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How I Minimised Capital Gains Tax on My Inheritance

By: J.A.J Aaronson - Updated: 18 Mar 2010 | comments*Discuss
Capital Gains Tax Cgt Asset Isa Tax

Capital Gains Tax is often overlooked in the debate about tax on inheritance. People become so concerned with minimising or eliminating their Inheritance Tax (IHT) bill that they completely forget about or ignore the very real risk of losing chunks of cash to Capital Gains Tax (CGT). In reality, Capital Gains Tax is a significant problem that can see you giving away a large proportion of your inheritance to the tax man.

Capital Gains Tax is just that – a levy on capital gains. This means that you are likely to be taxed when you dispose of an asset and that asset has increased in value between the time at which you acquired it and the time of disposal. You can dispose of an asset by, for example, selling it, giving it away, or exchanging it for another asset.

This case study concerns Jeanette who inherited assets worth £20,000 from her father’s estate.

“There was no house,” she says, “so almost all of the assets in the estate were liquid. I inherited a mixture of cash and stocks, as well as my father’s car.”

Utilising exemptions

Capital Gains Tax is worked out on an annual basis, and every individual receives an annual exemption. In the 2009-10 tax year this exemption is £10,100. In addition, CGT is not levied ISAs or UK government bonds, amongst other things.

“Most of my inheritance was in shares, which I wanted to cash. I knew that I would have to pay some tax on them as I had inherited more than my annual allowance, but I wanted to keep the bill down as much as possible.”

When Jeanette was doing this, the annual exemption was £9,600 (it increases annually). She used her allowance to cover the cash element of the inheritance, and had £1,000 of the exemption remaining. She therefore cashed £1,000 worth of the shares to make up her allowance.

“I still had just over £10,000 worth of shares that I wanted to sell, and was looking for a tax efficient way to do this,” she said. “I spoke to a financial advisor, who told me there are very few options if you want to avoid Capital Gains Tax.”

Tax-efficient investments

The most important tool in this instance is an Individual Savings Account, or ISA. These have been hugely popular as a result of their favourable tax treatment. But, while many people simply think of them as similar to a bank account, they have important uses for those looking at other investments.

“I moved £7,200 of my shares into a stocks and shares ISA." Says Jeanette. "This is the maximum you can invest in each tax year, unless you are over 50. I decided that I can wait a while before cashing all the shares, so I am going to sell them off over the course of a couple of years to use up each of my annual allowances.”

Jeanette cashed the remaining £3,200 of shares (those that did not fit into the ISA) immediately, and had to pay CGT on this transaction at a rate of 18 per cent. However, as a result of careful planning and the utilisation of an ISA, this meant that her total tax bill was reduced to just £576, from a possible total of £1,872.

If you have inherited assets and are concerned about minimising your Capital Gains Tax bill, you should consult a financial advisor before taking any action.

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