Personal Tax Planning Part 2: Capital Gains Tax Planning

Planning for Capital Gains Tax

Put simply – as we’re sure the vast majority are aware of what CGT is by now –  Capital Gains Tax is a tax allocated against the profit made when selling an asset that has increased in value. 

It is only the gain that is taxed, not the total amount of money you received. E.g: if you bought a painting for £5,000 and sell it for £15,000 there is a £10,000 taxable gain.

 

CGT Rates for 2020 / 2021

Individuals have an annual CGT allowance of up to £12,300 that enables them to make gains on investments free of tax. Married couples may be able to use each other’s allowances by transferring assets before they are sold.

There are differing rates of CGT depending on what you are disposing of, and your tax bracket at the time of the sale:

Basic Tax Rate (20%)	Higher Tax Rate (40%)
18% on gains from sale of a residential property. 10% on gains from sale of other assets.	28% on gains from sale of a residential property. 20% on gains from sale of other assets.

There are however, certain circumstances in which CGT will not need to be payable. For example, the sale of a vehicle – granted not commonly sold for more than purchased – typically is exempt from CGT. The sale of any asset in which the total profits do not exceed your £12,500 personal allowance is also not subject to CGT liabilities.

 

Assets exempt from CGT include:

• Any gains on assets you gift to your spouse, as long as you were not separated and didn’t live together during the tax year.
• Qualifying gifts to a charity.
• Gains from ISAs or PEPs.
• Gains on disposal of certain UK government gilts and Premium Bonds.
• In most instances, the disposal of your main home.
• The disposal of your own car unless you use it for business purposes.
• Any personal possession (jewellery, paintings, antiques and other collectibles)  that are sold for under £6,000.

You can find out more information on what assets are liable for CGT here.

 

Further CGT Considerations

When disposing of an asset there are plenty of considerations to make that can affect the level of CGT liability you will have to pay. The disposal of an asset may also have an affect on the level of income tax.

 

Below are some additional considerations you could make in order to reduce, or limit your CGT liability:

• As the level of your taxable income, for income tax purposes, will affect the rate of CGT you will pay, investigating ways to reduce your income tax earnings may save you CGT as well as income tax.
• If your chargeable gains are likely to exceed the £12,300 limit, are there any assets you can sell at a loss to reduce the total gains below the tax-free limit? It is no longer possible to sell and buy back shares to facilitate this planning.
• If you’re selling your business make sure you have arranged your affairs to allow for claiming Entrepreneurs’ relief. This has the potential to allow for qualifying gains of up to £1m and only pay CGT at 10%.
• Your spouse and children are eligible for their own tax-free allowance of £12,300. Transferring assets between family members can reduce overall CGT liabilities if considered before the sale of the asset.
• It may be possible to claim other reliefs such as rollover and hold-over gains reliefs to reduce your potential liability to CGT.
• While the sale of your main home is typically CGT exempt, there may be a liability if you have used your home for significant business purposes, or if you have ever rented the property out at any point during your ownership.
• CGT payable on chargeable disposals after 5 April 2020 and before 6 April 2021 will be due for payment 31 January 2022. If you delay the disposal until after 5 April 2021, any CGT due will be payable a year later, 31 January 2023. Theoretically, you could delay a disposal by one day (from the 5 April to the 6 April 2021) and it would extend the amount of time you would have to pay the tax to by 12 months. This does not apply to disposals of residential property – say a second home. Chargeable disposals of this type have to be reported to HMRC online within 30 days of the sale completing, and more importantly, any CGT due has to be paid within the same 30 day window. 

Final Thoughts

Always discuss your options and thoughts with your accountant, pension advisor, or financial advisor before making any decisions that cannot be ‘walked back’. 

Ensuring you consult with your advisor before disposing of an asset may lead to you being able to minimise the level of Capital Gains Tax you will be required to pay. 

At Price Davis we have a wealth of experience assisting our clients with various tax planning activities, and provide pro-active advice based on each individual set of circumstances. Get in touch with our team by calling us on 01452 812491 or by sending an email to info@pricedavis.co.uk.

For more tips on how you can plan your income tax, check out the previous blog in the series titled How to Reduce your Income Tax.