What is Capital Gains Tax?
Capital Gains Tax is the tax on the profit made when selling or disposing of an asset. This applies to assets such as property, shares, or investments (excluding your main home, which is usually exempt). The tax is calculated on the "gain" or the difference between the original cost of the asset and the amount you sell it for.
Key Aspects of CGT:
- Who Pays CGT?
- UK residents who sell or dispose of assets, whether they're individuals, trusts, or companies, are liable to pay CGT on gains made.
- Non-UK residents may be liable for CGT on the sale of UK property or land.
- Rates of CGT
- For individuals, CGT rates are linked to your income tax band. Basic rate taxpayers pay 10% on most assets and 18% on residential property. Higher rate taxpayers pay 20% on most assets and 28% on residential property.
- Trustees and personal representatives typically pay 20% on gains for non-residential property and 28% for residential property.
- Annual Exempt Amount
- Each individual in the UK has an annual tax-free allowance called the "Annual Exempt Amount." For the tax year 2023-2024, this is £6,000. Any gains beyond this limit are taxable.
Capital Gains Tax Planning Strategies
Proper planning around CGT can significantly reduce the amount of tax you owe. Below are some practical strategies to consider:
1. Utilize the Annual Exempt Amount
Each taxpayer can take advantage of the annual exemption to shelter some of their gains from CGT. Spouses or civil partners each receive their own allowance, which means that by transferring assets between them, they can potentially double the tax-free gains. By carefully timing the sale of assets, you can maximize the benefit of the annual exempt amount.
2. Transfer Assets to a Spouse or Civil Partner
If your spouse or civil partner pays a lower rate of income tax, it may be beneficial to transfer assets to them before selling. Transfers between spouses and civil partners are exempt from CGT, so you can reduce the overall liability. This strategy works particularly well for married couples where one partner has unused annual exemptions or falls in the lower income tax band.
3. Timing the Sale of Assets
Effective CGT planning involves carefully considering when to sell an asset. If you anticipate a drop in income that could place you in a lower tax bracket (e.g., retirement), deferring the sale of an asset until your income decreases could help you pay CGT at a lower rate. Similarly, spreading sales across multiple tax years allows you to use your annual exemption more than once.
4. Make Use of Losses
If you've sold assets at a loss in previous tax years or anticipate a loss in the current tax year, those losses can be offset against your taxable gains. You can carry forward unused losses to future tax years, which can be useful in reducing future CGT liabilities. Be sure to claim any losses in your self-assessment tax return, as unclaimed losses will be lost.
5. Invest in Tax-Advantaged Accounts
Investments in tax-efficient vehicles such as Individual Savings Accounts (ISAs) are exempt from CGT. By transferring assets into ISAs, you can ensure that any future growth on the investment is shielded from capital gains tax.
6. Reliefs and Exemptions
There are several reliefs available that could reduce or eliminate your CGT liability:
- Private Residence Relief: The sale of your primary residence is usually exempt from CGT.
- Entrepreneurs’ Relief (now Business Asset Disposal Relief): This allows qualifying business owners to pay a reduced rate of 10% on qualifying gains from the disposal of business assets.
- Investors' Relief: Offers a 10% CGT rate for external investors in unlisted trading companies on qualifying gains, with a lifetime limit of £10 million.
7. Use Trusts
Trusts can be used as an effective tax planning tool to defer CGT. When an asset is transferred into a trust, CGT may be payable unless Holdover Relief is claimed. Holdover Relief allows you to defer the gain until the beneficiary sells the asset, providing more control over when the gain is taxed.
Reporting and Paying Capital Gains Tax
If you make a capital gain, you must report it to HMRC, usually through a self-assessment tax return. For UK property sales, individuals must report and pay CGT within 60 days of completion. Failing to report gains promptly can lead to interest charges and penalties.
Conclusion
Capital Gains Tax planning is essential for minimizing your tax liability and ensuring that you are maximizing available allowances and reliefs. By making use of strategies such as annual exemptions, loss offsetting, and transfers to spouses or civil partners, you can significantly reduce the tax burden. For more complex arrangements like trusts or business asset disposal, professional advice is highly recommended. Always stay updated with the latest tax rules and consult with a tax advisor to ensure you're optimizing your approach to CGT planning.