You
have been prudent and invested wisely, the value of your investment has
increased and now you want to realise your gains, but there is a problem.
You are expected to pay tax on the profits when you sell the asset. Does
this sound familiar? However, with careful planning, you could avoid or
reduce the amount of Capital Gains Tax (CGT) you have to pay.
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Careful
planning could reduce the amount of Capital Gains Tax you have
to pay.
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Complex
tax
CGT remains one of the most complex taxes. You don't pay it on the profits
of the sale of your main home, but you have to pay it when you sell
most other assets, including shares. It is due at your highest rate
- so if you are a high earner you could see 40% of a gain go to the
taxman.
Every man, woman and child has an annual CGT exemption. This tax year
(2001/02) you can have gains of £7,500 before the taxman can take a
penny. Taper relief has also reduced the tax due on asset sales. But
how can you wash away your gains?
Safeguard your gains
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To shelter from CGT in the future, consider investing in shares and
collective investments such as unit trusts using your £7,000 ISA entitlement.
The savings wrapper provides full CGT and income tax protection.
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If you've used up your own ISA allowance for this year, but still have
money to invest and are married, consider transferring funds to your
spouse in order that they can use their ISA allowance.
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Transferring (ie. gifting) money or assets between married partners
is tax-free, although the sale of the asset could still involve CGT.
If you have gain-pregnant assets, try to sell some each year to use
up the allowance. Again, if you're married and have gains exceeding
the exempt limit, you can transfer assets to your spouse tax-free, so
they can use their own allowance.
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You should review both your own and your spouse's (non-ISA) share portfolios
annually to check if one has dramatically outperformed the other. You
could save on future tax by redistributing assets between each other.
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You may wish to invest cash for your children in a bare trust to use
up their CGT allowance in future years. But bare in mind that income
over £100 per annum from parental gifts is subject to tax at the donor's
higher marginal rate.
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Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs)
provide an opportunity to defer CGT and reduce income tax. They are
high-risk investments but offer important tax breaks.
This area of financial planning is complex and requires a clearly
defined strategy. We can provide you with independent advice and provide
innovative solutions. For further information, please e-mail or contact
us.
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