The start of the 2016/17 tax year saw a reduction in the main rates of capital gains tax (CGT). Although this is likely to be welcome news for many, putting in place strategies to help mitigate your liability to CGT should still form an essential part of your financial planning.
Since June 2010, CGT has been charged in respect of individuals at the following rates:
- 10% if the gains qualified for Entrepreneurs’ Relief (ER)
- 18% where the individual was a basic rate taxpayer
- 28% to the extent that the individual was a higher rate taxpayer or the gains exceeded the unused part of an individual’s basic rate band.
In the 2016 Budget, the then Chancellor George Osborne announced that the 18% rate would be cut to 10%, while the 28% rate would fall to 20%. These changes came into effect from 6 April 2016. However, the CGT rates remain at 18% and 28% for residential property gains, non-resident CGT gains, ATED-related gains and gains accruing under the carried interest rules.
The rate of CGT payable on gains depends on the level of the individual’s taxable income and gains for the tax year. Effectively, the rules operate by ensuring that any unused basic rate band (£32,000 for 2016/17) can be used in the most beneficial way to reduce the CGT charged.
The figure for total taxable income and gains is calculated after taking into account all allowable deductions including losses, personal allowances and the CGT annual exempt amount, which is set at £11,100 for 2016/17.
Minimising your capital gains tax liability
You might want to consider the following points to help minimise a potential liability to CGT.
It may be possible to transfer assets to a spouse or civil partner or hold them in joint names in order to minimise your CGT liabilities. Holding an asset in joint names means the annual exempt amount for each individual (£11,100) is deducted from the gain before tax is due. If appropriate, you might want to transfer full ownership to a spouse or civil partner where their income places them in the lower rate tax band, thereby making use of both income and capital gains allowances. However, this constitutes a legal transfer and you should always seek expert advice before taking action.
Pension contributions are deducted from income before an assessment of your tax liability is made. Increasing your pension contributions could therefore allow you to extend the limits of the lower tax rate band. Any gains realised from other assets are taxed in accordance with this extended band after allowances have been taken into account.
Individuals with a particularly large gain may want to realise it gradually to take full advantage of more than one tax year’s allowance. This would then shelter the gain from a higher CGT charge.
Entrepreneurs’ Relief (ER) and the new Investors’ Relief (IR)
ER and IR may be available for certain business disposals and have the effect of charging both the first £10 million of qualifying lifetime gains for ER and IR at an effective rate of 10%. IR applies where qualifying shares have been issued by an unlisted trading company on or after 17 March 2016 and have been held for a period of three years from 6 April 2016. Many other rules and conditions apply, so please speak to us first to ensure that you maximise any relief.
We can help you with all aspects of CGT planning – please contact us for further advice.