Capital Gains Tax – all change?
Many of you may have seen from the press, or our website that Chancellor Rishi Sunak has asked the Office of Tax Simplification to review the Capital Gains Tax system in relation to individuals and small businesses
We are all too aware that government finances are stretched under current circumstances, and some amongst us may see this as an opportunity for him to raise additional funds. Some believe that the current system is open to abuse. The distinction between what is income and what is a gain can sometimes be uncertain. Those running companies have options on how to extract funds, and with lower Capital Gains Tax rates compared with Income Tax rates, capital gain treatment may be preferable.
Obviously only time will tell if there are any changes to the rules that many are familiar with. However, whether you are pessimistic by nature, a regular review of your circumstances is always a sensible option, and one now may avoid losing out later.
So, what basic points should you consider?
- Capital Gains Tax is generally charged on individuals at 20% of the chargeable gain, so after taking account of relevant losses, the annual exemption and any reliefs available. However, gains falling within a person’s lower rate band are taxed at 10%, and there is an additional 8% for gains arising on the sale of residential properties. These percentages are compared with rates of up to 45% on income. The amount of the basic rate band left to set against chargeable gains is determined by the level of your income. If you have any control over when your income is received, or more accurately is taxable, and it does not result in any other adverse consequences, you may be able to move income out of a tax year in which a gain arises. Many may see lower incomes for the current tax year, whether you are running a business or receiving dividends from quoted investments. This may result in the 2020/21 tax year being a sensible in which to crystallise a gain.
- A simple one, but make sure you utilise each year’s capital gains exemption if possible. It is currently £12,300 and allows you to make gains of up to this amount tax free. If you have a stockbroker acting for you, they should be considering using the allowance each year, but obviously alongside considering the performance of the investments.
- If you have any accumulated losses from previous tax years, can these be effectively utilised now before any change to the rules could happen?
- You may be holding an asset that is potentially sitting on a loss and the position is unlikely to change. Obviously do not rush ahead without taking advice, and consider all factors, but realising a loss now and setting it against a chargeable gain that has already arisen in the tax year may reduce exposure to Capital Gains Tax.
- Gifts between spouses and civil partners do not give rise to a capital gains charge. A gift into joint names prior to a disposal of an asset may make available two annual capital gains exemptions to set against a gain arising on the sale of the asset. Consideration is however needed to make sure that the gift does not impact on any other reliefs available, such as Business Asset Disposal Relief, formerly Entrepreneurs’ Relief.
- It is possible to hold over gains in certain limited circumstances, effectively passing the gain onto the donee. Will this relief still be available in the future?
- Make sure you understand what reliefs may be available to reduce any capital gain on the sale of an asset. We are all probably familiar with private residence relief on your main home, but what about properties that you have only lived in for part of the time because you have for example been working out of the country or have let at some stage? There is also a relief for the last 9 months of ownership of a property that has at some stage been your main residence. The reliefs may considerably reduce or may even eliminate a gain, especially with careful planning.
These points are just a brief indication of some of the general areas to consider. Capital Gains Tax can become very complex, but with timely and thoughtful planning exposure can be reduced. And remember the rules may be less generous in the future!
If you would like to discuss the topics explored in this article, please contact us here.
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