How to Mitigate Capital Gains Tax on Funds and Stocks

  • Consider taking gains this year before the capital gains tax deduction is reduced
  • Make the most of your Isa allowance
  • You can also transfer assets to your spouse and consider investments with tax advantages

From the next tax year, investors expect a fairly large increase in capital gains tax (CGT). In last week’s autumn statement, amid a wave of tax hikes, Chancellor Jeremy Hunt announced the CGT allowance would be cut from the current £12,300 to £6,000 from April 2023, then reduced to £3,000 from April 2024. -the taxpayer who makes a taxable gain of £12,000 will not owe CGT this year, but will have to pay £1,200 in 2023-24 and £1,800 in from April 2024.

CGT rates will remain unchanged. For assets other than residential property, higher and additional rate taxpayers pay 20% on taxable gains, while basic taxpayers pay 10% as long as the sum of non-allowance capital gains and their taxable income remains within the framework of the basic income tax. tape (they are taxed at 20% on anything over).

Before the April deadline, you should review your arrangements and ensure that you are holding and managing your investment in the most tax-efficient way. We will discuss the impact of the CGT on residential real estate in a separate article.

do it most of your Isa

The first obvious thing to think about is whether you are getting the most out of your Individual Savings Account (ISA) allowance. Since gains made within an Isa are tax-exempt – and Isa investments are also not subject to dividend tax, which will also increase from next year – this- this is obvious.

“Transferring investments into an Isa, with a generous annual allowance of £20,000, protects dividends and future earnings from the clutches of HMRC. It also means you no longer have to report them on your self-assessment tax return – so less hassle,” says Myron Jobson, Senior Personal Finance Analyst at Interactive Investor.

If you have investments outside of an Isa and haven’t used up all of your allocation, you may consider a so-called bed-and-Isa, which involves selling your non-Isa investments and redeem in an Isa. You can also do the same with a self-invested personal pension (Sipp) – despite rumors circulating before the fall statement, Hunt did not touch the tax relief for higher rate pensions, and pensions remain a very tax-efficient way to invest.

Before proceeding with a bed-and-Isa transaction, there are a few things to consider. Firstly, these transactions are not exempt from CGT – you will still have to pay it if you generate earnings above the allowance. But since the allowance will be reduced from next year, doing it now is a way to protect future earnings and minimize the bill. With markets in many cases still lower than last year, now might be a good time to do so, before a rally boosts your earnings (and your taxes as a result).

Second, depending on how the transaction is carried out, there is likely to be a difference between the price at which you sell your investments and the price at which you buy them back. This is something to be especially aware of if your platform doesn’t offer a bed-and-Isa service and you have to do it manually – try to figure out how long it will take the platform to perform selling the assets and later transferring the money to your Isa. The process can take a few days, during which the markets can work in your favor or against you.

AJ Bell, Interactive Investor and Barclays Smart Investor all offer an automated bed-and-Isa service – you select the investments you want to transfer, up to your remaining Isa allocation, and the platform takes care of the rest. This saves you the hassle and can help reduce the difference between buying and selling prices. AJ Bell, for example, claims that “the two trades are done together, so there is less exposure to market movements”.

Finally, there may be costs associated with the transaction – usually transaction fees and stamp duty, if applicable.

Losses and family allowances

If you need to hold investments outside of an Isa, remember to report losses as well as your gains. “By offsetting your capital losses against your gains, you can reduce the amount of gain subject to tax,” says Rachael Griffin, tax and financial planning expert at Quilter. “Unused losses from previous years can also be carried forward, provided they are reported to HMRC within four years of the end of the tax year in which the asset was disposed of.”

Another thing to consider is whether you should own all of your investments yourself. If you are married or in a PACS, you can think of a transmission between spouses.

“Transfers between married couples and civil partners do not trigger a taxable event,” says Alice Haine, personal finance analyst at Evelyn Partners. This means that you have two CGT deductions, Isa and dividends to try to minimize the overall bill.

“Even when the gain will exceed both sets of exemptions, shifting the investments to the spouse likely to be subject to a lower tax bracket can help reduce overall liability,” adds Haine. Keep in mind that if you transfer the assets, your spouse becomes the full legal owner.

Donating assets to charity is also exempt from CGT, while giving them to someone else (including your children or an unmarried partner) does. However, that could still be an option, especially if that was still the plan – better to do it before the allocation starts to shrink.

Finally, if you have already used all of your capital gains allowance but expect your income to decrease (e.g. due to retirement), going down tax brackets, you might consider take the capital gains later. As mentioned, basic rate taxpayers also pay a lower rate of CGT.

Investments with tax incentives

Once all available tax envelopes are exhausted, you can consider investments that offer some sort of tax advantage.

For a relatively low-risk option, Rachael Griffin of Quilter suggests investment bonds, which are subject to income tax but allow you to access 5% of your initial premium for up to 20 years with tax deferral. The tax-deferred allowance is added back only when the bond is cashed or matures, in order to calculate the total gain. Again, this can be useful if you expect to fall into a lower tax bracket in the future, for example when you retire.

Riskier options include venture capital trusts (VCTs) and business investment companies (EISs). Both offer 30% income tax relief. VCTs come with tax-free and CGT-free dividends, while EIS gains can be realized over a number of tax years, using various annual exemptions; or when the shares are sold, the gain can be transferred to a new SII.

“Remember that because you are investing in small start-ups they also carry additional risk, particularly when you consider that the UK is entering a long and protracted recession, which is why VCTs are generally suitable for wealthier or more experienced investors with a long-term approach,” says Haine.

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