Capital Gains Tax allowances and reliefs can substantially reduce the tax due when disposing of personal assets, says FPM Associate Tax Director Siobhan McCreesh.
Capital Gains Tax (CGT) is payable when the ownership of an asset changes. Typical examples of situations where CGT arises are:
- Disposing of an asset by selling or gifting it to another person
- Exchanging or swapping an asset
- Receiving compensation from an insurer for an asset that has been lost or destroyed
Assets that are within the scope of Capital Gains Tax include, land, investment or rental properties, businesses and business assets, stocks and shares, and valuable pieces of art, antiques, and jewellery. Certain assets—such as personal belongings worth less than £6,000, your home (subject to conditions), your motor car, and transfers of assets to your spouse or civil partner—are exempt from CGT.
Capital Gains Tax (CGT) Rates
Two factors determine the CGT rate — asset type (residential property or other assets) and income tax band.
- Residential property: Chargeable gains derived from residential property are taxed at 18% for basic rates taxpayers and 28% for higher rate and additional rate
- Other assets: Chargeable gains from all other assets are taxed at 10% for basic rate taxpayers and 20% for higher rate and additional rate
The maximum amount that a basic rate taxpayer can earn before they move into the higher rate tax bracket is £50,270.
How to Calculate CGT
To calculate whether Capital Gains Tax is due, you first need to work out whether you have made a capital gain or loss when disposing of the asset. To do this, you take the proceeds or deemed proceeds and subtract allowable costs such as the original amount paid for the asset, enhancement expenditure and legal fees.
If this shows that you have made a capital loss, you don’t need to carry out any further calculations. The loss can generally be offset against future disposals.
If, however, you have made a capital gain, also known as a chargeable gain, the next step to look at is whether you can avail of any tax reliefs.
Depending on the type of personal asset being disposed of, you may be able to claim tax relief subject to satisfying the eligibility criteria. Examples of relevant reliefs include:
- Personal assets: principal private residence relief when disposing of your main home, letting exemption where the tenant and owner co-occupy a property, investment relief and enterprise investment relief.
- Business assets: business asset disposal relief, incorporation relief, roll-over relief, hold-over relief and gift relief.
In the same way that there is a personal allowance for income tax purposes, each individual also has a Capital Gains Tax Allowance. This allowance is reset every year and cannot be carried forward. The current allowance is £12,300. This is deducted from the chargeable gain after Capital Gains Tax reliefs have been applied. Where utilisation of the available reliefs and allowance shows a capital loss, the chargeable gain is set to zero.
To maximise the available reliefs and your Capital Gains Tax allowance, the planning and timing of your asset disposals is crucial.
As previously explained, each taxpayer has an annual Capital Gains Tax Allowance which cannot be carried forward from one year to the next. Timing a disposal pre-and post- the end of the tax year ( 5 April ) can be advantageous as it enables you to avail of the allowance in each tax year. It may also be beneficial to transfer ownership of property to your spouse or civil partner in order to utilise their Capital Gains Tax Allowance where relevant.
If you have two or more disposals in the same tax year—for example, if you have a disposal with a large capital gain and an asset that could create a capital loss, it may be worth disposing of both in the same tax year so that you can offset the capital loss against the capital gain.
It is important to be aware that changes in the ownership and/or use of an asset can affect the capital gain on a future disposal. This is particular important for business assets, for example, if you own property that was used in your business but is now used for non-business purposes this can affect the availability of business asset disposal relief.
Other reliefs to consider include hold-over relief, which defers a chargeable gain until the future disposal of the asset by the transferee. This can be claimed on a number of different assets including gifts of business assets, agricultural land, and unlisted shares in trading companies.
Investing in assets that are exempt from CGT should be considered. Subject to certain conditions, investments in the Enterprise Investment Scheme are exempt if held for a minimum period of three years. You also have an annual ISA allowance ( £20,000) which can be used to invest in ISA stocks and shares. These shares are exempt from CGT.
Other tax planning opportunities include:
- Gifts to charity — these are exempt from CGT subject to certain conditions.
- Extending your basic rate band of tax —this can reduce the amount of tax you pay at the higher rate. Planning for gift aid contributions and pensions should be considered particularly in the year of a capital disposal.