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:
- The type of asset being disposed of – is it a ‘chargeable asset’ that falls within the capital gains regime?
- Did the disposal generate a gain? If so, how much was that gain?
- What is the income tax position of the owner who disposed of the asset?
We look at each of these elements in turn.
1. Was the asset a ‘chargeable’ asset?
The following should be considered as potentially liable for capital gains:
- Residential property – other than that used as the main dwellings, e.g.:
- Second homes
- Buy to lets
- Holiday lets
- Shares (excl those held via an ISA)
- Business assets, e.g:
- Shares held in a company
- Assets held and used for a business
- Personal possessions worth more than £6,000 (excl private cars)
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%).
2. Did the disposal generate a taxable gain?
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.
3. What is the income tax position of the asset owner?
The applicable capital gains tax rate will be determined by your income tax band:
- Higher rate taxpayers: 20% CGT rate
- Basic rate taxpayers: 10% CGT rate
- A surcharge of 8% applies to these rates on gains arising specifically from residential property (where not covered by main residence / principal private residence relief)
- Businesses: where an interest in a trading company has been sold, and it meets the condtions for Enterepreners’ Relief, then an effective rate of 10% is applicable
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.
Capital gains tax rates – what reliefs are available?
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:
- Reduces the capital gains tax rate to 10% where criteria are met.
- Most commonly, this will apply where a the shareholder in an unquoted trading company sells his or her shares. The requirements are that he or she works in the business and holds 5% of the shares. They must meet the qualifying conditions for 12 months.
- It may also apply where one sells an unincorporated business, or part of such a business.
- £10 million lifetime limit applies (separate to Investors’ relief limit, see below).
- 10% CGT rate when investing in an unquoted company in which you have no involvement while you hold the shares.
- You have subscribed to the shares after 16 March 2016.
- You have held them for at least three years.
- £10m lifetime limit applies (separate to Entrepreneurs’ relief limit, see above).
Business Asset Roll Over Relief
- Delay paying CGT when you sell or dispose of some types of asset used in your business if you replace them.
- Buy the new asset within 3 years of disposing of the old one.
- Gain on a business asset can be deferred until a point in the future.
Gift Hold Over Relief
- Pay no CGT if you give away a business asset – instead, the person you give it to pays tax when they sell it.
- Both parties must jointly elect to this arrangement.
- You used the business asset for trading as a sole trader or partner.
- Any unused allowable losses from previous years can be brought forward in order to reduce any gains.
- It is also possible to obtain holdover relief where one is transferring any type of asset to a trust.
- Delay paying CGT when you transfer your business as a going concern to a company.
- Transfer all your business and its assets (except cash) in return for shares in the company.
- Off-set capital loss of chargeable assets to reduce chargeable gains.
- Carry these losses forward to offset against future chargeable gains.
- Any amount claimed under the capital allowance scheme must be deducted from the capital loss you wish to offset.
- Potentially available if you transfer structure from limited company to a partnership or sole trader.
- If you acquire the company’s assets when it changes business structure, you may have to pay CGT if you sell or dispose of them later.
- Use asset value, including any Disincorporation Relief, when acquired.
Private residence relief
- CGT exemption generally applies when you sell or dispose of your main home.
- If you’ve used any part of your home just for business, you have to pay CGT on that part when you sell your home.
Enterprise Investment Schemes (“EIS”)
- Gains on EIS investments are free of CGT after a minimum of three years.
- Before this time, you may be able to defer or even remove your liability to capital gains tax through disposal relief or deferral relief.
Who needs to be aware of the capital gains tax rates?
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.
Enterprise Tax Consultants can advise on capital gains tax
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.
We offer the following related services, among others:
- Capital gains tax
- Capital gains tax on shares
- Capital gains tax on property
- Estate planning
- Inheritance tax planning
- Offshore trust advice
- Non dom tax
- Expat tax
Contact us for a no-obligation initial conversation about will and estate planning with one of our chartered tax specialists.