Capital gains tax bill jumps to record high – three things to consider before tax year end

Rishi Sunak dismantles graphic attack on his taxation record

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Capital gains tax receipts have doubled since 2017, hitting a record high of £14.6billion in the last year following the tax rise on entrepreneurs selling businesses. There are also growing concerns about what CGT changes Chancellor Rishi Sunak will announce in tomorrow’s Spring Statement.

Mr Sunak is under pressure from all angles to repair Government finances without affecting the UK’s economically vulnerable. 

The Office for Tax Simplification recommended in 2020 that the CGT rate be increased in line with income tax rates. 

Additionally, it was suggested that inherited assets be subjected to both CGT and inheritance tax. 

Alex Davies, CEO and founder of Wealth Club, shared three things investors should do before April 5 to reduce their tax bill. 

Income and Capital Gains tax

The most popular tax-free options for savers looking to keep their money out of the taxman’s hands tends to be pensions or ISAs, however, Mr Davies suggested they look elsewhere too. 

He shared: “If you’re prepared to take extra risk, you could look to the government’s venture capital schemes. 

“Each offers a different mix of tax benefits. Which you go for will largely depend on circumstances and how much risk you’re prepared to take. As a rule of thumb, the greater the tax benefits, the higher the risk.”

The first of these are Venture Capital Trusts, or VCTs, which offer up to 30 percent income tax relief. 

These returns are paid through tax-free dividends and have a £200,000 yearly allowance. 

Enterprise Investment Scheme offers the same tax benefits but does not provide tax-free dividends. 

Instead, Britons can defer their chargeable capital gains so long as they remain invested. 

Mr Davies explained: “It will only become payable once you come out of the EIS, unless you re-invest the money into another. The allowance is a whopping £1million a year or £2million if you invest at least £1million into ‘knowledge intensive’ companies.”

Finally, the Seed Enterprise Investment Scheme, or SEIS, “is the real winner” according to Mr Davies. 

It provides an investment that cuts both income and capital gains by 50 percent, with a more modest allowance of £100,000.

However, investing this entire allowance could see Britons saving £50,000 income tax and £14,000 in capital gains. 

Carry back tax

EIS and SEIS investments allow carry back, which allows investors to offset their tax relief against the previous tax year and get the tax they’ve already paid back into their pockets.

Mr Davies cautioned: “However, there is a catch. To be able to carry back to the 2020/21 tax year, your money must be invested, and the shares allotted, by April 5, 2022. If this deadline is not met, you don’t have the option to carry back, but of course can still offset the tax relief against the current tax year.”

Protect against IHT

Britons often find themselves sandwiched between CGT and IHT when it comes to passing on wealth to the next generation, but EIS and SEIS are IHT free after two years. 

Mr Davies cautioned that “the greatest IHT threat” actually comes from one’s ISA which will incur the full 40 percent tax bill. 

He shared a potential solution: “Spending your ISA might be fun, but probably not what you had in mind when you were saving into it. An alternative is to invest in an AIM ISA, a managed portfolio of AIM shares that can be IHT free after two years. 

“You still get the ISA benefits of tax-free income and growth for as long as you live, but you don’t need to worry about IHT on top.”

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