Losses can also be used for something. If you were to realize a loss in the same tax year, it may be offset by any gain, reducing and possibly even eliminating a tax bill. It is also possible to offset a loss up to four years after the end of the tax year in which you sold the asset. So it’s worth reporting any capital loss even if you don’t yet have a gain to offset it — it might be useful in the future.
The approach of the end of the financial year offers other opportunities to save on taxes. If you stagger a sale to sell some shares in the current tax year and a few days later in the new tax year (i.e. after April 5), a gain of up to £24,600 can be realized tax free. Indeed, a new annual CGT allowance becomes available from April 6.
Married couples or civil partners can double this allowance to 49,200 pounds since they can exchange their assets to minimize their combined CGT bill. Assets passed between these partners are not subject to capital gains tax, since they are passed on a so-called “no gain, no loss” basis. So, for example, if a partner originally paid £5,000 for some stock that is now worth £30,000, there is no CGT to pay if he simply transfers it to his partner. However, if the receiving partner then sold those same shares, the CGT would be calculated using the same base cost (i.e. £5,000). The advantage of transferring assets in this way is that more than one person’s CGT allowance can be deducted from any gain.
This type of exchange can be particularly useful for couples who separated during the tax year and are looking to divide their assets. However, divorcing couples should be aware that legally the ability to transfer assets without CGT ceases at the end of the tax year in which they separate, not when the divorce is finalized.
Once a gain has been realized using your CGT allowances, future capital gains can be avoided by transferring the proceeds into more tax-efficient vehicles, such as Individual Savings Accounts (ISAs) or self-invested personal pensions (SIPP). Capital gains realized under ISAs and SIPPs are exempt from CGT.
Realizing a capital gain on an investment property is a bit more complicated. To begin with, the CGT rate is higher for residential real estate. If you pay the basic income tax rate of 20%, real estate capital gains tax starts at 18%. For those who pay 40% income tax, the CGT rate starts at 28%. For non-real estate assets, the CGT rates are lower: 10% and 20% respectively.
A significant tax break is that your primary residence is exempt from CGT if you sell it for profit. Likewise, if you sell an investment property that was once your principal residence, you get relief for the years you lived in the building, plus an additional nine months when your ownership ends. These extra months are an allowance to account for the time it takes to buy and sell the home.
Keep in mind that unused CGT allowances cannot be carried over.
There are a few other CGT-related issues worth remembering. Although estate tax may be subject to your death, any capital gains tax is waived. However, if you donate property with a significant, unrealized capital gain during your lifetime, CGT is levied as if you had sold it for its full market value. This applies even if no money has changed hands.
The rules surrounding when a CGT invoice must be paid have changed several times. In matters of ownership, as a general rule, CGT declarations must be filed and paid within 60 days of the sale. For transactions made before October 27, 2021, the limit was 30 days.
Looking ahead, it is common for tax allowances to increase with the cost of living, a significant point with UK consumer inflation of 5.5% in February. The CGT allowance, however, has been frozen up to and including the 2025-2026 tax year, so it will remain at 12,300 pounds regardless of inflation in the meantime.
A final capital gains tax issue that is often overlooked is that gains made on cryptocurrencies are also subject to CGT. The good news is that many of the tax mitigation strategies applied to less ethereal assets can also be applied to crypto. However, with Bitcoin currently 43% below last November’s high of $68,790, the digital currency is more likely to be a loss that can be offset by gains in more conventional assets.
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Stuart Trow is a credit strategist, pension blogger, radio show host and member of numerous pension, finance and audit committees.