Most of us don’t worry too much about Capital Gains Tax – or CGT. Most of us are never called on to pay it.
But that might be due to change. Revenue from CGT reached a new high in the 2019-2020 tax year, bringing in £9.5billion for the Government, according to recent HMRC data. Now there is speculation that many more people could be faced with the tax, with Chancellor Rishi Sunak making some significant changes to the way it is charged.
At Continuum we are looking at what the changes might be – and how you may be able to avoid them.
What exactly is Capital Gains Tax?
You might be required to pay Capital Gains Tax when you sell an asset that’s increased in value.
It is charged on the profit you make, but it is not charged to everyone at the same rate. If you’re a higher or additional rate taxpayer you’ll pay 28% on gains from the sale of residential property and 20% on your gains from other assets, which can include investments. If you are a basic rate taxpayer, you pay 18% on residential property and 10% on everything else, unless the gain takes you above the basic tax rate.
If you buy an asset for £10,000 and sell it on for £40,000 in this tax year you make a gain of £30,000 and assuming you have your full CGT allowance of £12,300 available for the same tax year, this would be a taxable gain of £17,700 ( £30,000 less £12,300), and you will pay 10% of £17,300 = £1730 capital gains tax. Higher rate taxpayers will pay 20% of £17,700 = £3,540 capital gains tax.
Fortunately, CGT is not charged when you sell your home, or if your total gains are under your Capital Gains Tax allowance, currently £12,300 for individuals, and £6,150 for trusts as per tax year 2021/2022.
Will you be liable for CGT?
Get a free initial opinion from a Continuum tax expert here.
What may change?
Thanks to Covid 19, the Chancellor has a £1 trillion hole to fill and there is informed speculation about what changes he will make to fill it. He has already frozen the allowance until 2026, which will mean more people will find themselves with a tax bill in the coming years. It is possible that he could also bring CGT rates in line with income tax, 20% for basic rate payers, 40% for higher rate earners and 45% for additional rate taxpayers.
What happens now?
But if tax changes are coming, you need to be prepared.
There are a number of ways to avoid CGT liabilities:
You could sell to your spouse. You can transfer assets to a spouse or civil partner tax free (the rules differ depending on whether you were living together at the time of the disposal). This allows you to split your assets, such as an investment portfolio, in two. You can both then use your individual tax-free allowance, effectively doubling your tax-free entitlement.
You could split the sale of your assets. If you could split the sale into two tranches either side of the tax year, which starts on April 6. This allows you to make use of two annual tax-free allowances on what is effectively one sale, again doubling your protection.
You could offset the gain with a loss. Previous losses can be used to offset profit taxes. You can carry forward any loss incurred in the previous 10 years and deduct this from your gain, which could result in a lower tax bill or cut your tax bill entirely. You can also deduct costs incurred in improving your asset, such as refurbishing a second home, or restoring a painting.
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You could apply for Business Asset Disposal Relief. Formally known as Entrepreneurs’ Relief, this allows people who have shares in a company they own or work for to sell their stake and pay CGT at a discounted rate of 10% up to a limit of £1 million. To qualify you must be a shareholder, officer or employee of a company and held at least 5% of its shares for at least the last 12 months prior to disposal (between Oct 2018 and April 2019) and from April 2019 you must have owned the business for at least 2 years.
You could decide not to sell the asset at all. CGT does not apply after death.
If CGT is going to become a major part of the Chancellors recovery plans, it looks as though it could be time to getting professional help with your tax planning. At Continuum, we will be pleased to provide the help you need.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable Protection products or investment strategy, you should seek independent financial advice before embarking on any course of action.
Levels and basis of reliefs from taxation are subject to change and depend upon your personal circumstances.
The Financial Conduct Authority does not regulate taxation advice.