Limit your liability through capital gains tax advice on the full range of reliefs available to taxpayers.
Need to know…
If you are liable to Capital Gains Tax, you will be eligible for the annual tax-free allowance (“Annual Exempt Amount”), which allows you to make a certain amount of gain each year before you have to pay tax.
A key concern for High Net Worth Individuals (“HNWIs”) will be ensuring that any Capital Gains Tax reliefs are maximised – especially where assets are already standing at a gain and a future disposal is being contemplated.
For more complex fact patterns, it might be appropriate to consider investment holding structures both in the UK and overseas.
When you acquire an asset to use or hold for a period, the profit you make when you dispose of that item is treated as a capital gain – and is subject to CGT.
When you buy an item with the intention of selling it for a profit, that transaction is treated as a trade and you should pay income tax on the profit you make on the sale.
The difference between trading (Income Tax) and owning an item as an investment (CGT) can change depending on how you intend to use the item.
The distinction between trading and making a capital gain is important because the rates of tax you pay are different – Capital Gains Tax on most gains (except residential property) being around half the rate of income tax.
Trusts can be used to protect some or all of your estate for future generations on your death.
They can provide peace of mind while real life unfolds and you and your loved ones face changes such as relationship breakdown, bankruptcy, creditors, future care fees.
You may wish to protect your assets for children from a previous relationship, or avoid paying IHT twice when passed on from your beneficiaries.
Trusts also offer a degree of privacy as they are private documents and not publically disclosed, unlike probated wills.
For example, where a child inherits a substantial sum, if inherited outside of a trust, in the event of the child divorcing, the inheritance may form part of the divorce settlement at a potential loss of 50% to the former spouse.
Under a family trust however, the inheritance can be recalled in full as a loan. This might remove the sum from divorce proceedings, to be later returned intact following divorce settlement.
In another scenario, following the death of one parent, the surviving parent – the beneficiary of their spouse’s will – remarries. The second parent dies, and their new spouse inherits the full sum by default. The children of the deceased parents may receive nothing.
In this instance had a trust been set up by the original parents, the sum would have been called back by the trust on the death of the second parent, ready for the children to enjoy full benefit and bypassing the new spouse.
You only have to pay Capital Gains Tax on your total gains above an annual tax-free allowance. These are currently set at £11,300 for individuals and £5,650 for trusts.
Gifts to a spouse, civil partner or charity are typically exempt from CGT.
Capital Gains Tax is payable on the gain on any ‘chargeable assets’ that you sell. This includes most personal possessions worth more than £6,000 (car not included), business assets, property that is not your main home (exemptions apply) and shares outside of an ISA or PEP.
Depending on the asset, you may be able to reduce tax by claiming a relief.
If you dispose of an asset you jointly own with someone else, you have to pay Capital Gains Tax on your share of the gain.
Seeking Capital Gains Tax advice will help ensure you are meeting your liabilities in the most tax efficient manner.
Capital Gains Tax advice should also consider which assets are exempt from CGT when you dispose of them, including: motorcars of any value, moveable possessions worth no more than £6,000, government stock (gilts) and savings certificates, currency for personal use, and debts and most corporate bonds.
Exemptions can also apply relating to your main home, for example when you sell a property that has been your main home for the entire period of your ownership, the gain is completely free of CGT.
Reliefs can apply when you let your home, when you need to live elsewhere for your job or if you move into a care home. Selling part of your garden can also be tax-free if it is sold before or with the house.
You need to collect records to work out your gains and fill in your tax return. You must keep them for at least a year after the Self Assessment deadline.
You’ll need to keep records for longer if you sent your tax return late or HMRC has started a check into your return.
Businesses must keep records for 5 years after the deadline.
Keep receipts, bills and invoices that show the date and the amount you paid for an asset, any additional costs like fees for professional advice, Stamp Duty, improvement costs, or to establish the market value and the amount you received for the asset – including things like payments you get later in instalments, or compensation if the asset was damaged.
Also keep any contracts for buying and selling the asset (for example from solicitors or stockbrokers) and copies of any valuations.
A number of business reliefs are available and should be taken advantage of following Capital Gains Tax advice. These include:
Businesses need to replace their assets without worrying about the tax payable on the gain.
Where the full gain is reinvested in a new asset (within certain categories) which is used for the business, the gain will be rolled over into the value of that new asset. In that case CGT is only paid on the sale of the replacement asset, if that is not also replaced.
If you give a business asset or shares in your company to an individual, the gain can be held over so you don’t pay CGT. The recipient of the asset or shares will pay CGT on the gain they make when selling the gifted assets, as if they had owned those assets from the time you acquired them.
When you transfer your unincorporated business to a company, you would normally pay CGT on the gain made on any chargeable assets. But if you receive shares in return you can roll over the gain into the value of those shares. This defers the CGT payable until you sell those shares.
It should be noted that this relief is available to non-trading businesses as well as trading ones. This means that it is possible for a property investment business can qualify for the relief.
This relief reduces the rate of CGT payable to 10% on up to £10 million of qualifying gains made during your lifetime. Those gains must arise from the disposal of shares or bonds in your personal company, all or a significant part of your unincorporated business, an asset used by your business or by your personal company when the disposal is made in association with the disposal of at least 5% of the business or company.
There are additional requirements to meet for each of those disposals.
You can also enjoy the 10% rate of CGT when investing in an unquoted company which you do not work for. You need to have subscribed for the shares after 16 March 2016 and hold them for at least three years, disposing of them after 5 April 2019. There are strict rules as to your involvement in the company while you hold the shares, but up to £10 million of gains can qualify for this relief.
Note that the £10m limit is totally separate from the one that applied for Entrepreneurs’ Relief. As such, one can have £10m of gains which fall within the ER limit and a further £10m of gains in the IR limit subject to the disposal meeting the required conditions.
When you inherit an asset, Inheritance Tax is usually paid by the estate of the person who’s died. You only have to work out if you need to pay Capital Gains Tax if you later dispose of the asset.
If your asset is overseas you may still have to pay Capital Gains Tax.
We can advise on the specific rules governing this area for non-domiciled UK residents and use of the remittance basis system.
You have to pay tax on gains you make on residential property in the UK even if you’re non-resident for tax purposes.
You generally don’t pay Capital Gains Tax on other UK assets, eg shares in UK companies, unless you return to the UK within 5 years of leaving.
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ETC Tax can help you with all aspects of Capital Gains Tax
As experienced tax consultants, ETC Tax can provide Capital Gains Tax advice and guidance on liability, the relevant rates and eligibility for relief through allowances and exemptions.
We will identify potential triggers to a Capital Gains Tax (“CGT”) liability, such as selling shares or investment funds outside of a pension plan or tax-free Individual Savings Account, and advise on the most tax-efficient arrangement for your circumstances.
As well as your CGT annual exemption, we will explore additional reliefs that may be open to you, such as Entrepreneurs’ Relief.
We are also highly experienced in providing Capital Gains Tax advice to buy-to-let landlords or property owners of second homes, who may be hit hard by CGT on any property sales. Furthermore, non-UK resident landlords will also be hit hard by recent changes introduced known as Non-Resident CGT or NRCGT.