Capital gains tax (CGT) is a tax that may be charged if you make a profit on the disposal of an asset. Depending on your other income, it is charged at 10% or 20%, or for disposals of residential property, at 18% or 28%.
The amount of CGT collected each year in the UK is relatively modest when compared to the overall tax take, though it is expected to rise from the £9.3 billion (2018-19) to £11.6 billion (2023-24).
The UK tax regime is notoriously complex and there are various reliefs for CGT available, including for the sale of business assets and for the sale of your main home. The March 2020 Budget saw changes to Business Asset Disposal Relief (previously Entrepreneurs’ Relief), with the £10 million lifetime limit being drastically reduced to £1 million (though Investors Relief remains available with a lifetime limit of £10 million).
The Chancellor has recently asked the OTS to carry out a review of the CGT regime, and those changes we have already seen may indicate a general direction of travel and a possible future capital gains tax regime with fewer reliefs and exemptions and a greater parity with the income tax regime.
With this in mind, this update focuses on the current CGT allowances and reliefs, and the ways that taxpayers can utilise them to minimise their tax bill.
Using your annual allowance
Everyone has a tax-free CGT allowance, currently covering gains of up to £12,300 per tax year. If the allowance is unused it cannot be carried forward, therefore individuals should try to make use of their allowance annually to avoid the risk of incurring a larger CGT liability in future years.
Pension contributions and charitable donations
If your basic rate tax band is not fully utilised by your income, gains falling within the remaining limit will be taxed at the lower CGT rates. Therefore, you may wish to take steps to increase your basic rate band, such as making pension contributions or Gift Aid donations.
Transfers between spouses and civil partners are exempt from CGT. This means that married couples have a combined annual CGT allowance of £24,600. Spousal transfers should be considered if one spouse is not fully utilising their annual allowance, or their basic rate tax band.
If your net gains for a year are likely to exceed your annual allowance, you could mitigate your CGT exposure by selling a loss generating asset in the same tax year. However, care should be taken not to reduce your gains below the annual allowance as this could result in all or part of the allowance being wasted.
Chattels and exempt assets
Some assets are exempt from CGT. These include chattels (such as antiques and artwork) valued at £6,000 or less, or those with a useful life of less than 50 years (‘wasting’ chattels such as cars). There are also special rules that may restrict the chargeable gain on disposals of chattels valued over £6,000.
EIS and SEIS
Provided all of the detailed qualifying conditions are satisfied, shares in unquoted companies can be exempt from capital gains tax when they are sold (and can be used to defer gains when the initial investment is made). This is a complex area and one where specific advice is always needed.
Your main residence will generally be exempt from CGT due to Private Residence Relief. If you have more than one main residence it is possible to make an election (within two years of acquiring an additional residence) so that the relief covers the property standing at the largest gain. The elected property need not be the one in which most time is spent.
Gains arising on assets held within ISAs are not subject to CGT. Individuals can currently invest up to £20,000 into an ISA per tax year, so should consider utilising this allowance annually to make the most of the associated CGT relief.
Transfers to connected persons and trusts
Gifts of assets to ‘connected persons’ or trusts are deemed to take place at market value for both CGT and inheritance tax purposes. In both instances, gifting an appreciating asset can be beneficial, as any future capital growth is removed from your personal estate. Particularly In the case of a trust care needs to be taken to avoid an immediate inheritance tax charge (for example by using business or agricultural property relief or the inheritance tax nil rate band).
However, it should be noted that capital losses arising from these transfers can only be offset against future gains on disposals to the same connected person or trust.
This is a complex area and tax advice should always be sought before making any transfers to connected persons or trusts.
If CGT is due on a gift or transfer into trust, ‘gift relief’ may be available to defer it depending on the asset in question. This is to provide relief in situations where no proceeds are received to fund the tax liability. The CGT will be deferred until a future disposal of the asset by the recipient.
CGT uplift on death
If you die, your capital gains are wiped out, as inheritance tax is payable on your estate at 40% instead (where your estate exceeds the £325,000 nil rate band). Therefore, individuals should be cautious when making disposals later in life as this could result in paying tax twice, ie CGT on the disposal and inheritance tax on the cash proceeds.
Gifting assets to charity
Qualifying gifts of land, property or shares to a charity are exempt from CGT, and may have income tax advantages. Therefore, gifting a qualifying asset can be a particularly tax efficient way of making a charitable donation.
Coronavirus and valuations
Certain assets may have recently decreased in value due to the economic impact of Coronavirus. Therefore, it may be an advantageous time for individuals to transfer such assets to connected persons or into trust, as the CGT or inheritance tax would be based on the asset’s current market value.
Keeping the above tips in mind, and taking steps in plenty of time, should help you to plan effectively if you are looking to mitigate your annual CGT liability. However, the points noted here are general in nature and some of the planning required can be complex, or contains pitfalls for the unwary. As such, we strongly recommend you take specific advice that relates to your particular circumstances before taking any action.
For further advice on any issues raised here, please contact your usual Saffery Champness partner.