Can I reduce my CGT by making a pension contribution?

Ginger_Winner

Hi everyone - I am looking for some advice regarding CGT, which hopefully won't be too complicated for someone with experience in this area as my circumstances are pretty straight forward. Here's a quick summary:

- I recently sold a rental property and I intend to invest the proceeds in a combination of SIPP, ISA as well as standard investment trading account.
- I work freelance and have a limited company, of which I am the sole employee and I intend to pay myself £8,800 salary this year and no dividends. 
- The taxable gain on the property sale is £92k, so my CGT liability is going to be £22k according to the HMRC calculator.

I am keen to understand how I might minimise this CGT liability as I (rather foolishly) had not planned for this large tax bill.
I am single so there is no spouse allowance to share. I have made no personal contributions to my SIPP this year, so I was wondering if there is anything I might be able to do there that would help me. I should also have around £10k in my business which I could pay myself a higher salary if that would help.

I would really appreciate any advice. I sold the flat just over a week ago, so I realise I have to file the CGT return very soon.
Thanks in advance of any advice....

Jeremy535897

There is nothing you can do to reduce the immediate charge once the sale has completed (even if it hasn't completed, all you could do would be to realise capital losses before completion). If you were to make capital losses by 5 April 2021, they would reduce the liability and you could claim a refund when filing a self assessment form, so if you invest in shares (outside an ISA) and lose money, you could realise capital losses by 5 April 2021. Salary and pension contributions cannot affect the tax payable as they are income tax matters.

tacpot12

Yes, that's quite a big tax bill. You could, if you have any shares currently in a standard investment trading account that you could sell at a loss before 6th April 2021, you could offset your CGT liability against your gain from the property.

You should check that you have done the CGT calculation correctly. The HMRC calculator is good, but it can only work with the data you put into it. So make sure you have calculated your costs of purchase and cost of sale correctly, check your calculation for Private Residence Relief if you lived in the property as your own home at any time, and that you included the 9 months at the end of your ownership if it was ever your own home at any time. 

If you had any problems during the sale and needed purchase indemnity insurance, there may be additional costs that you can offset against the gain. Have a look at this case for details 

O'Donnell v HMRC [2017] UKFTT 347 (TC) (26 April 2017) (Judge Charles Hellier) (Bailii)

 
Although you only have a short time to pay the CGT, it is better to take all of that time to check and double check that you are not overpaying for some reason. 

If you were a higher rate tax payer, then making a payment into your SIPP could reduce the CGT rate you would pay if the payment brings you down into the basic rate of tax, but because you are only drawing a salary of £8,800 you aren't a higher rate tax payer anyway so there is no point. Don't forget that only paying yourself a salary of £8,800 when the company is receiving £50K+ for your services makes it much more likely that you will be subject to a tax inspection at some point. Better to pay yourself £22,000 a year and make sure you  are not near the top of HMRC's list for investigations...  

tacpot12

As you have a Ltd. company, you probably have an accountant as well. You could ask them to check your figures before you  complete your return and make a payment, just in case they can save you some more money. 

I'm aware of all this because I was in a virtually identical situation to yourself about three months ago with a property I sold, and I have been a contractor on a couple of occasions. I assume you will put £20K into a S&S ISA this year. You could keep £20K in cash, and put that into the ISA on 6th April. The rest will have to go into your pension or standard investment trading account (or GIA as I would call it). You will be limited as to what you can put in your pension, but using carry forward rules you might be able to put upto £40K into your pension and get tax relief on this. If you have been paying yourself a low salary for a while, the amount you can put into your pension will be a lot less than £40K, so you will probably be putting quite a bit into a GIA. For CGT reasons, you need to keep a record of the price you bought assets for and the costs of acquisition, as you will need to pay CGT on the gains you will hopefully have when you sell the assets when you have the opportunity to make further payments into your ISA. You aim should be to sell up to £20K of assets without incurring a gain that is about your CGT Allowance for the year. This is easy for the first few years, but  might get harder if the assets appreciate a lot - it's a nice problem to have though. 

Don't forget your company can make contributions to your pension, and these are a valid business expense, so will reduce your Corporation Tax liability.

