Finding a way to effective capital gains tax planning
Capital gains tax becomes payable on the disposal of certain assets at a profit, where an individual’s annual exemption is exceeded.
It’s essentially taxation on the increase in value of your assets, such as a second home, high value antiques or shares, during the time you have owned them. The tax is due when you sell or, perhaps less counter-intuitively, when you give them away.
It may be possible however through careful, responsible capital gains tax planning to reduce your tax bill. To take advantage of available tax reliefs, it becomes a matter of arranging your affairs in a tax-efficient manner.
Capital gains tax planning – not a case of ‘once and done’!
A regular review of your position in relation to capital gains is a sensible strategy to ensure you are managing your liability tax-efficiently.
Capital gains tax is structured by reference to the usual tax years. You have the option to declare any capital gains tax you need to pay either annually in your self assessment tax return, or straight away following the disposal.
How and when you declare capital gains tax should form part of your tax planning strategy. Crucially you will want to ensure you have considered the capital gains in the wider context of your tax position and put in place any necessary planning measures before you submit a final calculation.
How to approach capital gains tax planning
The starting point for tax planning is to understand what your current liabilities are, taking into account your tax rate and total gains over the tax year.
First of all, each taxpayer is entitled to an annual exemption of £11,300 (2017/18), below which capital gains are tax-free.
Higher rate taxpayers are charged a capital gains rate of 20%, basic rate taxpayers at 10%. A surcharge of 8% applies to gains arising from residential property.
Gains above that threshold are taxed at 10% until your total of taxable income and gains (after annual exemption) exceeds £33,500, and are taxed at 20% above that.
Key planning considerations should include the tax position for you and other family members such as your spouse or civil partner, while ensuring certain rules are adhered to. For example, if you are close to one of the thresholds, moving gains (or income) from one person to another (e.g. a spouse or civil partner) or from one tax year to another may reduce liabilities.
The ability to transfer gains or income to a spouse or civil partner however will only be effective where it is a genuine, outright gift of the asset. Transferring assets to a spouse or civil partner can usually be done without triggering a tax charge. Care should be taken where separation has occurred.
If you gift a taxable asset to anyone other than your spouse or civil partner, you are usually charged tax on the gain as if you had sold the asset at its full market value. However, there may be other reliefs such as gift/hold-over relief available depending on the circumstances (see below).
Certain life events such as marriage, divorce or separation will demand specific advice on liabilities arising from asset disposal.
Capital gains tax planning for higher rate tax payers
Higher rate taxpayers will pay 28% on gains from residential property and 20% on gains from other chargeable assets.
Mitigating capital gains can work in a number of ways by taking advantage of available reliefs, exemptions and making best use of available tax rates.
Principal private residence (PPR) relief
The gain on a property which was the owner’s principal private residence is generally exempt from capital gains tax by virtue of Principal Private Residence Relief.
For owners of multiple properties, consideration should be given to changing their deemed residence to benefit from PPR on the property standing at most gain.
There is no minimum requirement on how long the property was deemed the main residence. It is the quality of occupation and not the quantity that is relevant. HMRC have stepped up their activity in this area, so take heed.
In all cases the final 18 months of ownership are treated as exempt.
If you own property which has at some point been your main residence and which you have at some point let as a residential property, you may also be eligible for letting relief on gains.
The amount of lettings relief is the lowest of:
- the amount of private residence relief;
- £40,000; or
- the amount of the gain that is chargeable by reason of the letting.
Letting relief can be claimed in addition to PPR, although each relief must be claimed against different periods of time.
You may be able to ‘roll over’ the gain on an asset where it has been purchased in replacement of an asset previously used by the business, within set time limits.
Subject to certain conditions, the gain is ‘rolled over’ so that capital gains on the original asset is not payable until the new asset is sold.
Forward planning helps here, as this relief can be taken into consideration when looking at the future disposal of an asset which is intended to be replaced.
