Capital gains tax (CGT) is a tax on the profit when you sell or transfer something for increased value including:
• Personal assets worth more than £6,000 (apart from a car)
• Any property which has not your been your main home throughout your period of ownership (subject to some exceptions for certain periods of non-occupation)
• Company shares (except those held in certain tax exempt wrappers)
• Business assets not held in a company
No tax is payable on capital gains above £11,300 (2107/18) and the rate you pay on any gains above this figure will depend on the total of your taxable income (from your salary, dividends and any other income) and gains added together. If the total sum falls within the basic rate band then you will be charged 10% (or 18% for residential property interests) on the capital gain element. If the total figure means you are in the higher or additional rate tax brackets then you will pay 20% (or 28% for residential property interests) to the extent that your capital gain falls within these bands.
However there are numerous ways in which CGT liabilities can be reduced or deferred.
Transfers between spouses/civil partners
No tax is payable on a capital gain on assets transferred between spouses or civil partners. Instead the donee spouse effectively takes on the donor spouse’s acquisition cost. If you are considering selling an asset, it might be worth considering transferring assets to a spouse or civil partner in order to use any available annual exemption and any remaining basic rate tax band they have to mitigate any CGT liability.
A transfer of assets into trust will crystallise any ‘gain’ showing for CGT purposes. The transfer to trust could be made over a number of tax years so the gain is spread across more than one annual exemption and basic rate tax band.
Alternatively, the gain can be ‘held over’, i.e. it would not become chargeable until the trustees dispose of the asset(s) in the future. Trustees have a personal annual exemption of £5,650 (2017/18) divided equally by the number of trusts in existence which the same person has set up and gains exceeding this amount are taxed at the higher rates of 20%, or 28% in relation to residential property which does not qualify as the main residence of a beneficiary entitled to occupy under the terms of the trust.
Assets could later be transferred from the trust to its beneficiaries, again with any gain held over until they dispose of the asset. The beneficiaries’ own available annual exemptions and remaining basic rate tax bands could then be used.
Business assets rollover relief
Rollover relief can be useful in circumstances where an individual is disposing of a business asset to enable the gain to be deferred until new business assets, acquired within certain time limits, are disposed of in the future.
An individual disposing of the whole or a distinguishable part of a business may be able to claim entrepreneurs’ relief which can reduce the CGT rate to 10%. This is subject to a lifetime limit of up to £10m of gains.
Business asset holdover relief
In the same way as for transfers of any assets to trust, qualifying business assets can be transferred to individuals and the gain held over until the eventual disposal of the assets.
Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS)
The prerequisites of an EIS or SEIS (namely a qualifying investment in a small, unquoted trading company) tend to mean that the investor is taking on a significant amount of risk. However, any gains made by an individual can be deferred where an asset is sold and the proceeds reinvested in an EIS or SEIS, until the investment is sold at a future date.
Taxpayers can defer CGT liabilities through corporate vehicles. For example, if an individual gifts a business asset to a company, they can benefit from hold over relief so that any chargeable gain on the transfer is deferred. The company will discharge the liability when it disposes of the asset. Companies pay corporation tax on their chargeable gains after indexation at 19% unless the asset transferred is a residential property worth over £500,000 in which case the applicable rate is 28%.
An individual who transfers an entire business to a company, and receives shares in the transferee company as a consideration, can defer any gain arising on the business until the shares are disposed of in the future.
Whilst companies can provide useful long term tax planning opportunities, in the short term the tax saving may not be cost effective depending on the size of the gains. This is because the individual may be unlikely to be able to extract proceeds from the company without any tax charges and there are expenses associated with the operation of the company (for instance stamp duty land tax would be payable on the transfer of land or property).
If an individual incurs a gain during a period in which they are a non-UK resident for at least five full tax years, there would be no CGT due in the UK although this does not apply to residential property in the UK. An individual would need to obtain advice specific to the jurisdiction in which they are resident on the tax treatment there to ensure that there is a benefit.
It is important to carefully consider both your personal and financial circumstances and your business interests when considering available tax planning opportunities. Our Wills Trusts & Tax team is able to discuss these options with you and provide bespoke advice tailored to your requirements.