Plan ahead to cut your Capital Gains tax liabilities
Capital Gains: the good news/bad news tax.
Good news … you've made money.
Bad news … well, it's a tax.
Capital Gain is the difference between what you paid for something and the amount you sell it for, and the amount of tax you pay on a Capital Gain depends on your income.
Here's how it works:
• Calculate your gain
• Subtract your annual tax-free allowance (£11,100 for the 2015-16 tax year and £11,000 for the 2014-15 tax year)
• Subtract allowable expenses
• Whatever remains is added to your income: if the total is below the higher rate tax, then your gain is taxed at 18%. If your gain pushes your income into the higher rate band, then the amount of your gain above that threshold will be taxed at 28%
Carol Cheesman of Cheesmans Accountants suggests seven ways you can reduce your Capital Gains Tax (CGT):
1. Utilising the annual exemption
It's important to note that if unused, the annual exemption cannot be carried forward. Think ahead to make the best use of each year's allowance.
Making a transfer to a spouse or civil partner—they are entitled to their own annual exemptions—is an effective way to fully utilise this allowance, but do not make any arrangements to effect the sale until the transfer is complete. You should leave a reasonable interval between the transactions. Also specify that the transfer is absolute and unconditional.
2. Utilising losses
If you have any investments standing at a loss, it may be beneficial to crystallise these – particularly if a Capital Gain has pushed you into the 28% bracket.
A capital loss must be claimed within four years of the end of the tax year in which it occurred for relief to be given. Subsequently, the loss claimed can be carried forward indefinitely.
Capital losses realised in respect of unquoted shares can, in some cases, be relieved against income. Relief must be claimed within 12 months of 31 January following the end of the relevant year of assessment.
3. Deferring disposals
If the annual exemption for the current year has already been used, consider deferring the sale of assets until after the end of the tax year. By doing this you will utilise the 2016-17 annual exemption and defer the payment of any capital gains tax due by 12 months until 31 January 2018.
4. Bed and spousing
The practice of bed and breakfasting is where stocks or shares are sold and then repurchased shortly afterwards to secure a higher acquisition cost. This practice is negated by the rule requiring a disposal to be matched with any acquisition of securities of the same class in the same company in the next 30 days. However, this applies only to a repurchase by the same person. Your spouse or civil partner can repurchase the shares without this rule being applied.
5. Negligible value claims
If an asset becomes worthless, a negligible value claim can be made.
For this, you can think of the worthless asset as having been sold for its current market value—which is zero—and then reacquired for the same price: zero. This puts your base cost for Capital Gains tax purposes at nil.
A capital loss arises at the time of the owner's deemed disposal of the asset, therefore your loss can be treated as arising in the tax year in which the negligible value claim is made, or—provided HM Revenue & Customs is satisfied that your asset was of negligible value in the two years immediately preceding your claim—in any of the previous two tax years.
To maximise any Capital Gain – plan ahead. Consider other aspects of your finances and investments, and choose a strategy that benefits you most. Remember there are professionals who can do this for you.