Financial literacy is not the simplest of skills to acquire. Between shrewd accountancy and a proper understanding of the UK’s tax systems, many fall through the cracks – a particularly dangerous phenomenon in the context of a cost-of-living crisis, and potential recession. However, the complexities of financial literacy do not just affect those on the breadline. Higher earners need financial savvy to optimize income, savings, and investments for maximum potential. Misunderstood but crucial: What is Capital Gains Tax, and how can it be effectively managed for financial success?
What is Capital Gains Tax?
CGT taxes profits from asset sales; understanding this government tax is crucial for financial planning and wealth management. Selling above cost triggers Capital Gains Tax if profits exceed the threshold, determined by Capital Gains Allowances.
The rate at which capital gains are taxed depends on several criteria, from income levels to asset type and value. High earners are typically charged more in Capital Gains Tax than lower earners. But there are different routes by which the impact of this can be minimised.
What Do You Pay Capital Gains Tax On?
Capital Gains Tax is applied to the sale of most assets, with some key omittances. ‘Chargeable assets’ include tangible possessions above a £6,000 value threshold, businesses and business assets, stocks, and shareholdings, and secondary properties not being used as your primary residence. First or primary homes are exempted from CGT, as are personal vehicles. So too are stocks, shares, or other such assets held with an ISA exempted, while possessions with a 50-year ‘shelf life’ are considered ‘wasting’ assets ineligible for taxation.
Tax Rates and Allowances
The £6,000 figure above is a common one, also being the Annual Exempt Amount for individuals; that is, individuals can make up to £6,000 in capital gains without incurring a CGT bill. This figure is £3,000 for trusts.
As for tax rates, those on basic-rate Income Tax must calculate their tax rate utilising their distance from the next Income Tax Band, their allowance, and the value of the asset. Higher and additional-rate Income Taxpayers, however, pay 20% flat on gains from chargeable assets – and 28% on the sale of property used for non-primary residential purposes.
Tips for Reducing Capital Gains Tax
Reducing tax liability is essentially an exercise in efficiency. Specialist firms and advisors are best-placed to understand the workings of these financial systems, and structure high-earners’ finances accordingly to minimise exposure. Any personal attempts to reduce CGT liability, particularly on the part of those with less in the way of financial literacy skills, should be undertaken cautiously; tax avoidance can cross the Rubicon into tax evasion without a proper understanding of the systems and liabilities at play.