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Capital Gains Tax

Capital gains tax was introduced in 1965 to tax profits made on the disposal of personal property. It only applies to individuals – companies pay corporation tax on chargeable gains instead. There are quite a few exemptions such as private cars, most personal chattels, life assurance policies, foreign currency and, most importantly, your own principal private residence. In general, capital gains tax is only charged on assets held for their investment potential such as shares, land and property, business assets, antiques and works of art.

The capital gains tax regime has undergone many changes and makeovers down the years, most recently in 2010 when the rate was increased to 28% for higher rate taxpayers. There were also major changes in 2007 when the Labour Chancellor, Alistair Darling abolished taper relief and what was left of indexation allowance. These were both time-based and recognised the effects of inflation on the value of your property, so for the first time since 1982 we are now paying tax on inflationary gains. Following a huge uproar from the small business community, who were faced with seeing tax on their retirement nest eggs almost doubled, Darling sweetened the pill by introducing Entrepreneurs Relief. Originally this only applied to the first £1 million of lifetime gains but was increased to £2 million in the March 2010 Budget and then to £10 million in the March 2011 Budget.

There are quite a few tax planning techniques that can be used to reduce or defer your capital gains tax liability. Please give us a call if you would like us to review your assets and advise you on your personal tax strategy. Meanwhile, the information sheets and tax tips below will tell you more.

Information Sheets Tax Tips
bulletpoint What is a capital gain?
bulletpoint Exemptions and allowances
bulletpoint Private residence relief
bulletpoint Private Letting relief
bulletpoint Entrepreneurs relief
Spouse transfers
Consider transferring property to your spouse or putting it in joint names in order to utilise their annual allowance.
Share portfolios
Stagger your disposal of share portfolios over a number of years in order to gain maximum benefit from your annual allowance.
Main residence
Consider re-designating your principal private residence for a short while if you are planning to sell a second home.
Let property
If you let property to private individuals try to live there yourself for a short while in order to take advantage of residential letting relief.
Business assets
If you sell business assets and re-invest the proceeds in other business assets, consider deferring the gains by claiming roll-over relief.
Goodwill
Don’t forget the value of goodwill if you incorporate your business as it may entitle you to take over £18,000 from your company tax free.

Example

John bought a house for £180,000 in 2004 and let it to tenants as a private home until 2014 when he sold it for £400,000. His buying and selling costs were £20,000. After deducting his annual CGT allowance of £11,000 he had a taxable gain of £189,000 and, as a higher rate taxpayer, had to pay capital gains tax on this at 28%. His total tax bill was therefore £52,920.

He could have substantially reduced his tax liability by living in the property at some point, let’s say for 2 years. This would have reduced his taxable gain by 35% as the last 18 months are always exempt if a house has been your main home (or nominated as your principal private residence) at any time. The gain would have applied to only 6.5 years out of the 10 in which he owned it.

In addition, he would have been entitled to letting relief of £40,000 reducing the gain still further to £90,000. After deducting his annual CGT allowance, his total tax bill would have been £22,120. He would have saved £30,800 (over 58%) just by living there for 2 years.

Had he put the property in joint names with his wife, she would also have been entitled to £40,000 Letting Relief and their taxable gains would have been £14,000 each. As a basic rate taxpayer, her gain would have been taxed at just 18% and their combined CGT liability would have been just £6,440. A simple piece of tax planning would have saved them an additional £15,680.

In total, these 2 actions would have reduced the CGT bill on the sale of the house by almost 88%.

It just goes to show how much you can save by effective tax planning.

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