Note: This is a detailed guide to avoiding capital gains tax in the UK. Readers in the US might check out Mike’s tax site.
Most people won’t ever need to consider avoiding capital gains tax, because they’ll never be liable to pay it.
Your home and car are exempt from UK capital gains tax, and the average person has few other assets outside of cash, pensions, and ISAs – which are all exempt, too.
You also get a personal capital gains tax allowance every tax year (from 6th April to 5th April), which is usually sufficient for avoiding capital gains tax bills.
- The allowance is currently £10,100 in gains a year, where a gain is the increase in the value of the asset between buying and selling it. You subtract capital losses from capital gains to arrive at your total gain for the year. (Note: Gains and losses are only ‘realised’ when you sell).
Any gains in excess of your allowance are charged capital gains tax at 18%.
- Note that if you’re a business person selling your company you may be able to claim entrepreneurs’ tax relief.
CGT is avoidable for most
If you’re only investing a few thousand pounds a year, then by using ISAs and/or paying attention to your gains, particularly towards the end of the tax year, you can easily avoid paying CGT.
Wealthier people with big portfolios outside of ISAs, landlords disposing of rental properties, and entrepreneurs might need to do more.
For the really rich, avoiding capital gains tax is a way of life. Such people may even leave the UK to avoid a tax bill! That is beyond the scope of this article.
Reminder: You are entitled to avoid paying taxes where possible, but tax evasion is illegal.
8 ways of avoiding capital gains tax
I have paid capital gains tax, but only one year when I sold shares in a private company I co-founded. Here are my tips on avoiding capital gains tax.
1. Remember your annual CGT allowance
Stay alert to how much in capital gains you’ve made, and consider selling assets to use up your allowance (without going over it!) before the tax year ends.
Your £10,100 personal CGT allowance is for the gain on sales, remember, not the total value of the sale.
All your taxable gains count towards that one allowance.
- If you buy shares for £10,000 and sell them for £20,000, that’s a £10,000 gain, which is just within your annual allowance. Make another capital gain of £500 in the same tax year and the excess amount above £10,100 would be liable for tax. (So you’d pay 18% on £400 in this example).
It doesn’t matter when you bought the assets – it’s only the year in which you sell them that’s important for CGT.
2. Realise losses to offset gains
Your total taxable gain is the sum of all your capital gains – minus all the losses you incur when you sell taxable assets for less than you paid for them.
This means you can deliberately reduce your overall gains by realising losses. You might do this by selling shares that you’re holding at a loss, for instance, or by selling an antique that is no longer worth what you paid for it.
The idea is to reduce your gains to within your personal allowance for the year.
Remember that CGT is only 18%, and it’s only charged on the amount over the allowance, so think hard before you sell just for tax purposes.
3. Exploit your annual ISA allowance and pension
The number one thing you can do towards avoiding capital gains tax is to invest within ISAs and/or pensions.
Gains and losses on investments inside an ISA sit entirely outside of the CGT system, getting rid of the whole problem. ISAs also save you paperwork!
Due to sloppiness on my part I didn’t use ISAs in my early years, and so not all my investments are tax-protected. Don’t make my mistake!
4. Don’t sell your asset
Pretty obvious, but often overlooked. Capital gains tax only becomes liable when you sell (or transfer) your asset. If you don’t sell it, you don’t have to pay tax on the gain.
Instead of selling you might enjoy a dividend income from a shareholding (or the rent from a property) indefinitely, and let the capital gain grow.
The risk is you’ll one day be forced to sell, either by your own circumstances or by say a company takeover, and then you’ll be hit with a big tax charge on the gains.
It’s better if possible to defuse big liabilities in advance.
5. Transfer assets to your spouse (husband, wife, or civil partner)
A rare perk of married life! Transfers between spouses are not taxed, and you both get an annual CGT allowance.
This means you can transfer enough of your assets to your husband or wife for him or her to sell to use up their own allowance.
This effectively doubles the CGT allowance for married couples. You might get into a fight though if you’re both keen investors with your own gains to realise!
6. Bed-and-spousing
In the old days you’d sell shares on which you’d made a good gain to use up some of your CGT allowance, and then the very next day you’d buy back shares in the same company.
This was called bed and breakfasting, and it is no longer possible, because you are no longer allowed to buy back the same shares you sold within 30 days if you want to crystalise a capital gain.
