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Offsetting is a term that is used within the world of tax. It basically means balancing money that you are owed with the money that you owe. For example, if HMRC allows you to do so, they sometimes let you offset taxes you owe them with tax rebates they owe you.

Offsetting can also be used to describe a similar process in business when a contact of yours is both a supplier and a customer. You can offset the invoice you owe them from the invoice they owe you.

What does offsetting mean when it comes to tax?

If you’re trying to understand offsetting, then it’s important to know that it can mean a few different things when it comes to tax. This includes:

  • Subtracting a capital loss from a capital gain and paying less tax. For example, let’s say you had two shares and sold one for-profit and one for a loss: you’ll only pay Capital Gains Tax on the difference
  • The same as above can apply to the tax you pay on rental income if you have multiple properties
  • You can also offset profits this year by bringing forward losses from the previous year – but only for the same type of income

Example of offsetting

Lena owns shares in a media corporation. 

In June, she decides to sell some of them and makes a profit of £30,000. Later on in the year, she sells more for a loss of £16,000. When it comes to paying tax, she’ll only pay Capital Gains Tax on the difference, £14,000. 

This is because Lena can offset the capital loss from the capital gain. She only pays tax on the difference: 30000 – 16000 = 14000.

If you want to know the amount of Capital Gains Tax you might have to pay on your shares, property or cryptocurrency gains, you can use our handy calculator here to work it out.

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