Insights

When you dispose of an asset and make a gain, capital gains tax is normally payable. Some assets, for example personal possessions worth up to £6,000 each, such as paintings or jewellery are exempt, as is your car or your own home, but the majority of capital assets will incur capital gains tax (CGT) when sold at a profit. 

The amount of CGT payable will depend on your overall income – if you are a basic rate taxpayer you will be liable at 18% and if you are a higher rate taxpayer, the rate is 28%. Bear in mind that when arriving at your level of income and hence you rate of tax, you need to include the gain itself (after deducting the annual CGT exemption).

If you sell a business or shares in a qualifying company and you qualify for entrepreneurs’ relief, the rate of CGT is reduced to 10%.

How can tax planning help to reduce your capital gains tax bill?

1. Ensure you qualify for entrepreneurs’ relief (ER)

If you own a business or shares in a company and believe you qualify for ER, make sure that both you and the business asset satisfy all of the qualifying criteria for a complete 12 month period prior to a disposal. This will avoid making a disposal and later finding you are not entitled to the relief.

2. Use your annual exemption

Every taxpayer is entitled to an annual CGT exemption, which is £10,900 for the 2013 / 2014 tax year. Where assets are owned jointly, the gain will be allocated between the owners with each being entitled to their own annual exemption. It is important to note that the CGT allowance cannot be carried forward and is lost if not used in the tax year.

3. Use an ISA to shelter savings or shares

If you sell shares in order to utilse your annual CGT exemption, you may consider purchasing them back within an ISA. Although there will be dealing charges to pay, this effectively moves assets into a CGT-free environment and as an ongoing tax planning strategy, has the potential for substantial CGT savings. It is possible to hold £11,520 worth of shares in an ISA.

4. Offset capital losses

If you own capital assets which are standing at a loss, the capital loss arising on sale can be offset against other capital gains of the same or future tax years.

5. Bed and spousing

‘Bed and breakfasting’ of shares is caught by anti avoidance legislation. If however you have sold shares in order to utilise your annual CGT allowance and the ISA route outlined above doesn’t appeal, consider arranging for your spouse or civil partner to re-purchase the shares at their current value. This offers an opportunity to use your annual CGT allowance to cover the initial gain and then shelter the asset, at a higher acquisition price, from further tax in the future.

6. Make a negligible value claim

If you own shares that are worthless, it may be possible to make a ‘negligible value’ claim and claim a capital loss based on the acquisition price.

7. Invest into SEIS or EIS companies

It is possible to shelter gains from CGT by reinvesting them into tax efficient companies. These enable an individual to invest a defined amount into a company and receive tax free gains in the future whilst ‘rolling over’ or entirely eliminating current gains.

For more information on tax planning to reduce capital gains tax, please contact Lesley Stalker by emailing las@rjp.co.uk.