While filing taxes, it is possible to become preoccupied with choosing assets and overlook the tax repercussions, notably the capital gains tax (CGT). Ultimately, choosing the best stock or mutual fund might be difficult enough without considering the after-tax returns. Like buying a property, selling one may be a difficult undertaking, especially without considering taxes.
However, to maximise your investment returns, you must incorporate taxes into your plan and consider the best times to purchase and sell. Here, we'll examine the capital gains tax and how to reduce it.
This blog will cover everything about capital gains tax, how it works, and how to avoid it.
What is Capital Gains Tax?
To understand capital gains tax in simpler terms, it refers to the tax levied on capital gains. These are levied only when assets are transferred between owners. Although all capital gains are subject to taxes, long-term earnings usually follow a different tax strategy than short-term gains. Individuals who pay taxes might lessen the cost of their capital gains taxes by using tax-efficient financial practices. An investor's profit when they sell an investment is subject to the Capital Gains Tax UK. It must be paid in the tax year when the investment is sold.
Some examples of capital gains include jewellery, machines, trademarks, patents, property, and many more.
Now we will move on to discussing how capital gains tax works.
How Does Capital Gains Tax Work?
You must calculate the appropriate rate for the profit you earned on the asset(s) when your gains exceed the yearly allowance. You can use your allowances when jointly owning an asset, including in a marriage. This implies that if you earn a profit, say through selling a second house, you may increase it to £24,600 before CGT kicks in.
To assist in lowering your CGT burden, you are also permitted to transfer investments between individuals in your marriage or civil relationship.
If you transfer a commodity to a partner and sell it for a profit, the amount of CGT owed will be determined by how long you and your partner together owned the property, not by the date the asset was handed over to them.
Knowing that different reliefs could be available, this should always be undertaken after seeking particular counsel.
How Can You Pay Capital Gains Tax?
To pay capital gains tax UK, you must report taxable gains on the tax return and make the payment. If you haven’t filled out a tax return, you will have to register with HMRC first. Give yourself enough time to fill out the tax return, as it can take a few days or weeks to get a hang of the system.
You should know that the time to pay the first CGT instalment after selling an asset has decreased from 22 months to 30 days. You'll need these things before you state your capital gains:
- Methods for determining each capital gain or loss
- details on the prices and what you paid for each item
- Other important details, like any reliefs a person is entitled to
Rates of Capital Gains Tax UK
The tax rate for residential property is 28% where the total gains and income are above the specified tax basic rate band. If it is below that limit, it is 18%. The rate is 28% for personal relatives of the deceased. The rates for non-residential real estate and other investments are 10% and 20%. If you are qualified, you may take advantage of the comparable Entrepreneurs' Relief program, which requires you to pay just 10% of the sale price of a business or shares, when selling a non-publicly listed firm.
How to Calculate Capital Gains?
We can calculate capital gains by subtracting the sum you paid for an asset from the sum you sold that particular asset for.
Capital gain= Selling price- the price you paid for the asset
If the selling price is less than what you originally paid for the asset, it is considered a capital loss.
Steps to determine your capital gains:
- You should differentiate your short-term and long-term capital gains as they are taxed differently.
- Sum up all your short-term gains and losses.
- You can use tax preparation technology or consult a tax preparer to know your tax liability.
You can try an online capital gains tax estimator to assess your potential taxes. Most calculators merely provide you with an estimate of your tax due. To determine your real tax due, it is advised to speak with a qualified tax expert or use tax software.
How Can One Avoid Capital Gains Tax?
Are you looking for ways to avoid capital gains tax? Below are the things to consider on how to avoid capital gains tax UK:
- Determine the timing of your capital gains
Determining the timing of your capital gains is a simple yet efficient way to make sure that you get the maximum benefits by the annual exempt amount. This is so as the annual CGT adopts a “use it or lose it” strategy. This means that you are not liable to carry any part to the future years.
Everyone will have an annual exemption in which they can make tax-free gains of around £6,000. You can carry it to the next year.
- Avoid purchasing lost investments back.
Avoid buying a lost investment again immediately after the beginning of the year if you sold it to take advantage of a tax break. The government may impose a fine on you if you do it within a month after selling.
- Make the most of your retirement
Do not sell your profitable assets until you are retired. Your capital gains tax rate may be lowered in retirement if your yearly earnings are relatively less. You might not be required to pay any capital gains tax if the tax rate is inadequate.
- Keep track of your allowable costs
Some maintenance costs can be tax deductible based on your investing practices. Keeping track of these tax-deductible commodities will help you pay lesser capital gains taxes.
- Plan for the long-term investment
If you find businesses that will hold the stocks for the long term, you have to pay a lower tax rate. It may sound easy, but there are so many things to consider. A business’s fortunes can vary with time, and this may cause you to sell your stock earlier than expected.
- Invest profits
By reinvesting the earnings into a new asset within a certain amount of time, people can lower their responsibility for capital gains tax on the asset. To maximise their advantages and reduce their tax liability, people need to be alert about the terms and circumstances linked to such a strategic investment choice.
Individuals might further reduce their tax obligation on those profits by using their capital gains to build a new home or buy capital gain bonds.
- Maximise your losses
You can take advantage of unanticipated occurrences that result in a loss on an asset. The sum of tax you may owe might be decreased by balancing your capital losses against your gains every tax year because CGT is only assessed on net capital gains.
You can also transfer capital losses on your assets to future tax years. This implies that if you have a loss for a particular year, you should think ahead and decide if it would be best to carry it over to the next tax year.
- Consider your inheritance as well
If you inherit an asset, there is no CGT liability unless you want to sell it. If the asset was passed down to you, it is necessary to determine the original value before it was transferred to you. There can be a gain if you decide to sell your asset during the estate period.
Ensure to track the assets' values for which you are a beneficiary in wills. The amount of CGT you will ultimately owe will be determined by the difference between the sale price and the cost when you inherited it.
- Consider cryptocurrency gains
If you often invest in cryptocurrencies and have gained much from them, you must know that the government does not treat them as money. You will be levied taxes on related profits if you live in the UK. This means that you must pay taxes on your cryptocurrency asset gains, like how CGT is applied to the proceeds from the sale of shares. CGT does not apply to the paper (unrealised) profits made on cryptocurrency; gains are realised when you exchange it for another cryptocurrency or change it to pounds.
Additionally, you must consider the 30-day rule. This stops individuals from selling shares and purchasing them again the next day to use their annual CGT allowance. Doing this may increase the purchase value, thereby lowering CGT exposure.
How Unicorn Accountants Can Help You with Capital Gains Tax?
Because capital gains tax is difficult to understand, consulting with a financial expert or accountants in London who can guide you through the procedure and explain ways to avoid paying CGT might be helpful. Unicorn accountants can help you overcome all the obstacles and help you with your capital gains tax. If you want to minimise your capital gains tax, the best decision is to contact an expert.
Our experts have an in-depth knowledge of capital gains tax and how to avoid capital gains tax while maintaining absolute compliance. So, you can depend on us and rest assured of your tax requirements.