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Applying the correct capital gains tax rates in particular circumstances, following recent legislative changes, can now actually be a complicated undertaking for taxpayers. This is despite clamours for simplification of tax law!
By way of background, capital gain tax rates are set by the government, and the prevailing rate is determined largely by the following factors:
We look at each of these elements in turn.
The following should be considered as potentially liable for capital gains:
This should not however be considered a definitive or comprehensive list – the property element for example involves various exceptions. Seek advice on your particular circumstances.
If your asset is considered to fall within the scope of the capital gains regime, you then need to calculate if a gain was made on the transaction – be that a sale, transfer or gift.
Capital gains tax rates are usually not a concern if you are selling your home, as the property which is used as, or deemed to be, your main residence will be exempt from capital gains tax for any such periods.
However, other UK-based residential property is likely to be caught by capital gains tax, and will be subject to an 8% surcharge on the prevailing rate (ie 18%/28%).
Ascertain this by deducting the value of the asset when purchased, including any capital expenditure incurred on the property, from the proceeds received on sale.
Care should be taken where an asset is transferred at nil value. For example, a gift to a family member of trust. Rather counter-intuitively, these are disposals for CGT purposes and one is deemed to have received market value. Reliefs may be available in these circumstances.
You may also be able to deduct certain ‘allowable costs’. These will differ between different asset types. For example, for property related assets, you may be able to take from the gain the cost of legal and agent fees as part of the sale process.
You only have to pay capital gains tax on total gains above your annual tax-free allowance. For 2017/18 this is set at £11,300 for individuals and a maximum of £5,650 for trusts.
The applicable capital gains tax rate will be determined by your income tax band:
Note that for basic rate taxpayers, gains above the annual exemption are taxed at 10% until total of taxable income and gains exceed £33,500 – above this you will be taxed at 20%.
Note also that the rules and rates for trusts may differ to those applicable to individuals.
Given the significance of income tax in determining the applicable rate, careful use of capital gains tax planning should help you for example consider the tax position of you and other family members such as your spouse or civil partner to mitigate your liability, such as moving gains (or income) between individuals (e.g. your spouse or civil partner) or tax years – within governing rules.
Finally, you will need to report your gain to HMRC either annually in your self-assessment tax return, or immediately after the disposal.
Whichever capital gains tax rates apply, certain reliefs may be available. This is a substantial area of tax planning, and professional advice is recommended to ensure you select the most suitable tools for your circumstances which could, in brief, include:
Business Asset Roll Over Relief
Gift Hold Over Relief
Private residence relief
Enterprise Investment Schemes (“EIS”)
While limited companies pay corporation tax on profits, if you are self employed, a sole trader or in a business partnership, you will need to ensure you are meeting your liabilities for capital gains tax, and applying the correct capital gains tax rates on the gain from the disposal of chargeable business assets.
There have also been recent rule changes affecting the CGT position of non doms, non residents and expats.
While potentially far-reaching in scope and typically involving significant sums in tax liability, capital gains tax can often, with careful and responsible planning, be managed through available reliefs and exemptions.
As specialist tax advisers, we can assist with all aspects of capital gains tax, including advice on which capital gains tax rate applies to you, as part of an effective approach to tax planning.
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