BBC QT audience discuss the use of taxpayers’ money
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Capital Gains Tax can often be an unexpected expense on what is usually a joyous occasion: coming into a fair amount of money from selling a big asset. As more and more people find themselves caught out by either CGT or inheritance tax, many seek a way to retain more of their profits.
Head of financial planners at Vanguard, James Norton, shared five ways savers can legally reduce their CGT bill.
Allowances
CGT offers a few allowances and annual exemptions, which currently stands at £12,300 per year.
Essentially this means that total gains in a single tax year within this amount will be entirely exempt from a CGT bill.
Mr Norton noted that this allowance is a “use it or lose it” deal as individuals cannot carry the amount forward into the next tax year.
He also pointed out this allowance applies to every individual, meaning that a married couple could have gains of £24,600 in a tax year without incurring CGT.
Offset losses against gains
In most circumstances, individuals can incur gains and losses within the same tax year, reducing the amount of CGT incurred overall.
In fact, if one’s losses exceed their gains in a year they can carry the excess forward to offset future gains but these must be registered with HMRC.
All-in-one fund
Mr Norton suggested savers look at multi-asset funds which don’t pay on gains when the fund itself sells holdings.
This is because it is seen as the fund trading rather than the individual.
Although, there could be tax charges in other countries but this will then be paid from the fund’s ongoing charges figure.
CGT charges will only be due when the individual sells their shares of the fund but this could also be reduced by utilising the annual allowance and selling only parts of one’s holding in a single tax year.
Manage taxable income levels
The rate of CGT one pays is dependent on the income tax band they fall under.
Mr Norton noted as a consequence, reducing one’s income tax rate can have a benefit by reducing their CGT bill.
He shared two simple ways to do this are through pension contributions and charitable donations.
ISA allowances
ISAs are tax-free by nature and have an additional benefit of £20,000 current allowance, meaning that savers could utilise both their ISA allowance and CGT allowance to avoid the tax bill.
Mr Norton shared that he has seen many “diligent investors” with ISAs worth £500,000 or more who essentially don’t have to worry at all about their CGT bill.
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