If I were you, I would pay myself £18K this year, put as much of the proceeds from the property sales into my pension, then an ISA, and they a GIA (possibly keeping £20K back to pay into the ISA on 6th April), and have the company make pension contributions in future years.    

Ginger_Winner

Thanks for the advice. So having read through everything, I think its looking like I am pretty much stuck with this £22k of CGT to pay, this is because:

- I don't have another capital loss that I can make to offset the gain
- Making employee contributions to my pension won't effect my CGT thresholds because I am a lower rate tax payer
- I have (sadly) taken into account all of the expenses and time in residence for the CGT calculation

I appreciate the other general pension advice and the comments about decreasing the likelihood of being investigated by HMRC. My business doesn't turnover that much and anything left over after salary is used as an employer contribution to my SIPP so hopefully that doesn't send warning signs to HMRC.

I guess the only glimmer of light I have is that if I invest outside of a SIPP and ISA between now and April 5 and make a loss then that could be offset.

Thanks again for taking the time to write those detailed responses.

[Deleted User]

Please don’t do what you suggested in your penultimate paragraph. If you invest £5000 and sell for £2000 you will have lost another £3000 or it will have cost you £3000 to reduce your CGT by £3000. The tax tail wags the dog!

With reference to Jeremy’s post, I am certain that his idea would have been to realise current losses on investments already made and utilise - not invest more to make a loss!

Jeremy535897

[Deleted User] said:

Please don’t do what you suggested in your penultimate paragraph. If you invest £5000 and sell for £2000 you will have lost another £3000 or it will have cost you £3000 to reduce your CGT by £3000. The tax tail wags the dog!

With reference to Jeremy’s post, I am certain that his idea would have been to realise current losses on investments already made and utilise - not invest more to make a loss!

Indeed. You are always better making a profit that might be taxed at 20% than a loss that might be relieved at 28%. My point was simply that if at say 31 March 2021 investments purchased happened to be showing a loss, it would be logical to crystallise them by 5 April 2021 (but don't reacquire the same shares until at least 31 days after the sale).

macman

I'm not sure your £22k calculation is correct. After deducting your annual CGT allowance, you have a gain of £79,700. Since your salary is less than your personal allowance, your taxable income is zero. The CGT on that gain is 18% on the first £50k, and 28% on the balance. I make that about £17,316. 
Or is your gain a net figure, after deducting the CGT allowance? Even doing it that way, I still get only £20,600.
Or do you have other taxable income than your salary?
NB: have you included any improvement costs when calculating the gain, as they can be offset, as well as the purchase and sale costs?

Jeremy535897

macman said:

I'm not sure your £22k calculation is correct. After deducting your annual CGT allowance, you have a gain of £79,700. Since your salary is less than your personal allowance, your taxable income is zero. The CGT on that gain is 18% on the first £50k, and 28% on the balance. I make that about £17,316. 
Or is your gain a net figure, after deducting the CGT allowance? Even doing it that way, I still get only £20,600.
Or do you have other taxable income than your salary?
NB: have you included any improvement costs when calculating the gain, as they can be offset, as well as the purchase and sale costs?

It's £37,500 at 18%, not £50,000, if OP has taxable income within the personal allowance. OP said all expenses and main residence relief had been taken into account. Assuming the CGT allowance has also been taken into account, you have £37,500 at 18% plus £59,500 at 28% = £22,010.

Whitham

Pension contribution can reduce your CGT. It won't reduce your gain. But it will increase your basic rate band so more of your gain will taxed at 18% or 28%. Whether it is worth tying your wealth up that way for a 10% tax saving though is something else. But if you were going to do it anyway, then better this side of 5 April than the other.

Ginger_Winner

Whitham said:

Pension contribution can reduce your CGT. It won't reduce your gain. But it will increase your basic rate band so more of your gain will taxed at 18% or 28%. Whether it is worth tying your wealth up that way for a 10% tax saving though is something else. But if you were going to do it anyway, then better this side of 5 April than the other.

OK, so are you saying that if I make a personal contribution to my pension of £8k for example, that would push my 28% threshold up by £8k effectively reducing my CGT bill by £800?