Capital gains tax planning
Selling something you own for more than you originally bought it for is the basis of doing ‘good business’ in terms of both personal and business finance.
Depending on the profit that an individual or organisation makes on the sale of their asset, they may become liable to pay capital gains tax (CGT).
There have been a number of changes introduced to CGT and its allowances and reliefs for the 2016/17 tax year.
Individuals and businesses who may be planning on selling assets in the near future should be aware of what their CGT liability is likely to be.
CGT is applied on the profit (or ‘gain’) that may occur when an asset is sold (or ‘disposed of’) after it has increased in value.
CGT is a tax applied to the gain, not the total amount of money that the buyer gives you as part of the sales process.
For example, you buy an antique table for £7,500 and sell it for £18,000. Your gain here is £10,500.
Budget 2016 saw significant cuts to the main rates of CGT. As of April 2016, the rates for CGT are:
Note that companies pay corporation tax on their capital gains. The methodology for calculating the amount liable to the gain is largely the same although there are some CGT reliefs that companies cannot qualify for.
Disposals of residential property that do not qualify for private residence relief and carried interest are taxed at the previous rates.
You pay CGT at the higher rate on the portion of any gains that make you exceed the basic rate threshold. To arrive at this figure your gain is added to you income and compared to the income tax thresholds.
Annual exempt amount
Every individual is entitled to a tax-free allowance, which means that they are not liable to pay CGT on their overall gains for that year if they fall under £11,100 (£5,500 for trusts).
Any person or organisation that is planning on making a profit from the sale of their assets needs to understand the kinds of gains are taxed and the strategies for reducing CGT.
As well as the annual exempt amount, there are a number of different aspects to CGT planning.
The foundation of CGT planning is making sure that the gains you have made are actually liable for CGT in the first place.
There is no requirement to pay CGT on assets that are given or sold to your spouse or civil partner. The exceptions are if you are separated and didn’t live together during the tax year in question or the assets were gifted to a business in order to be sold on.
Spouses and civil partners may have to pay CGT if they dispose of the asset later.
Similarly, CGT is not liable on assets gifted to charities. If, on the other hand, you sell an asset to a charity for more than you paid for it or less than market value, you may have to pay CGT.
Other tax-free assets
As well as certain kinds of gifts, there are a number of different kinds of assets that are exempt from CGT.
You don’t have to pay tax on gains made from the following:
most personal possessions worth less than £6,000
wasting chattels such as cars
UK government gilts and premium bonds
ISAs and personal equity plans
lottery and betting winnings.
If you inherit an asset, you may need to pay CGT if you later dispose of it. In these circumstances you carefully need to consider what your acquisition cost is for CGT purposes.
Whether you are not you are liable to pay CGT on gains made on assets that are located overseas will depend on your status under the residence and domicile rules. This area of law can quickly become complex and it is recommended that you seek professional help if you are unsure of your current status.
Trusts are a key way in which people manage assets and pass on wealth to family members. While creating a trust is a key part of inheritance tax planning, how they interact with CGT liability is important.
A trust is made up of 3 distinct roles:
the settlor who places the assets into the trust
the trustee who manages the trust
the beneficiary who benefits from the trust.
Responsibility for paying CGT on the gains in question will depend on whether an asset is being
transferred in or out of a trust. In most cases the liability for CGT on assets taken out of trust is placed on the trustees, although there are a number of exceptions to this rule. For example, if the trust is a bare trust, the liability lies with the relevant beneficiaries.
There are a multitude of caveats and technical details to how CGT works with regards to trusts so the above information should be treated as a basic overview.
There are a number or CGT related reliefs which can be used to lower your liability.
Private residence relief
This relief applies to individuals who are disposing of their only or main residence (both land and property). There are restrictions on non-UK residents and UK residents claiming relief on properties located abroad. There are other criteria to meet in order to qualify for this relief.
Individuals who are disposing of part or all of their business may be able to use this relief and pay CGT at 10% on qualifying assets. As in most cases where Entrepreneurs’ Relief is to be claimed the gain is significant the fact that the 10% CGT rate exists where gains fall within the basic rate band has only marginally eroded the benefit of this relief.
Eligibility extends to soles traders, partnerships and those with at least 5% of shares and voting rights. There are various other rules to meet depending on what you are selling
Gift hold-over relief
Individuals may be able to claim gift hold-over relief if they are gifting business assets (including shares) or selling them for less than they are worth.
Of course, it is possible to make a loss on the disposal of assets. If these losses occur on the sale of taxable assets, they can be used to reduce your total taxable gains and lower your CGT bill.
In very limited circumstances losses can be offset against income.
If your total taxable gain is above the annual exempt amount, you can use any losses you have to take your total below the allowance. If you have any losses remaining after you drop below the exemption threshold they can be carried forward to a future tax year.
You cannot claim losses on assets given to spouses, civil partners, family members and other ‘connected people’ unless you are offsetting a gain from the same person.
You have up to 4 years after the end of the tax year in which they occurred to report a capital loss to HMRC. CGT planning should be a central concern of anyone who is considering disposing of some of their or their business’ assets. We can help you make sure that you get the best results.
How we can help
We can help with all aspects of capital gains tax. As with all taxes it pays dividends to forward plan as doing so provides the opportunity to ensure that taxes arising are as low as possible.
Contact our team today to discuss your CGT planning requirements.