However, your spouse can buy shares in the company you sold.
So what you do is you sell the investment to realise the capital gain – taking into account your annual allowance, of course – and then your partner repurchases the same assets in their own trading account.
This way you keep the assets in the family, but you’ve defused the gain.
7. Bed-and-ISA-ing
Same idea as bed-and-spousing, but this time you re-buy within an ISA. (The only true love for me!)
Purchasing back the same assets in an ISA doesn’t violate the 30-day rule.
8. Carry forward capital losses
If you make an overall capital loss in a year, you should note it on your Self Assessment tax return.
Capital losses that you declare and carry forward like this can be used to reduce your capital gains in future years when you might otherwise be liable for tax.
The bottom line on avoiding capital gains tax
Avoiding capital gains tax basically boils down to three things:
- Preparation: By using ISAs and pensions, you prevent gains becoming taxable in the first place.
- Alertness: Being aware of your taxable gains over a particular year will enable you to decide whether it’s a good idea to realise other gains or losses.
- Defusing: If you’ve seen some of your assets increase in value, it may be worth realising some of the capital gains by selling them, and potentially repurchasing them after 30 days (or sooner if using one of the methods above). Like this, you use your annual allowance to stops gain growing over the years.
When employed together, these strategies for avoiding capital gains tax can easily reduce or eliminate gains entirely, unless you’re very wealthy. (In that case, it’s Monaco or the Bahamas for you, m’lad!)
If after everything there’s no way of avoiding capital gains tax then it’s best to pay it with a smile.
Nobody likes to pay tax, but you must have done something right to see the gain. And 82% will remain yours to keep!
(Image by: Itzafineday)
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Thank you for explaining CGT to me; I never really understood it before.
Your site is really interesting.
Reading this just reinforces your earlier (and repeated) point that ISAs are great not just because of the tax benefits, but also because they take away so much hassle. And to think that some people try to turn income into capital gains in order to avoid income tax…. All I can say is that they must have accountants who do this work for them!
With the increased ISA limits I don’t think most of the readers of your blog will ever need to invest outside of one, except possibly in a pension. Either way, for most of us mere mortals CGT is only an academic concern, so long as we don’t forget to invest in ISAs from day one!
One last important point: UK gilts are CGT-free for UK taxpayers (though not funds of gilts, I think). The tax saving that creates on holding index-linked bonds in particular (the index-linking of the principal counts as capital gain) must be considerable. If anyone finds their investments outgrowing an ISA, they could simply put part of their gilt portfolio into individual gilts held outside the ISA and leave the other assets inside.
@Niklas – Thanks for the extensive comment! With Gilts, it is worth remembering they’re CGT tax free (click on the link to ‘UK Capital Gains Tax’ in the article for the detail of what’s exempt and what’s not) but of course the income isn’t.
Also, it’s really a requirement of the market that they are CGT tax-free, as otherwise liquidity and returns would be impaired in some way when considering the yield to maturity — although the same would be true of corporate bonds, and they are subject to CGT (I’m sure there’s PhDs on this).
Of course, being exempt from CGT is only helpful when you might get a gain! Most gilts are trading well above par, so buying now and holding to redemption will give you a capital loss (which won’t be offset-able against taxable gains elsewhere).
All the more reason to buy gilts when they’re trading below par, of course. (Those days of 6-7% yields look so glorious in retrospect. Worth remembering for next time!)
“Bed and Spreadbet”: If I had some gains in say Barclays shares, I could sell them today and buy the same number of shares as a spreadbet and keep it like that for 30 days and reverse the transaction. The benefit is I can book the capital gains for this tax year if I am not at £10,100. The only drawback is that spreadbet costs roughly 2-3% per year. The bid-offer spreads are very small and no stamp duty. Spread bets do not have any taxes, so not capital gains or capital losses or other taxes.
I am not sure if Bed-and-CFD is treated by the taxman in the same way. The benefit is that CFD could trigger capital losses / gains.
@Nandan – Excellent contribution, thank you. You’re quite right that spreadbetting can be used to remain exposed to a stock despite the 30day rule. I’d remind readers to read up in detail about spreadbetting, as novices often gear up much more than they think they do when using a spreadbet, and that spreadbetting can lose you a lot of money if you don’t know what you’re doing. But for a sophisticated investor looking to use his or her CGT allowance, this is indeed another useful tool in the armory.
