Aspects of Capital Gains Tax
Shortly after taking office, the Coalition Government announced that it would seek ways of taxing non–business capital gains ‘at rates similar or close to those applied to income’. The subsequent Emergency Budget saw the introduction of a new rate of capital gains tax (CGT) as well as changes to Entrepreneurs’ Relief.
While the additional CGT rate of 28% may have been lower than previously feared, the new rules nevertheless affect millions of people including those with employee share schemes, owners of second homes and buy–to–let landlords.
What are the rules?
CGT is payable on the amount of profit or gain made when you sell or otherwise dispose of an asset, for example by giving it as a gift or transferring ownership to someone else.
There are now two rates of CGT for individuals - a standard rate of 10% and a higher rate of 20%. The rate of CGT payable on gains depends on the level of the individual’s taxable income and gains for the tax year.
The higher rate applies to gains where an individual has total taxable income and gains for the tax year of more than the basic rate band for income tax. For 2016-17 this is set at £32,000. Where an individual’s total taxable income and gains are up to £32,000 the standard rate of 10% applies.
The figure for total taxable income and gains is calculated after taking into account all allowable deductions including losses, personal allowances and the CGT annual exempt amount.
All taxpayers continue to benefit from the annual exempt amount, which is £11,100 for 2016-17.
Meanwhile, the rate of CGT for trusts and personal representatives of deceased persons is 20%, except where Entrepreneurs’ Relief applies.
Entrepreneurs’ Relief
Entrepreneurs’ Relief enables qualifying gains to benefit from a reduced rate of CGT. For 2016-17 this rate is 10%. Each taxpayer has a lifetime limit on gains which can qualify for Entrepreneurs’ Relief, which is currently set at £10 million.
Generally, Entrepreneurs’ Relief is available to individuals on the disposal (after at least one complete qualifying year) of:
- all or part of a trading business carried on alone or in partnership
- the assets of a trading business after cessation
- shares in the individual’s ‘personal’ trading company
- assets owned by the individual used by the individual’s personal trading company or trading partnership.
Minimising your tax liability
The failure to align CGT and income tax rates means that capital is preferable to income where the option exists. This should be taken into account as part of your planning strategy.
For information and advice tailored to your individual circumstances, please contact us.
Transferring assets
It may be possible to transfer assets to a spouse or civil partner or hold them in joint names in order to minimise your CGT liabilities. Holding an asset in joint names means the annual exempt amount for each individual (£11,100) is deducted from the gain before tax is due. If appropriate, you might want to transfer full ownership to a spouse or civil partner where their income places them in the lower rate tax band, thereby making use of both income and capital gains allowances. However, this constitutes a legal transfer and you should always seek expert advice before taking action.
Pension contributions
Pension contributions are deducted from income before an assessment of your tax liability is made. Increasing your pension contributions could therefore allow you to extend the limits of the lower tax rate band. Any gains realised from other assets are taxed in accordance with this extended band after allowances have been taken into account.
Sell gradually
Individuals with a particularly large gain may want to realise it gradually to take full advantage of more than one tax year’s allowance. This would then shelter the gain from a 20% CGT charge.
Assets exempt from CGT
There are a number of assets which can grow in value, free of CGT. For example, the tax is not levied on any asset held in an Individual Savings Account (ISA), so you may want to transfer assets into your ISA to ensure that they are CGT–free in the future.
Other exemptions include Premium Bonds, profits made from selling your main home or private car, betting and lottery winnings, personal injury awards and personal possessions worth no more than £6,000.
Investments in some ‘wasting assets’ such as wine, classic cars and race horses are also exempt from CGT.
Beneficiaries of inherited assets are not liable to pay CGT at the time of inheritance, although they may be liable to pay the tax on any profits or gains made when they dispose of the assets in the future.
Reporting a gain
If you have CGT to pay, you will need to complete the supplementary pages of the Self Assessment (or Trust and Estates) tax return. If you do not normally complete a return, or have not received a tax return or letter from HM Revenue & Customs, you will need to notify them of your liability to pay CGT, by the 5 October following the end of the tax year. You should also keep a record of any information that you use in order to help you work out your capital gain or loss, fill in your return, and make a claim for losses.
If you have any questions or would like more information on how you may be able to reduce your CGT liability, please contact us. We will be delighted to assist you.