Seed Enterprise Investment Scheme (“SEIS”) Reinvestment relief
A capital gains break is available where gains are re-invested into a SEIS company. To qualify, the investment must be held for at least three years without withdrawal of reliefs on the shares.
Enterprise Investment Scheme (“EIS”)
Uncapped capital gains tax deferral is available where disposal proceeds are reinvested into a qualifying EIS company. Relief is also available to defer the gain on the disposal of an asset, within one year before and three years after.
If the investment is disposed of at a loss then capital gains tax loss relief should be available. Both Seed EIS and EIS are very complex and further advice should be sought.
Entrepreneurs’ relief (“ER”)
With Entrepreneurs’ relief, you effectively pay 10% tax on gains on qualifying assets, which include:
- all or part of a business – including the business’ assets after it is closed;
- shares – where you have at least 5% of the issued share capital;
- shares you acquired through an Enterprise Management Incentive scheme after 5 April 2013.
A £10 million lifetime limit applies to ER, £10 million. There are a number of conditions that must be satisfied for the year prior to sale in order to qualify for ER so advanced planning may be needed to take advantage.
Investors’ relief (“IR”)
The relief may be available where one is acquiring shares in non-listed companies. Where the relief applies then the rate of tax on qualifying gains is 10%.
Timing restrictions apply, and there can be no connections with the company (e.g. employed or connected to employee). In addition, the shares must be ordinary, fully paid-up shares in a trading or holding company. There is a £10 million lifetime limit which is separate to that for ER.
Gift hold-over relief
Rather counter-intuitively, one pays CGT on gifts of assets. A tax liability with no cash received may seem unfair and that is where ‘Gift/Hold-over relief’ comes in.
Where a business asset is gifted or sold at undervalue or a non-business asset is transferred into trust, hold-over relief provides the original owner and recipient with the opportunity to jointly elect to defer the gain. When the asset is eventually sold or given away, the recipient accepts liability for any chargeable gains arising when the original owner held the asset.
Tax efficient investments
Gains within an ISA are tax-free, up to the prescribed investment threshold (£20,000 in 2017-18 per individual). Use planning to maximise this exemption as the annual allowance is lost if it is not used.
Note that strict rules apply where funds are provided to the ISA by parents to children.
Other capital gains tax planning considerations
The UK has slightly unsophisticated rules in this regard. Generally speaking, with some exceptions, a non-UK resident person does not pay UK CGT on any asset. This was bolstered by a 5-year temporary non-residence rule and various other anti-avoidance rules for non-UK trusts and companies.
Your tax residence will play a significant part in tax planning.
However, this enduring principle of UK taxation has been eroded by the introduction of non-resident CGT with effect from 6th April 2015. Capital gains tax now applies to gains made by non-UK residents disposing of UK residential property. This position is also different for UK resident non-doms, who may only be liable to tax on foreign gains remitted to the UK.
Using your full annual exemption
If you do not use your capital gains annual exemption, it cannot be carried forward. Consider selling assets standing at a gain where the gain will be covered by your annual exemption or deferring disposals where you have already used your annual exemption.
Transfers between spouses and civil partners are free from capital gains and maybe considered where one partner has not used all of their capital gains exemption. The disposal could comprise a gift followed by a sale to the spouse to maximise available reliefs. Note that there may be an impact on availability of other reliefs.
Gains or income?
Returns in the form of gains are taxed at a maximum of 20% (or up to 28% on residential property not qualifying for main residence relief) rather than up to 45% under income tax.
It may be prudent to review how your assets are held so that they produce either a tax-free return or a return subject to capital gains tax.
Take advantage of low capital gains tax rate
With capital gains rates for 2017-18 the lowest they have been for many years, it may be an option to consider disposal of an asset now, particularly if the potential gain is significant. Gains can be triggered by sales to friendly structures.
ETC can advise on capital gains tax planning
As experienced tax consultants, ETC can provide capital gains tax planning advice and guidance on liability, the relevant rates and eligibility for relief through allowances and exemptions.
Our services include:
For advice, contact one of our specialist chartered tax specialists.