Capital Gains Tax Planning
Capital gains tax planning should always form part of your regular tax planning activities. So, in this second post in our Year End Tax Planning series, we take a look at some of the key considerations you should have in mind as we approach the end of the financial year.
Rates of capital gains tax
Capital gains in excess of the annual exemption of £12,300 are taxed as follows:
- 10% for basic rate taxpayers
- 20% for higher and additional rate taxpayers
For gains from residential property and private equity, the 10% rate becomes 18% and the 20% rate becomes 28%.
The CGT rate on business assets qualifying for Business Asset Disposal Relief (“BADR”) is 10% on gains up to the lifetime limit of £1million for disposals from 11 March 2020. The CGT rate is also 10% on assets qualifying for Investor Relief with a lifetime limit of £10 million of gains per person.
Annual exemptions
Each individual has an annual exemption from capital gains tax which cannot be carried forward. For 2020/21, this is £12,300 and has to be utilised on or before 5 April 2021.
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 or your spouse or civil partner could buy it back in their name.
Selling your investment and purchasing a similar investment is an option. Also, repurchasing an asset after more than thirty days have elapsed is 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 whom 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 in excess of the annual exemption, now is the time to consider realising 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 a second or further 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 as to 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 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 an asset that became worthless in 2018/19 is 31 January 2021. The claim can also be made for losses to be recognised in the current year.
Payment date
Capital gains tax is payable on 31 January following the end of the tax year in which the disposal took place, other than for UK residential property. 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.
For UK residential property, the capital gains return and the payment of the tax due have to be made to HMRC within 30 days of the completion of a sale. This tight timescale can be problematic with the potential need to research historic records and obtaining valuation advice.
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%. Placing an emphasis on investing for capital gains rather than income can help minimise your tax liability, subject always to the differential in tax rates being maintained.
Liquidations
Generally, any distribution in a liquidation is charged to capital gains tax subject to certain anti-avoidance legislation. 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.
Call us
In our next post, we’ll be talking about Inheritance Tax but if you’d like advice about your year-end tax planning and what you need to do, call us today and we can discuss your options.