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Personal tax  •  Tax Planning  •  Taxation

10 ways to reduce your next capital gains tax bill

By RJP LLP on 25 January 2017

2019/20 Tax planning tips

Updated: 10th September 2019

When you make capital gains on assets you own, you may be required to pay capital gains tax (CGT) at the appropriate rate. CGT rates on all assets with the exception of residential property are now at an all-time low, which has created some very interesting tax planning opportunities. This article is especially relevant for taxpayers looking to minimise capital gains tax on a second property, for instance a holiday home or buy to let property.

Before the current tax year ends on 5 April 2020, what could you be doing to make your money work harder and reduce your CGT liabilities? What are some of the best ways to reduce capital gains tax on property and shares?

Make the most of your annual allowance to minimise CGT

Each tax year everyone can make capital gains up to the value of their annual exempt amount without paying CGT (capital gains tax). This includes children. In the current 2019/20 tax year, the annual exemption amount is £12,000. Therefore, when reviewing last minute tax planning opportunities, one of the first things to consider is whether you can make use of your annual tax-free exemption before it is lost, because if unused, it cannot be carried forward.

Married couples and civil partners can transfer assets between one another on a no gain/no loss basis, provided the transfers made are outright and are unconditional. This provides an opportunity to transfer assets prior to a sale when only one person’s annual exemption remains unused or, where gains exceed the annual exemption, where one individual is a higher rate taxpayer and the other is not.

 

If you are a company shareholder, don’t lose Entrepreneurs’ Relief (ER)

If husband and wife, or civil partners, own shares in their joint trading company, there can be cases where one is entitled to ER (because they work for the company for example) whilst the other is not. In this situation, shares can be transferred to the qualifying spouse, before a share sale, with that individual qualifying for ER on the disposal of those shares providing they previously held the qualifying minimum 5% shareholding in the company.

They now also need to satisfy two further conditions: Under the changes introduced, the qualifying holding period for assets has increased from 12 months to two years. Further; a shareholder selling shares must, in addition to holding at least 5% of the voting rights in the company, be entitled to at least 5% of the profits available for distribution to shareholders, or in the event of a sale of the company’s shares, be entitled to at least 5% of the proceeds.

 

Rent out a former main residence

Capital gains tax on property needs careful management to minimise the tax liabilities. If you sell your main home, any gains you make will be tax free provided certain conditions are met. Firstly, the property must have been your principal private residence (PPR) and it must be sold within 18 months of the date you move out.  Note the rules concerning PPR will soon be changing and this timeframe is to be reduced to 9 months from 6 April 2020.

If you are trying to sell a former home and struggling to do so within the 18-month (or 9-month) timeframe, you may be able to rent it out and in doing so, help to minimise your CGT exposure proportionally. This is because you will be eligible for tax relief for periods when the property is let, to a maximum value of £40,000 per owner. However note that this additional relief is also set to be effectively withdrawn from 6 April 2020.

Care should be taken if you purchase a second property due to a 3% increase in SDLT rates on all second homes. This surcharge is refunded where you purchase a second home and dispose of your previous main residence within 36 months.

 

Consider a principal private residence election

Taxpayers who own more than one property available for their use can make an election to choose which should be treated as their main residence for tax purposes.

This should be considered carefully based on the likely increase in market value of the property, and also bearing in mind that where a property has been your main residence at any time, the last 18 months are exempt from CGT as outlined in 3 above (soon to become 9 months). In addition, the lettings exemption outlined above is available in relation to a property which has been your main residence and has been rented out. Note that additional advice should be taken if you are non-UK domiciled.

 

Make the most of current low CGT rates

It is worth noting that the rates of CGT are currently lower than they have been in the recent past. The top rate for higher taxpayers is 10% where entrepreneurs’ relief applies and 20% on all other assets apart from residential property, which remains at the rate of 28% and 18% for basic rate taxpayers. If you have long standing gains to declare it might be worth considering taking advantage of the low rates whist they remain.

 

Preserve previous years’ capital losses

If you have incurred capital losses during the year, these must be deducted from any capital gains of the same year before offsetting the £12,000 annual exemption.

