Investors and Savers: Capital Gains Tax (CGT)

Posted by siteadmin on Tuesday 22nd of March 2016.

Capital gains are taxed as the top slice of income, but the rates are currently lower than those that apply to income not covered by allowances. From 6 April 2016 most rates will be cut by 8% so gains will generally be taxable at 10% to the extent they fall in the £32,000 wide basic rate band (2016/17) and 20% if they fall into the higher or additional rate bands. However, for gains on residential property (eg buy-to-let) and carried interest the 2015/16 tax rates of 28% and 18% will continue to apply. The capital gains tax annual exemption for 2016/17 will remain unchanged at £11,100 because inflation (as measured by the Consumer Price Index) to last September was below zero.

The tax rates and annual exemption (per person, not per couple) mean that if you can arrange for your investment returns to be delivered in the form of capital gains rather than income, you will often pay little or no tax on your profits. While investment decisions should never be made on tax considerations alone, traditionally favouring capital gains over income when setting your investment goals has been a sensible approach. However, with the new dividend allowance, this will no longer be automatically the case, despite the CGT rate cuts.

Year End Planning: If you do not use your £11,100 annual exemption by Tuesday 5 April, you will lose it and a possible tax saving of over £3,100. If you have gains of over the exemption to realise, it is worth deferring the excess until after 5 April to gain another £11,100 exemption, benefit from the new CGT rates (if applicable) and defer the CGT bill until 31 January 2018.