The Government has cut the amount you can make in capital gains before you face tax, and it’s taking an axe to the tax-free allowance again next year too.

However, some clever family planning can help those who are sitting on gains to protect their wealth from a tax hit, both now and in the future.

Most people will have thought about using their spouse or partner to help cut their tax bill, to ensure they are using both their allowances. But often children are overlooked for tax planning. Anyone with a child or grandchild can do some smart manoeuvring to help cut their capital gains tax bill.

WHAT ARE THE OPTIONS?

Children have their own capital gains tax allowance, the same as adults. That means in the current tax year children can have gains of £6,000 and from next year gains of £3,000. However, children can’t directly own investments in their own name until they turn 18, so any asset transfer would typically use a trust.

A bare trust is often the simplest way and allows assets to be transferred into the child’s name, which means you can use their tax-free allowances.

There is a rule to limit this benefit when it comes to the income a child can earn from savings and investments, but that doesn’t apply to capital gains.

Once any assets transferred by parents into their child’s name earns more than £100 in income, that income will be taxed as though it is the parents’ – which is intended to stop parents funnelling money into accounts in their child’s name. But there is no equivalent rule for capital gains, so parents can maximise their child’s allowances.

HOW MUCH COULD I SAVE IN TAX?

Transferring assets to your child means that any gains over their annual limits will be taxed as though they are the child’s. As children often have no (or very little) income, this means gains will likely be taxed at a lower rate than the parent.

Basic-rate taxpayers pay 10% on gains on investments, while higher and additional rate payers pay 20%. That means a child would pay 10% tax on gains compared to the 20% rate a parent or grandparent may face.

WHEN IS THE CAPITAL GAIN CALCULATED?

When you transfer investments to your child and grandchild it is a taxable event for capital gains tax purposes. That means you need to work out the market value of the assets at that point and see if you owe tax on the gains.

However, if you haven’t already used your capital gains tax allowance this year you could realise gains up to £6,000 (in the current 2023-24 tax year) and then transfer more assets next year up to the £3,000 limit for 2023-24.

You can apply for a bare trust with AJ Bell via this link. If you have more than one child, then you need to open a bare trust dealing account for each child. But unlike a Junior ISA, there are no limits on how much you can put into a bare trust dealing account each tax year.

AN EXAMPLE OF HOW THE PROCESS WORKS

Victoria owns shares in Company X that she bought for £10,000. They are now worth £20,000. She could transfer £12,000 of shares to her daughter, Annie, in the current tax year, which could equate to a capital gain worth £6,000.

Then next April she could transfer another £6,000 of shares, which equates to a £3,000 capital gain (for simplicity’s sake we’ll assume the shares don’t change in value in that time). That leaves her with £2,000 worth of shares, with a £1,000 gain, that she could transfer the following year.

What’s more, if we fast forward five years, the shares in Company X that Annie owns are now worth £30,000. That represents an additional gain of £10,000 when compared to the value when the shares were transferred to her. The investments could be sold on her behalf, using up her £6,000 tax-free allowance and the remaining £4,000 of gains would be taxed at just 10%, rather than the 20% rate her mother Victoria would face, as a higher-rate taxpayer.

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