However, brought forward losses can be more valuable, because they are deducted from capital gains after the annual exemption. Depending on the level of gains incurred, this can preserve losses to carry forward to future years.

Note that once losses have been declared on your tax return, provided they have not already been set against gains made in the same year, they can be carried forward indefinitely to offset against capital gains in future tax years to reduce your potential CGT liabilities.

 

Use paper losses to reduce CGT but whilst retaining the investment

Assets which are carrying a gain which is within your annual exemption, but which you want to hold onto can prove troublesome. This is because of the CGT ‘matching’ rules which prevent the selling and re-purchasing of shares to create an uplift in the base cost (known as bed and breakfasting). It is however possible for a married couple or civil partners to sell shares held by one person, with their spouse to re-purchasing within 30 days. Additional planning could involve re-purchasing within an ISA or trust wrapper to minimise CGT in the future.

 

Take advantage of the Investors’ Relief

This is a CGT relief introduced to allow external investors in unlisted companies to pay just 10% tax on any gains they make in the future, up to a lifetime limit of £10m. Unlike other tax efficient investment schemes like EIS, there are no restrictions on the size of company you can invest in, which makes this a very flexible option.

 

Restructure a share portfolio to use new capital gains tax reliefs

Given that capital gains tax rates are currently low and Investors’ Relief is available, it might be worth considering whether to restructure a portfolio of investments in unquoted shares. When shares are sold, CGT is payable at 20% after offsetting losses and the annual exemption but where the shares qualify for Investors’ Relief, the rate is reduced to 10%.

 

Utilise Entrepreneurs’ Relief to pay only 10% CGT

Identify whether a disposal of business assets will qualify for Entrepreneurs’ Relief (ER). This is available to company shareholders owners when they sell shares in their company, subject to qualifying conditions having been met. It is capped at a lifetime limit of £10 million of gains with any excess being taxed at the appropriate main rate of CGT (either 20% or 10%). If you own company share options which have been awarded through an EMI (enterprise management initiative) share option scheme, these may also qualify for ER.

partners@rjp.co.uk

 

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60 Day Deadline for CGT Returns and Tax Payments

If you sell a property and incur capital gains tax on the transaction, you will need to file a tax return and also pay any tax that is due within 60 days of completion, or penalties will arise. Need help with your property taxes? Talk to us.

2019/20 Tax planning tips

Updated: 10th September 2019

When you make capital gains on assets you own, you may be required to pay capital gains tax (CGT) at the appropriate rate. CGT rates on all assets with the exception of residential property are now at an all-time low, which has created some very interesting tax planning opportunities. This article is especially relevant for taxpayers looking to minimise capital gains tax on a second property, for instance a holiday home or buy to let property.

Before the current tax year ends on 5 April 2020, what could you be doing to make your money work harder and reduce your CGT liabilities? What are some of the best ways to reduce capital gains tax on property and shares?

Make the most of your annual allowance to minimise CGT

Each tax year everyone can make capital gains up to the value of their annual exempt amount without paying CGT (capital gains tax). This includes children. In the current 2019/20 tax year, the annual exemption amount is £12,000. Therefore, when reviewing last minute tax planning opportunities, one of the first things to consider is whether you can make use of your annual tax-free exemption before it is lost, because if unused, it cannot be carried forward.

Married couples and civil partners can transfer assets between one another on a no gain/no loss basis, provided the transfers made are outright and are unconditional. This provides an opportunity to transfer assets prior to a sale when only one person’s annual exemption remains unused or, where gains exceed the annual exemption, where one individual is a higher rate taxpayer and the other is not.

 

If you are a company shareholder, don’t lose Entrepreneurs’ Relief (ER)

If husband and wife, or civil partners, own shares in their joint trading company, there can be cases where one is entitled to ER (because they work for the company for example) whilst the other is not. In this situation, shares can be transferred to the qualifying spouse, before a share sale, with that individual qualifying for ER on the disposal of those shares providing they previously held the qualifying minimum 5% shareholding in the company.

They now also need to satisfy two further conditions: Under the changes introduced, the qualifying holding period for assets has increased from 12 months to two years. Further; a shareholder selling shares must, in addition to holding at least 5% of the voting rights in the company, be entitled to at least 5% of the profits available for distribution to shareholders, or in the event of a sale of the company’s shares, be entitled to at least 5% of the proceeds.

