As speculation of possible Capital Gains Tax (CGT) reforms in the 2021 Budget continues, below are some key CGT planning points for married couples/civil partners and individuals under the age of 18 that fall under the current rules.
Spouses and civil partners are taxed separately on their capital gains and, in the remainder of this article, for the word “spouse” also read “civil partner”. They each have their own capital gains tax annual exempt amount. However, it is possible for assets to be transferred from one spouse to the other and, at the same time, effectively transfer the capital gain without triggering a chargeable gain. This ‘no gain/no loss’ (tax neutral) disposal is only available between spouses who are living together. It is not possible to transfer capital losses between spouses.
Capital gains are charged to tax at the individual’s marginal rate of tax, i.e. 10% or 20% (18% or 28% for residential property (e.g. buy-to-let) and carried interest). Gains which, when added to the taxable income of the investor, fall below the basic rate income tax limit are taxed at 10% and gains that are in excess of this limit are taxed at 20%). This means that if one spouse pays tax at a lower rate it may be worth transferring assets before disposal in order to take advantage of the lower tax rate and/or annual exempt amount, if also available. The saving that could be made will be 10% of the gain (20% – 10%). Such a transfer must be on an outright basis with ‘no strings attached’.
Of course, such transfers to facilitate use of the annual exempt amount will remain valid.
There are two other matters that should be considered:
Where one spouse has losses and the other has gains, a transfer of assets between them could ensure that one spouse’s losses are used against the other spouse’s gains.
Business Asset Disposal Relief (formerly Entrepreneurs’ Relief)
This reduces the rate of CGT on business assets to 10% (up to a cumulative lifetime limit of gains per individual of £1m from 6 April 2020). Where those business assets are shares, the person making the disposal (who must be an employee or director of the company) must have held at least 5% of the company’s ordinary shares (which must entitle them to at least 5% of the voting rights, 5% of the company’s distributable profits, 5% of the nets assets on winding up) for at least two years before the disposal in order to qualify for relief. Where both spouses hold shares in a trading company but either one or both of them hold less than 5% there may be a case for a transfer of shares between them to enable one of them to qualify for the relief.
Children are entitled to their own capital gains tax (CGT) annual exempt amount in the same way as any adult individual. Where parents or grandparents are happy to make gifts to children, such gifts have to be made to a trust since a child cannot give a valid receipt under English law until they attain age 18. The trust could be a simple bare (absolute) trust or even a nomineeship such as a designated account.
For CGT purposes, a bare trust or nomineeship will provide most tax efficiency as the child’s full annual exempt amount will be available and any further gains will be taxed on the child. Therefore, there is also likely to be a ‘rate benefit’ accruing to a child/bare trust for the child. The rate of CGT in most cases, up to the higher rate tax threshold, will be 10% as opposed to the possible 20% rate of the parent/grandparent.
Of course, the actual transfer from a parent/grandparent to a bare trust/nomineeship will not be exempt, although any gain deemed to arise (on the basis that the asset is disposed of for its market value) may, of course, fall within the disposer’s CGT annual exempt amount.
It should also be remembered that, while there are anti-avoidance provisions for income tax purposes (generally, where trust income exceeds £100 gross in a tax year it is assessed on the parental settlor, although there are more favourable rules for trusts that were established prior to 9 March 1999 that have not subsequently been added to where income of less than £100 is paid to or for the benefit of a minor child of the settlor), there are no equivalent provisions for CGT purposes.
If you would like to discuss the implications of Capital Gains Tax on your 2020/2021 tax return, please contact your Finura adviser.
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