Capital gains tax is about to become a big headache for many more investors. Under current rules, individuals have a relatively generous £12,300 of investment gains which they can realise each tax year without being subject to tax.

However, the Chancellor has announced that from April 2023, this allowance will fall to £6,000, and then from April 2024, it will be cut to just £3,000 a year. Any gains above these levels are taxable at 10% or 20% for basic and higher rate taxpayers respectively, with an additional 8% tax on residential property sales.

This is going to cause problems for investors on two counts. First, they now face a higher tax bill when selling investments. Second, more investors are going to find themselves caught up in capital gains tax calculations, which can be beastly to say the least.

HOW CAN I REDUCE OR AVOID CAPITAL GAINS TAX?

There are a range of options open to investors who wish to mitigate the capital gains tax they are going to pay on their investments.

The most obvious is to make appropriate use of pension and ISA allowances, as gains made within these shelters are free from capital gains tax. They protect you from income tax along the way too.

You can even move investments you hold outside a SIPP or ISA inside the wrappers by performing a ‘bed and ISA’ or a ‘bed and SIPP’, whereby you sell shares or funds and buy them back within the tax shelter.

This does crystallise any gains, which may be liable to capital gains tax, but seeing as the CGT allowance is £12,300 this year, and £6,000 next year that still gives you scope to tuck away a decent chunk of investments from the ravages of capital gains tax.

There are other tax shelters, such as VCTs and EIS’s which also offer growth free from capital gains tax, but these funds invest in early-stage companies, which means they come with high risks and low liquidity.

USING A PARTNER’S ALLOWANCE

There is a manoeuvre rather curiously called a ‘bed and spouse’, though it’s perhaps not quite as romantic as it sounds. The annual capital gains allowance applies to an individual, and so it makes sense for a couple to share their assets out between them, to maximise the allowance of each partner.

The good news is that if they’re not evenly spread currently, transfers of assets between spouses or civil partners are free from capital gains tax, so you can conduct a ‘bed and spouse’ by re-registering investments from one partner to the other.

By doing a bit of shuffling, you may therefore be able to arrange your investment affairs a little bit more efficiently as far as capital gains tax is concerned.

As part of any redistribution of assets, you should also give some consideration to the income tax band each partner sits in too. Those in higher rate tax brackets would pay a higher rate of capital gains tax on any gains that are realised above the annual CGT allowance, and they will also likely pay higher income tax rates on any interest or dividends received from investments too.

So, there may be some trade-offs and judgements which need to be exercised in getting the right balance, depending on your tax bands and whether you hold investments that produce an income.

WORKING OUT YOUR TAX LIABILITY

In a way, protecting your investments from capital gains tax is the easy bit, compared to working out your capital gains tax liability if you do exceed the annual threshold.

For some holdings this may be straightforward because you can easily find out what you paid for them, and you know what the proceeds are when you sell them.

But it can quickly get more complicated. What if you aren’t selling an entire holding? Or if you have bought and sold shares along the way, at different prices? For instance, maybe you have a regular monthly investment into a fund or have simply traded in and out of a share depending on prevailing conditions. There are more complicated rules applying in these circumstances.

If you hold accumulation units in a fund (outside of an ISA or SIPP), you could be in for some testing times with a spreadsheet too. These units reinvest any dividends along the way, and those dividends are liable to income tax.

To avoid paying capital gains tax on these dividends too, the government allows you to use them to reduce your capital gain when you sell, but you will need to have your paperwork in good order to be able to tot them up over the years.

The complexity involved is itself a compelling reason to avoid capital gains tax through tax shelters and tax planning, if possible, let alone the actual financial saving you make.

If you find you have exhausted all the possible avenues and do end up paying capital gains tax, perhaps you can console yourself that at least there are gains to be taxed, so in that sense, it’s a nice problem to have.

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