 

Rent out a former main residence

Capital gains tax on property needs careful management to minimise the tax liabilities. If you sell your main home, any gains you make will be tax free provided certain conditions are met. Firstly, the property must have been your principal private residence (PPR) and it must be sold within 18 months of the date you move out.  Note the rules concerning PPR will soon be changing and this timeframe is to be reduced to 9 months from 6 April 2020.

If you are trying to sell a former home and struggling to do so within the 18-month (or 9-month) timeframe, you may be able to rent it out and in doing so, help to minimise your CGT exposure proportionally. This is because you will be eligible for tax relief for periods when the property is let, to a maximum value of £40,000 per owner. However note that this additional relief is also set to be effectively withdrawn from 6 April 2020.

Care should be taken if you purchase a second property due to a 3% increase in SDLT rates on all second homes. This surcharge is refunded where you purchase a second home and dispose of your previous main residence within 36 months.

 

Consider a principal private residence election

Taxpayers who own more than one property available for their use can make an election to choose which should be treated as their main residence for tax purposes.

This should be considered carefully based on the likely increase in market value of the property, and also bearing in mind that where a property has been your main residence at any time, the last 18 months are exempt from CGT as outlined in 3 above (soon to become 9 months). In addition, the lettings exemption outlined above is available in relation to a property which has been your main residence and has been rented out. Note that additional advice should be taken if you are non-UK domiciled.

 

Make the most of current low CGT rates

It is worth noting that the rates of CGT are currently lower than they have been in the recent past. The top rate for higher taxpayers is 10% where entrepreneurs’ relief applies and 20% on all other assets apart from residential property, which remains at the rate of 28% and 18% for basic rate taxpayers. If you have long standing gains to declare it might be worth considering taking advantage of the low rates whist they remain.

 

Preserve previous years’ capital losses

If you have incurred capital losses during the year, these must be deducted from any capital gains of the same year before offsetting the £12,000 annual exemption.

However, brought forward losses can be more valuable, because they are deducted from capital gains after the annual exemption. Depending on the level of gains incurred, this can preserve losses to carry forward to future years.

Note that once losses have been declared on your tax return, provided they have not already been set against gains made in the same year, they can be carried forward indefinitely to offset against capital gains in future tax years to reduce your potential CGT liabilities.

 

Use paper losses to reduce CGT but whilst retaining the investment

Assets which are carrying a gain which is within your annual exemption, but which you want to hold onto can prove troublesome. This is because of the CGT ‘matching’ rules which prevent the selling and re-purchasing of shares to create an uplift in the base cost (known as bed and breakfasting). It is however possible for a married couple or civil partners to sell shares held by one person, with their spouse to re-purchasing within 30 days. Additional planning could involve re-purchasing within an ISA or trust wrapper to minimise CGT in the future.

 

Take advantage of the Investors’ Relief

This is a CGT relief introduced to allow external investors in unlisted companies to pay just 10% tax on any gains they make in the future, up to a lifetime limit of £10m. Unlike other tax efficient investment schemes like EIS, there are no restrictions on the size of company you can invest in, which makes this a very flexible option.

 

Restructure a share portfolio to use new capital gains tax reliefs

Given that capital gains tax rates are currently low and Investors’ Relief is available, it might be worth considering whether to restructure a portfolio of investments in unquoted shares. When shares are sold, CGT is payable at 20% after offsetting losses and the annual exemption but where the shares qualify for Investors’ Relief, the rate is reduced to 10%.

 

Utilise Entrepreneurs’ Relief to pay only 10% CGT

Identify whether a disposal of business assets will qualify for Entrepreneurs’ Relief (ER). This is available to company shareholders owners when they sell shares in their company, subject to qualifying conditions having been met. It is capped at a lifetime limit of £10 million of gains with any excess being taxed at the appropriate main rate of CGT (either 20% or 10%). If you own company share options which have been awarded through an EMI (enterprise management initiative) share option scheme, these may also qualify for ER.

partners@rjp.co.uk