Note: This guide to avoiding capital gains tax in the UK was updated in June 2011. US readers might check out Mikes tax site .

M ost people wont ever need to consider avoiding capital gains tax. because theyll never be liable to pay it.

Your home and car are exempt from UK capital gains tax. as are personal belongings worth less than £6,000 when you sell them, and the average person has few other assets outside of cash, pensions, and ISAs which are all exempt, too.

You also get a personal capital gains tax allowance every tax year (from 6th April to 5th April), which is usually sufficient for avoiding capital gains tax bills.

• The allowance is currently £10,600 in gains a year, where a gain is the increase in the value of the asset between buying and selling it. You subtract capital losses from capital gains to arrive at your total gain for the year. (Note: Gains and losses are only realised when you sell ).

Any gains in excess of your allowance are charged capital gains tax at either 18% or 28%, depending on your total taxable income. (See this HMRC CGT guide to work out which band youre in.)

• Note that if youre a business person selling your company you may be able to claim entrepreneurs tax relief .

CGT is avoidable for most

If youre only investing a few thousand pounds a year, then by using ISAs and/or paying attention to your gains, particularly towards the end of the tax year, you can easily avoid paying CGT.

Wealthier people with big portfolios outside of ISAs, landlords disposing of rental properties, and entrepreneurs might need to do more.

For the really rich. avoiding capital gains tax is a way of life. Such people may even leave the UK to avoid a tax bill! That is beyond the scope of this article.

Reminder: You are entitled to avoid paying taxes where possible, but tax evasion is illegal.

8 ways of avoiding capital gains tax

I have paid capital gains tax, but only one year when I sold shares in a private company I co-founded. Here are my tips on avoiding capital gains tax.

1. Remember your annual CGT allowance

Stay alert to how much in capital gains youve made, and consider selling assets to use up your allowance (without going over it!) before the tax year ends.

Your £10,600 personal CGT allowance is for the gain on sales, remember, not the total value of the sale.

All your taxable gains count towards that one allowance.

• If you buy shares for £10,000 and sell them for £20,000, thats a £10,000 gain, which is within your annual allowance. Make another capital gain of £1,000 in the same tax year and the excess amount above £10,600 would be liable for tax. (So youd pay capital gains tax on £400 in this example).

It doesnt matter when you bought the assets its only the year in which you sell them thats important for CGT.

2. Realise losses to offset gains

Your total taxable gain is the sum of all your capital gains minus all the losses you incur when you sell taxable assets for less than you paid for them.

This means you can deliberately reduce your overall gains by realising losses. You might do this by selling shares that youre holding at a loss, for instance, or by selling an antique that is no longer worth what you paid for it.

The idea is to reduce your gains to within your personal allowance for the year.

Remember that CGT can be as low as 18%, and its only charged on the amount over the annual allowance. so think hard before you sell just for tax purposes.

3. Exploit your annual ISA allowance and pension

The number one thing you can do towards avoiding capital gains tax is to invest within ISAs and/or pensions.

Gains and losses on investments inside an ISA sit entirely outside of the CGT system. getting rid of the whole problem. ISAs also save you paperwork!

Due to sloppiness on my part I didnt use ISAs in my early years, and so not all my investments are tax-protected. Dont make my mistake!

4. Dont sell your asset

Pretty obvious, but often overlooked. Capital gains tax only becomes liable when you sell (or transfer) your asset. If you dont sell it, you dont have to pay tax on the gain.

Instead of selling you might enjoy a dividend income from a shareholding (or the rent from a property) indefinitely, and let the capital gain grow.

The risk is youll one day be forced to sell, either by your own circumstances or by say a company takeover, and then youll be hit with a big tax charge on the gains.

Its better if possible to defuse big liabilities in advance.

5. Transfer assets to your spouse (husband, wife, or civil partner)

A rare perk of married life! Transfers between spouses are not taxed, and you both get an annual CGT allowance.

This means you can transfer enough of your assets to your husband or wife for him or her to sell to use up their own allowance.

This effectively doubles the CGT allowance for married couples. You might get into a fight though if youre both keen investors with your own gains to realise!

6. Bed-and-spousing

In the old days youd sell shares on which youd made a good gain to use up some of your CGT allowance, and then the very next day youd buy back shares in the same company.

This was called bed and breakfasting. and it is no longer possible, because you are no longer allowed to buy back the same shares you sold within 30 days if you want to crystalise a capital gain.

However, your spouse can buy shares in the company you sold.

So what you do is you sell the investment to realise the capital gain taking into account your annual allowance, of course and then your partner repurchases the same assets in their own trading account.

This way you keep the assets in the family, but youve defused the gain.

7. Bed-and-ISA-ing

Same idea as bed-and-spousing, but this time you re-buy within an ISA. (The only true love for me!)

Purchasing back the same assets in an ISA doesnt violate the 30-day rule.

8. Carry forward capital losses

If you make an overall capital loss in a year, you should note it on your Self Assessment tax return.

Capital losses that you declare and carry forward like this can be used to reduce your capital gains in future years when you might otherwise be liable for tax.

The bottom line on avoiding capital gains tax

Avoiding capital gains tax basically boils down to three things:

• Preparation: By using ISAs and pensions, you prevent gains becoming taxable in the first place.

• Alertness: Being aware of your taxable gains over a particular year will enable you to decide whether its a good idea to realise other gains or losses.

• Defusing: If youve seen some of your assets increase in value, it may be worth realising some of the capital gains by selling them, and potentially repurchasing them after 30 days (or sooner if using one of the methods above). Like this, you use your annual allowance to stops gain growing over the years.

When employed together, these strategies for avoiding capital gains tax can easily reduce or eliminate gains entirely, unless youre very wealthy. (In that case, its Monaco or the Bahamas for you, mlad!)

If after everything theres no way of avoiding capital gains tax then its best to pay it with a smile .

Nobody likes to pay tax, but you must have done something right to see the gain. And at least 72% will remain yours to keep!

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