Tax Year End – Capital Gains Tax Planning

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Capital gains tax (CGT) has traditionally been a tax that most people could ignore. However, as has happened with higher rate tax, the reach of CGT has been growing and will extend further over the next few years.

In the Autumn Statement 2022, the Chancellor gave the CGT ratchet another three turns:

  • The annual exempt amount was reduced from £12,300 in 2022/23 to £6,000 in the current tax year and just £3,000 from 2024/25;
  • The provision to index-link the exempt amount unless the Chancellor decided otherwise was scrapped;
  • The higher rate income tax threshold was frozen at £50,270 through to 5 April 2028. This has an impact on CGT because it means more higher rate taxpayers for whom the rate of CGT is 20% (28% for residential property), against the 10%/18% basic rate taxpayers suffer.

This trio of measures could have dragged you into paying CGT or at least mean you have to pay the tax more attention than you have in the past.

Below are some key CGT planning points for married couples/civil partners and individuals under the age of 18.

Married Couples/Civil Partners

Spouses and civil partners are taxed separately on their capital gains. They each have their own capital gains tax (CGT) annual exempt amount. However, it is possible for assets to be transferred from one spouse or civil partner 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/civil partners who are living together. (However, please see below regarding couples that are separating, in relation to disposals that occur on or after 6 April 2023). It is not possible to transfer capital losses between spouses/civil partners.

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 or civil partner 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 can also facilitate use of the annual exempt amount. Please see Using the annual CGT exemption.

There are two other matters that should be considered:

Losses
Where one spouse or civil partner has losses and the other has gains a transfer of assets between them could ensure that one spouse’s/civil partner’s losses are used against the other spouse’s/civil partner’s gains (broadly, money or assets must not return to the original owner of the asset showing the loss).

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). 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, and either at least 5% of the nets assets on a winding up or at least 5% of the proceeds in the event of a company sale) for at least two years before the disposal in order to qualify for relief. Where both spouses/civil partners hold shares in a trading company, but either one or both of them hold less than the required 5%, there may be a case for a transfer of shares between them to enable one of them to qualify for the relief.

Legislation is being introduced in the Spring Finance Bill 2023 that will provide that:

  • separating spouses or civil partners be given up to three years after the year they cease to live together in which to make no gain or no loss transfers;
  • no gain or no loss treatment will also apply to assets that separating spouses or civil partners transfer between themselves as part of a formal divorce agreement;
  • a spouse or civil partner who retains an interest in the former matrimonial home be given an option to claim Private Residence Relief (PRR) when it is sold;
  • individuals who have transferred their interest in the former matrimonial home to their ex-spouse or civil partner and are entitled to receive a percentage of the proceeds when that home is eventually sold, will be able to apply the same tax treatment to those proceeds when received that applied when they transferred their original interest in the home to their ex-spouse or civil partner.

These changes will apply to disposals that occur on or after 6 April 2023.

Individuals under the Age of 18

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 tax return, please contact your Finura planner.

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Sources: https://www.techlink.co.uk/user/knowledge/browse/taxation/94849_CAPITAL_GAINS_TAX_-_PLANNING/95425_Married_Couples-Civil_Partners_and_CGT_planning/
https://www.techlink.co.uk/user/knowledge/browse/taxation/94849_CAPITAL_GAINS_TAX_-_PLANNING/95426_Children_and_CGT_planning/

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