Year End Capital Gains Tax Planning
In our last article in this Year End Tax Planning series, we took a look at income tax planning and gifts to charity. As we approach the end of another financial year, in this article, we highlight some of the areas you should consider when it comes to capital gains tax planning.
Annual exemptions
Each individual has an annual exemption of £3,000 from capital gains tax. This cannot be carried forward.
Selling investments, such as shares or unit trusts, standing at a gain may use this annual exemption. If you wish to retain your investment, you could repurchase it through your ISA, or your spouse or civil partner could buy back that investment in their name.
Selling your investment and purchasing a similar investment is also an option.
Rates of capital gains tax
Capital gains in excess of the annual exemption are taxed as follows:
- 18% for basic rate taxpayers
- 24% for higher and additional rate taxpayers.
For gains from private equity, the rate is 28%.
The capital gains tax rate on business assets qualifying for Business Asset Disposal Relief will increase from 10% to 14% for disposals made on or after 6 April 2025. The rate will increase again to 18% for disposals made on or after 6 April 2026.
There is a lifetime limit of £1million for gains qualifying for Business Assets Disposal Relief. This limit also applies to gains qualifying for Investor Relief.
Bed and Breakfasting
One way of crystallising capital gains is to sell and then buy back stocks and shares. This also provides an opportunity to increase the base cost for future sales. There is a rule however requiring a 30-day window between selling and buying. The repurchase will therefore need to be delayed beyond 30 days after the sale, or as mentioned above, either your spouse or civil partner could repurchase the stock or shares, or they could be bought back by your ISA.
Spouses and civil partners
Transfers of assets between married couples or civil partners are treated for tax purposes as occurring at a value which produces neither a gain nor a loss such that the donee inherits the donor’s base cost for capital gains tax.
If assets standing at a capital gain are transferred to your spouse or civil partner and are then sold, they should be able to use their annual exemption or brought forward capital losses against the gain realised.
Gifts and transfers to Trust
Gifts to your children (and anyone else whom you wish to benefit) and transfers to a Trust will realise a capital gain as the asset will be deemed to have been sold for open market value.
Consideration will need to be given as to whether the capital gain can be held over to the recipient of the gift. In relation to gifts to Trust, consideration will also have to be given to the inheritance tax consequences of the transfer.
Realising capital losses
If you have already realised capital gains this year in excess of the annual exemption, now is the time to consider realising any assets standing at a capital loss.
If your investments are held by more than one investment manager or you have personal holdings too, you will need to consider the overall position and not just let each investment manager consider their portfolio in isolation.
Negligible value claims
An asset you still own may have become worthless and, if so, you can claim the capital loss arising for capital gains tax purposes. If the asset comprises shares in an unquoted company with a UK trading business, it may be possible to offset the loss against your income.
A capital loss may also be claimed for worthless shares where Enterprise Investment Scheme (EIS) income tax relief was claimed and that relief has not subsequently been withdrawn. That capital loss will be the cost of the shares less the EIS income tax relief obtained on the purchase of the shares.
Payment date
Capital gains tax is payable on 31 January following the end of the tax year in which the disposal took place, other than for UK residential property. By delaying a sale until after 5 April, you give yourself an extra twelve months before the capital gains tax has to be paid. Notwithstanding the recent increase in capital gains tax rates, consideration will have to be given to the likelihood of further increased capital gains tax rates applying in future tax years or from future dates.
For UK residential property, the capital gains return and the payment of the tax due have to be made to HMRC within 60 days of the completion of a sale. This tight timescale can be problematic with the potential need to research historic records and obtain valuation advice.
Investing for capital growth
There remains a significant difference between the additional rate of income tax of 45% and the normal top rate of capital gains tax of 24%. Placing an emphasis on investing for capital gains rather than income can help minimise your tax liability, subject always to the differential in tax rates being maintained.
Liquidations
Distributions made during a liquidation will generally be treated as capital proceeds and charged to capital gains tax. This will require a formal liquidation with the appointment of an insolvency practitioner, but where assets of the business are below £25,000, an informal process can be followed.
The main benefit of distributing the company’s assets through a formal liquidation is that any funds are paid as a capital distribution, as opposed to income, and attract capital gains tax. Accordingly, where shareholders are mostly individuals and there are over £25,000 of assets to distribute, it is generally worth proceeding with the formal route of liquidation. Otherwise, the distribution will be charged to income tax at the dividend tax rates.
The favourable capital gains tax treatment of the distribution is subject to certain anti- avoidance legislation. In broad terms, the anti-avoidance legislation has the effect of catching individuals who have successive companies or businesses carrying on the same or similar activity.
Land and Property
Joint property ownership
Where spouses or civil partners jointly own assets, other than close company shares and furnished holiday lets, for tax purposes the income in the first instance is deemed to be split 50:50 regardless of the beneficial or legal ownership. Where the 50:50 split does not reflect reality, a declaration can be made so the spouses or civil partners are taxed in accordance with the ratio of actual ownership. Where a 50:50 split is not beneficial it is important that the declaration is made in a timely manner.
Capital gains tax: UK property returns
Where a UK resident individual, trustee or personal representative or partner in a partnership disposes of UK residential property and capital gains tax is due, a capital gains tax UK property return must be filed, together with payment of the capital gains tax due, within 60 days of the date of completion of the transaction.
Non-UK residents are required to report not just disposals of residential property, but all disposals of UK land whether or not they realise a gain including indirect disposals such as the sale of shares in property rich companies. A company is property rich if 75% or more of its gross asset value derives from UK property.
For those meeting the requirements of Self-Assessment, the property disposal will also need to be reported on their personal tax return.
We hope you have found the suggestions above helpful. In our next article in this series, we will be looking at inheritance tax planning. As always, please contact us to discuss your circumstances with you.
These articles have been written to provide a general guide to potentially highly complex issues. Whilst great care has been taken in the production of these articles, they are intended to provide the clients and friends of Ritchie Phillips LLP with an outline of the issues individuals, families and trustees should consider and you should seek specific advice before taking or refraining from any action.
