Capital Gains Tax (CGT) is a tax that may be charged on the profit or gain made when selling, gifting, transferring, exchanging or disposing of an asset. There are a number of assets, such as your home, and any personal belongings worth less than £6,000, that are exempt from CGT. However, assets such as shares, collective investments and second properties that generate a capital gain are generally liable to CGT. Each individual has a personal CGT allowance every year (6 April to 5 April), which for many investors is sufficient for avoiding a CGT liability. Any gains in excess of the allowance are charged to CGT at either 18% or 28%, depending on the individual’s other total taxable income in the year the gain arises. Although the current CGT rates are historically low (CGT has been charged at 40% in recent years) and many individuals will never pay it, there are a number of ways in which CGT can be reduced or even removed altogether.
1. Make use of the CGT Allowance
Every individual has an annual CGT allowance which currently lets them make gains on investments of up to £10,900 free of tax. If unused, the allowance cannot be carried forward into the next tax year, so it is advisable to use this tax-free allowance each year in order to reduce the risk of incurring a significant CGT bill in subsequent years.
2. Make use of losses
It might be wise to sell some assets at a loss if the overall gain in the tax year exceeds the annual allowance. Gains and losses established in the same tax year must be offset against each other, so will reduce the amount of gain that is subject to tax. Losses must be registered with HMRC within four years from the end of the tax year in which the loss has occurred.
3. Transfer assets to your Spouse or Civil Partner
Transfer between spouses is currently exempt from CGT. This means that assets can be transferred between husband and wife or civil partners so that both annual CGT allowances are used. This effectively doubles the CGT allowance for married couples and civil partners. The transfer must be a genuine, outright gift.
4. Bed AND Spouse
In the past it was possible to use up some of your CGT allowance by selling shares on which you had a gain, and then buying back the same shares the next day; this was known as ‘bed and breakfasting.’ However, investors are no longer allowed to buy back the same shares within 30 days if they intend to crystallise a capital gain. Spouses or civil partners are permitted to buy back the shares sold by their spouse or civil partner immediately, so the gain is realised CGT free while enabling the family to retain the assets.
5. Invest in an ISA/Bed AND ISA
Gains (and losses) held within an ISA are exempt from CGT so it makes sense, particularly for higher rate tax payers, to utilise the ISA allowance each year. From April 2014, an individual aged over
18 can invest up to £11,880 in a Stocks and Shares ISA. From July 2014, there will be a single new ISA (a NISA) of up to £15,000, which can be invested in stocks and shares or cash. This means that a married couple, or civil partners, can invest up to £30,000 per annum in this tax-privileged investment. Over many years, some investors have built up multiple six-figure sums in ISAs by utilising their allowance each year.
As with the bed and spouse option, a bed and ISA involves selling assets to realise a capital gain and then immediately buying back the same assets inside an ISA. This enables all future gains on the asset to be CGT free.
6. Contribute to a Pension
By making a pension contribution (where one has net relevant earnings), the tax on a capital gain can be reduced from 28% to 18%. A pension contribution extends the upper limit of an individual’s income tax band by the amount of the gross contribution. For example, if an investor is able to make a gross pension contribution of £10,000, the point at which higher rate tax becomes payable will increase from £41,865 (limit for 2014–2015) to £51,865. If the capital gain, once added to the other taxable income in the year the gain is realised, falls within the extended personal allowance, the CGT liability will become 18% instead of 28%.
7. Give shares to charity
If one gives land, property or qualifying shares to a charity, or sells them to a charity at less than the market value, income tax relief and CGT relief are available.
8. Invest in an EIS
Any gains that are made on investments in an EIS (Enterprise Investment Scheme) are free from CGT if held for three or more years. If the shares are disposed of at a loss, one can elect for the amount of the loss, less any income tax relief given, to be set against income for the year in which the shares were disposed of – or any income for the previous year – instead of being set against capital gains.
CGT deferral relief is available to individuals and Trustees of certain Trusts. The payment of tax on a capital gain can be deferred where the gain is invested in a share of an EIS qualifying company. The gain can arise from the disposal of any kind of asset, but the investment must be made within the period of one year before or three years after the gain arose. There is no minimum period for which the shares must be held; the deferred capital gain is brought back into charge whenever the shares are disposed of, or are deemed to have been disposed of under the EIS legislation. The downside of EIS is that generally these types of schemes are higher risk than traditional stocks and shares.
9. Hold over Relief
Hold over relief is available on certain assets. Where hold over relief is claimed the chargeable gain is postponed, usually until the transferee disposes of the assets.
Hold over relief may be claimed for:
• Gifts of business assets
• Gifts of unlisted shares in trading companies etc.
• Gifts of agricultural land
• Gifts which are chargeable transfers for inheritance tax (IHT) purposes
• Certain types of gifts which are specifically exempted from IHT
10. Chattels that escape CGT
Possessions such as antiques and collectibles are called chattels. Gains on some are tax-free. Items with a predicted life of 50 years or fewer, known as ‘wasting assets’, are CGT-free, provided they were not eligible for business capital allowances. Antique clocks and vintage cars are treated as ‘wasting assets’. Pleasure boats and caravans also fall into this category.
If the gain is not tax-free, CGT is charged in a special way. The taxable gain is the lower of the actual gain or five-thirds of the excess of the final value over £6,000.
For example, if you sell an antique clock for £7,000 which you originally bought for £5,000, the actual gain is £7,000 - £5,000 = £2,000. The gain under the special rules is 5/3 x (£7,000 - £6,000) = £1,666.
Since this is lower, your taxable gain is £1,666.
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