Simon Mitchell recently wrote a piece for ePrivate Client
Despite much speculation that the Chancellor would announce changes to Capital Gains Tax (CGT) in his most recent Budget, Mr Sunak has kept rates the same for now. He also announced that the annual exempt amount for CGT will be frozen at its present level until 2026. This is currently £12,300 for individuals and estates, and £6,150 for trustees of most settlements.
However, rumours are already swirling that an increase to CGT will perhaps now be announced in the autumn. While we will have to wait and see if that is the case, it does seem likely that some changes to CGT are on the horizon. On 11 November 2020, the Office of Tax Simplification (OTS) published a report into the future of CGT and the ways in which it could potentially be reformed. It is worth carefully considering the recommendations laid out in this report, as they could indicate how the Government may act going forward.
By way of background, CGT is a profits tax that is paid on the profit (or capital gain) which is generated when an asset is sold for more than its acquisition value (whether the asset was originally bought, received as a gift, or inherited).
It typically applies to sales or disposals of investment properties, shareholdings and other investments but does not apply to gifts of cash. There is also an exemption covering a taxpayer's main residence. It is worth noting here that couples or civil partners may only have one main residence between them.
If you are a higher rate tax payer, two rates of CGT apply - 28% on gains on residential property, and 20% for gains from other chargeable assets. If you are a basic rate tax payer, the rate you pay depends on the size of the gain, your taxable income and whether your gain is from residential property or other assets.
The report from the OTS outlines various ways in which the Government could consider reforming CGT and, in particular, has highlighted the following recommendations:
- Increasing the rates of tax that apply for CGT purposes so that they are more closely aligned to the equivalent rates of tax that apply for income tax purposes (and in the process, consider reducing the number of rates of tax that apply for CGT purposes);
- Reducing the annual exemption for CGT purposes so that it acts purely as a de minimis provision and not as a wider tax allowance; and
- Removing the CGT uplift on death so that when a beneficiary inherits an assets, the pre-death gains would remain relevant and would therefore be taxable when the beneficiary later sells or disposes of it
Of course, it is for the Government to decide if it wants to adopt some or all of the recommendations that have been put forward by the OTS. However, given that the Government commissioned the OTS to provide the report and given also that it needs to raise extra revenue to cover the costs of the pandemic, now may be a good time to consider making disposals of assets to avoid being caught by any new rules that might be imposed for CGT purposes.
Now is also the time to carefully plan how to mitigate your exposure to CGT going forward. Beyond the obvious approach of ensuring you use your annual allowance, and take advantage of paying into ISAs and pension schemes, there are a variety of other steps you can take, as outlined below.
Consider your losses
Gains and losses established in the same tax year can be offset against each other, so will reduce the amount of gain that is subject to tax. As such, if you are likely to make an unavoidable loss on selling any assets, then plan to dispose of it in the same tax year as realising any gains. You may also be able to carry forward unused losses from one tax year so that they can be offset against gains in future tax years
Assets can be transferred between spouses and civil partners, to take advantage of two sets of annual CGT allowance, effectively doubling it. This can often happen where one spouse or civil partner owns a property (for example) in his or her own name and transfers that property into joint names before contracts are exchanged, in which case both CGT allowances become available..
Giving to charity
CGT relief is available for gifting land, property or, in some cases, shares to a charity. Where the administration of an estate is concerned, and where a charity is due to inherit some of the estate or specific assets in the estate, those assets are usually transferred out to the charity before any sale of the assets takes place so that the CGT exemption can be used.
Setting up trusts
A trust is a legal arrangement where 'trustees' hold assets for ‘beneficiaries', and they are often created as part of an estate planning exercise, usually with a view to reducing the amount of inheritance tax that is paid on a person’s death. By transferring property or other assets into trust and surviving seven years, the gift of the assets into the trust will typically fall out of play for inheritance tax purpose. As assets are transferred into a trust, it is often possible to “hold over” the gain so that no CGT is payable at the point the transfer into the trust. However, the gains in play leading up to the transfer into trust will remain taxable when the assets are later sold. This sort of planning is increasingly common but needs to be looked at carefully.
Hold over relief
Hold over relief can also be available on the transfer of certain business and agricultural assets and means that the chargeable gain can be postponed. However, if the assets are later sold, the gains will then be taxable in the usual way although it may be possible to reduce the rate of CGT on the first £1 million generated by using Business Asset Disposal Relief (previously known as Entrepreneurs Relief). If applicable, this reduces the rate of CGT to 10% on the first £1 million, though this is a person’s lifetime allowance and could have been used up on earlier disposals.
Inevitably tax planning is a really complex area. While it is possible to potentially reduce your exposure to CGT both in disposing of assets wisely and planning ahead, getting it wrong can lead to significant consequences. As such, it is wise to seek both financial and legal advice at the earliest opportunity. As it remains entirely possible that the rules around CGT could change in the future, we would recommend taking action now.
This article first appeared in ePrivate client https://www.paminsight.com/epc/article/mitigating-your-exposure-capital-gains-tax-window-opportunity