Hi, a member of my family who is 98 has a large amount in assets in shares she has had for 30/40 years. In some cases with aquisitions etc the original company the shares were in has been swallowed up by another and equivalent shares were issued. My question is, that as these shares were bought so long ago essentially for next to nothing will they have to pay capital gains on everything if they sell a particular share? Or is there some period of time with which you get more relief? Evem if there isn’t presumably there’s some sort of calculation to translate original cost into something meaningful i.e in today’s money which maybe takes inflation or similar into account
your help would be appreciated into any way we an lessen their exposure. Thanks
@Andy – Unfortunately I’m not a professional adviser and can’t give individual advice. I can say for what it’s worth is that as I understand it taper reliefs have been abolished on share disposals for UK investors. This would mean that unfortunately you would have to pay on the full gain, with no deduction made to allow for the passing of time or inflation. (There used to be a different system called indexation which did do this, but it’s been replaced by the flat 18% rate).
In general I approve of the simpler flat rate 18% tax as it’s far simpler, but this circumstance shows one of the drawbacks.
You should take professional advice I think (from an accountant maybe?) in case there are special vehicles that can be used in such cases between family members. I’d have thought this would be sensible anyway in light of the potential inheritance tax issues if your family member should pass away.
@Andy,
For shares held before 31-03-1982, the cost price is that on 31 march 1982 .
Please see http://www.hmrc.gov.uk/helpsheets/hs284.pdf
If there has been no capital gains this tax year for her, I would suggest that she sell 10,100£ worth of shares before 5th April 2010 to have the tax free £10,100. Whatever the cost, capital gains can not be more than what you sell for I think.
Good luck,
@NS Excellent information, thank you — I was still in short trousers in 1982. But I need to be aware of this too, and will read up the link.
Thanks again, please stick around!
@Andy – also worth noting that there is a free CGT uplift on death so the entire estate becomes liable for IHT, but not CGT. This means, each asset is classed as if it is purchased for it’s value on the date of death. Original purchase values are then ignored.
Someone has mentioned telling your relative to sell these assets – this isn’t always viable, especially for those of pensionable age. You may find she is drawing income from such assets.
Good luck.
That’s why it’s always nice to have a tax planning before we get trap of any unexpected tax liabilities. In our country, transferring assets to our family is one preferable tax saving move. But yes..we can still opt not to sale them.
Victorino on: How to reduce income tax payable and expense
For a while now I’ve been seriously contemplating ways to minimize my taxes paid on investments. Even worse than the capital gains tax is the dividend tax.
Here in canada, we’re only taxed a maximum of 25% on half of our capital gains. In other words, 12.5% is a tops. And we got our tax havens, like the TSFA.
But dividends certainly aren’t as lenient. Especially when considering withholding taxes from outside countries.
Oi, you aren’t kidding when you said tax avoidance is a way of life…
Aury (Thunderdrake) on: Hoarding Dragon Basics – The Stock Market
@Aury – We’re lucky in the UK with the tax treatment of dividends. In fact, if you’re a lower rate taxpayer you don’t pay extra tax on the dividends you receive at all. Higher rate payers effectively pay 25%, which is less than the higher rate of tax. For a while with CGT at 18% it made sense to go for capital gains here, but if CGT is going to rise to 40% or more (still in dispute) then income products may get more popular again.
Just realised I’ll probably have to overhaul and re-write this whole page when we have the new CGT rules. Curse the politicians!
Firstly, great website and fantastic information ! A quick question – If I made a capital gain loss in the previous fanancial year (09/10), can I carry this loss forward, ie £5K loss carried forward + £10,100 relief, total 2010/11 £15,100 without CGT ??? Cheers, David.
@David – I’m not qualified to give personal tax advice and so this isn’t that, but I believe in general that’s the case, yes. However, you’d have had to declare the capital loss on your tax return for 09/10 in order to now set it against your capital gain this year.
Please also note that as I write (9th August 2010) this article needs to be updated in light of the annoying changes in the recent emergency budget, which has lifted CGT for higher rate taxpayers to 28%. The general principles of CGT avoidance remain the same (if anything they’re even more important now!)
Thanks for the kind words about the site.
Does the liability for capital gains tax ever go away?? For example, if I sold a house two years ago and didn’t pay CGT, will I have to pay it when I return to live in the UK (I’ve been living abroad for 10+ years).