Best Ways To Avoid Capital Gains Tax

Profit aka capital gains can best be summarised as the gain on an investment when you sell the property for more than its base price. It can either be short term capital gain (from an investment held for less than a year) or long term capital gain (from an investment which is sold after one year). Now the government will not let you take the entire profit home. It will take its cut from the gains you have earned and the portion that goes to the ex-chequer is the capital gains tax. Your stocks, bonds, jewellery, coin/ stamp collection, property (other than the one used for business purpose) etc are some of the capital assets that are taxed capital gains.

But do you want your capital gains to go to the government? Well, the natural tendency is to avoid capital gains tax and some of the common ways to do so are:

Stay invested for long: The longer you stay invested, the lower will be capital gains tax rate and the better will the growth of your investment. This might sound a little challenging in the turbulent market conditions. But a calculated risk return analysis can help you in achieving the trade-off.

Use tax-deferred retirement plans: Instead of investing in the regular retirement plans, choose the ones which qualify for exemptions under various sections of the income tax law. Individual retirement account allows the investor to buy and sell investments without incurring any capital gains tax.

Observe the holding period: Capital gains tax in long term is less in comparison to short-term. Holding an investment for a few extra days or months to reduce your tax liability is any day a sensible move instead of taking a haste decision which might result into heavy tax liability.

Capital losses to offset capital gains: Investments are subject to risk and thus you can incur both loss and profit on any investment you make. If the capital loss on an investment is more than the capital gain, the same can be used in offsetting the gain and it will minimise your tax liability.

Choose the cost basis: Though First In First Out (FIFO) is the common method used in calculating the cost basis of any investment acquired over a period, the other options are Last In First Out, Specific Share Identification, Average Cost and Dollar Value LIFO.

Call 01844 212907 at Wills & Trusts Wealth Management for more information on the same.


Location: Thame OX9, UK

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