What is capital gains tax?
Capital gains tax is a tax on the increase in the value of an asset between the time it was acquired and the time it is disposed of.
Sale is the most common form of disposal but gift, loss or destruction can also be forms of disposal where tax may be payable if a gain is made.
Are all gains taxable?
There is an annual exempt amount (£6,000 for 2023/24 and reducing to £3,000 for 2024/25). Gains up to the annual exemption in any tax year are exempt from capital gains tax. Only gains in excess of this are taxable. The allowance has to be used in the current tax year or it is lost. The allowance cannot be carried forward or backwards into another tax year. Any losses, however, can be carried forward indefinitely to offset against future gains.
How is the liability calculated?
The taxable gain you have made in a tax year after deduction of the annual exemption is added on top of all of your taxable income to see how much of the gain falls into the basic-rate tax band and how much falls into the higher-rate tax band. Any gains within the basic rate are taxed at 10% (or 18% for residential property) and anything in the higher-rate band is taxable at 20% (or 28% for residential property).
Are there any other exemptions from capital gains tax?
There are a number of exemptions and reliefs that can be used to mitigate the liability.
Gifts made between husbands, wives and civil partners are not liable to capital gains tax. However, when the new owner disposes of the asset, their gains will be based on the price their partner acquired the asset for.
Any gains made on assets are exempt on death. The person who inherits the asset is deemed to have acquired them at the probate valuation of the asset, which is usually their value on the date of the deceased person’s death.
Gains made on your home are also exempt. If you have multiple properties that you use as a home you can nominate which one you wish to be your home within two years of acquiring the latest property. After this time the ability to nominate is lost and HMRC will decide which property is eligible for the relief based on the facts and how much you use each property.
If you previously used a house as a home, but it is no longer your home, then you may be able to get a proportionate relief for the time it was your home plus an additional nine months. Similarly, if you rent out part of the property you live in you may be able to get a proportionate relief.
If you dispose of all or part of your business then you may be able to benefit from Business Asset Disposal Relief. This effectively brings the capital gains tax rate down to 10% for the first £1 million of gains made on the sale of your business. There are a number of criteria to be met in order to qualify for the relief, so this should be discussed well in advance of the sale with the accountants helping you to value and sell your business.
There are other less common exemptions, such as the exemption for tangible wasting assets (e.g. boats, cars, racehorses), exemptions for individual chattels or articles sold for less than £6,000 (e.g. an item of furniture or a set of antique crockery). There are also some investments that are exempt from capital gains tax e.g. ISAs, gilts and insurance bonds.
How can I ensure that I use my annual exemption?
As stated earlier, the annual exemption has to be used in a tax year or it is lost. To do this, it used to be common practice to sell sufficient shares on one day to utilise the annual exemption and buy them back the following day. This was known as ‘bed and breakfasting’ but it no longer works, at least in the way it used to, due to the ‘share matching’ rules.
If you have acquired shares in the same investment over a period of time, when you come to sell some of those shares, the question is, which shares are you selling? The ones you acquired first, that probably have the largest gain, or the ones you acquired last?
The share matching rules provide the answer to that question by stipulating a specific order in which the shares are sold.
The first shares sold are deemed to be those acquired on the same day as the sale, followed by the shares acquired in the 30 days following the date of the sale, followed by the ‘section 104 holding’, which is basically all the other shares using an averaged acquisition price.
If you sold 100 shares today that have made a large gain on since you bought them, but bought back 100 shares in the same company tomorrow, then the acquisition price of the shares you sell will be the price you bought them for on the following day, so there would be very little gain or loss made. If the objective was to use the annual exemption rather than waste it, the plan would not work as intended.
If you wish to sell shares to utilise the annual exemption then there are a number of ways to do it. You could:
- Wait 30 days before repurchasing the shares, or
- Buy different, but similar, shares the following day, or
- Buy the same shares using an ISA or a SIPP
What is holdover relief?
Holdover relief can be used to defer a tax liability in two situations.
First, if you gift any type of asset that is potentially liable to capital gains tax to a trust, then that is a disposal for capital gains tax and may create a liability for the donor. However, depending on the type of trust and who the potential beneficiaries are, it may be possible to holdover the gain. This means that rather than paying the liability on the gain, the trustees of the trust take ownership of them with the previous owner’s acquisition cost rather than the cost on the day they received them. Effectively the tax on the gain has been deferred until the trustees sell them.
Holdover relief can also be used where qualifying business assets are transferred to someone else either as a gift or for less than they are worth. Provided the assets qualify for the relief (for example, they must be shares in a trading company and the donor must have at least 5% of the shares and the voting rights) then again the liability can be held over to the new owner, who acquires the shares with the previous owner’s acquisition costs.
Any last tips?
If you are calculating the gain on shares, be careful that you have identified which shares you are selling. The share matching rules (see above) can throw a spanner in the works if you accidentally buy the same shares back within 30 days.
If you have reinvested the income then some of the gain made will be down to income which has already been taxed, so you may be able to reduce the gain made by the income you have received.
If you are selling a property that was once your home, then take advice on how private residence relief applies. There is another valuable relief known as lettings relief, however for sales after April 2020 letting relief only applies where the homeowner and their tenant are in occupation of the property at the same time.
Is it worth paying for advice?
UK tax is amongst the most complex in the world, and the cost of advice can often be dwarfed by the additional savings that can be made by taking advice from someone who understands the reliefs available and how to ensure that you qualify.
Speak to Evelyn Partners
If you would like to discuss capital gains tax or have other questions about financial planning or investments, Evelyn Partners can help. It’s easy to book a free consultation online or you can call us on 020 7189 2400.
Examples of how tax or tax relief may apply are based on our understanding of current tax legislation. Whether any tax will be payable, at what level it is charged and whether you qualify for tax relief will depend upon individual circumstances and may be subject to change in the future. Please note we do not provide tax advice. This article does not constitute personal advice.
This article was previously published on Tilney prior to the launch of Evelyn Partners.