Capital gains tax (CGT) made the headlines earlier this year when, to many people’s surprise, the then Chancellor George Osborne reduced the rates for 2016/17. With this in mind, we consider some of the key features of the current system.
How is capital gains tax charged?
As a basic rule, CGT is charged on the difference between what you paid for an asset and what you receive when you sell it, less your annual CGT exemption (£11,100 for 2016/17) if this has not been set against other gains.
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 in 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.
What are the current rates?
Prior to 6 April 2016, CGT was charged at 18% where the individual was a basic rate taxpayer, or 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. However, in the 2016 Budget, the Chancellor 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.
Do these new rates apply across the board?
No, 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.
What about 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 the first £10 million of qualifying lifetime gains for both 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.
How can I minimise my liability to capital gains tax?
The good news is that there are a number of strategies that can help to mitigate a potential liability to CGT. Consider the following action points:
- Transfer assets – Is it possible to transfer assets to a spouse or civil partner or hold them in joint names? 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.
- Make pension contributions – Increasing your pension contributions could 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.
- Utilise reliefs – It is possible that reliefs could reduce a 20% CGT bill significantly. However, it is important to consult with us about the timing of any sale, and the CGT reliefs and exemptions to which you might be entitled.
- Sell gradually – Individuals with a particularly large gain may want to realise it gradually to take full advantage of more than one tax year’s allowance, thus sheltering the gain from a higher CGT charge.
Please contact us for further advice relating to CGT.