As the second blog in our end of year tax planning series, in this post, we take a look at the different rates of capital gains tax (CGT), how to take full advantage of your and your partner’s allowance and other CGT implications you need to consider before the end of the tax year.
Rates of capital gains tax
Capital gains in excess of the annual exemption of £12,000 are taxed as follows:
- 10% if the gain is within an individual’s basic rate band and
- 20% for gains above the basic rate band
For residential property and private equity, the 10% rate becomes 18% and the 20% rate becomes 28%.
In addition, the CGT rate on gains on business assets qualifying for Entrepreneurs’ Relief or Investor Relief (up to a lifetime limit of £10million per person and per relief) is 10%.
Each individual has an annual exemption from capital gains tax which cannot be carried forward. For 2019/20, this is £12,000 and has to be utilised on or before 5 April 2020. Selling investments, such as shares or unit trusts, standing at a gain may use this annual exemption.
If you wish to retain your investment, you could sell it to your ISA and then your spouse or civil partner could buy it back to use your annual exemption.
Repurchasing a similar investment or repurchasing the asset after more than thirty days have elapsed is also a possibility.
Spouses and civil partners
Transfers of assets between married couples or civil partners are treated for tax purposes as occurring at a value which produces neither a gain nor a loss such that the donee inherits the donor’s base cost for capital gains tax.
If assets standing at a capital gain are transferred to your spouse or civil partner and are then sold, they should be able to use their annual exemption or brought forward capital losses against the gain realised.
Gifts and transfers to Trust
Gifts to your children (and anyone else who you wish to benefit) and transfers to Trust will realise a capital gain as the asset will be deemed to have been sold for open market value.
Consideration will need to be given to whether the capital gain can be held over to the recipient of the gift. In relation to gifts to Trust, consideration will also have to be given to the inheritance tax consequences of the transfer.
Realising capital losses
If you have already realised capital gains this year, now is the time to realise any assets standing at a capital loss.
If your investments are held by more than one investment manager or you have personal holdings too, you will need to consider the overall position and not just let each investment manager consider their portfolio in isolation.
Main residence elections
Where an individual acquires two or more residences which they occupy as their home, it is necessary to consider which of these homes will qualify for exemption from capital gains tax as the main residence. This can be decided either as a matter of fact or by the making of an election. The election has to be made within two years of first having two or more properties available, or on any change in the number of properties available, or on making a previous main residence election. In practice, an election should always be made if you want certainty of which property qualifies for the exemption.
Negligible value claims
An asset you still own may have become worthless and, if so, you can claim the capital loss arising on the asset for capital gains tax purposes. If the asset comprises shares in an unquoted company with a UK trading business, it may be possible to offset the loss against your income.
The claim can be backdated by up to two years, so the time limit for making a claim for a worthless asset in 2017/18 is 31 January 2020 but the claim can also be made for losses to be recognised in the current year.
Capital gains tax is payable on 31 January following the end of the tax year in which the disposal took place. By delaying a sale until after 5 April, you give yourself an extra twelve months before the capital gains tax has to be paid. Consideration will have to be given to the likelihood of increased capital gains tax rates applying in future tax years, particularly if the availability of the 10% rate under Entrepreneurs’ Relief is restricted further.
It should be noted from 6 April 2020, new reporting and payment requirements are being introduced for residential property gains. Within 30 days following completion of a sale, the return and payment of the tax due will have to be made to HMRC.
Investing for capital growth
There remains a significant difference between the additional rate of income tax of 45% and the normal top rate of capital gains tax of 20%. This difference is even greater if Entrepreneurs’ Relief is available to reduce the capital gains tax rate to 10%.
Generally, any distribution in a liquidation is charged to capital gains tax subject to certain anti-avoidance legislation. If Entrepreneurs’ Relief is available, the tax rate is 10%, otherwise, it will normally be a tax rate of 28%.
Certain distributions in a liquidation will be charged to income tax as dividends, at tax rates of up to 38.1%. In broad terms, the anti-avoidance legislation has the effect of catching individuals who have successive companies or businesses carrying on the same or similar activity.
For a reminder of income tax planning considerations, you’ll find our first blog in this series here. For advice and more information about CGT and what you may need to do or consider before the end of the tax year, please feel free to contact us.