to be affected by CGT in any way, you should consult with a tax expert.

More inofrmation

To find a chartered accountant who can advise on tax issues:

Institute of Chartered Accountants in England and Wales (ICAEW): http://www.icaew.co.uk/

Institute of Chartered Accountants of Scotland (ICAS): http://www.icas.org.uk/cms/

Institute of Chartered Accountants in Ireland (ICAI) : http://www.icai.ie/index.cfm

More pages

Page 1: Introduction
Page 2: Non-business assets held after 6 April 1998

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