With changes to pension rules reducing the amount
we can save for our retirement, it’s more important than ever to make the most
of those assets we have managed to acquire
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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