Capital Gains Tax – 2018/19 Tax Year End
In this blog mini-series, our Tax Partner, Terry Smith CTA ATT, provides his thoughts on a number of matters that should be considered prior to 5th April 2019. As well as confirming the details of allowances and forthcoming legislative changes, Terry also offers some advice to help clients make informed and timely decisions.
In this post, Terry provides an update and actions relating to Capital Gains Tax.
Other topics in this blog series:
- Income Tax
- Property Assets
- Tax Advantaged Investments
- Inheritance Tax
- Charitable giving and GiftAid
- Annual Exemption
The annual exemption for 2018/19 is £11,700. This is a ‘use it or lose it’ allowance; it cannot be carried forward to future years. It therefore makes sense to crystallise gains each year to the extent of the annual allowance, if possible. Note that under the ‘bed and breakfasting’ rule (selling some shares and then buying the same shares shortly after to crystallise a gain or a loss), a gain or loss does not crystallise for tax purposes if you sell shares and repurchase the same shares within 30 days. The proceeds would be matched with the repurchase cost and not the original cost.
If a repurchase is intended then to be effective for tax purposes, over 30 days should elapse between sale date and repurchase date
Married couples and civil partners can arrange for one partner to transfer assets to the other at no gain/no loss to ensure that the respective annual exemptions are fully used.
- Capital Gains Tax Rates
The rate of Capital Gains Tax (CGT) is 10%, where the total of taxable gains and taxable income is less than £34,500. Any excess gains are taxed at 20%. Where Entrepreneurs Relief (ER) applies, the rate on the whole gain is 10% (see below) subject to the lifetime limit
The 10% and 20% rates also apply to gains on commercial property, but gains on residential properties are taxed at the higher rates of 18% and 28%.
Let us know if you have ever lived in a rental property you are selling; we may be able to claim a partial principal private residence exemption and an additional letting exemption to reduce the CGT you may have to pay
- Disposals and Losses
Capital losses must be offset against capital gains in the same year. Unused losses are carried forward indefinitely and can then be offset against future gains. A formal claim is required. The claim must be submitted to HMRC within four years of the end of the tax year of the loss, otherwise it will be time-barred. Hence, claims must be made by 5 April 2019 in respect of 2014/15 losses, if claims have not already been filed. When an asset has become valueless or worth next to nothing, it may be possible to make a “negligible value claim” in order to crystallise a capital loss. The claim can be related back up to two tax years in certain circumstances, allowing the loss to be offset against gains made in earlier years.
CGT is charged at 10% where Entrepreneurs Relief (ER) applies, subject to a lifetime limit of gains totalling £10m. ER applies to the sale of a trading business carried on as a sole trader or partnership, or to the sale of shares in a trading company. It can also apply to personally held assets that have been used in the trade of a partnership that you are a partner of or a company that you are a shareholder in. The 2018 Budget made several changes to the qualifying conditions for ER. For a disposal of shares on or after 29 October 2018, the rights attaching to those shares must include a 5% interest in the distributable profits and net assets (as well as 5% of the voting power and nominal value). For a disposal of assets on or after 6 April 2019, the minimum period that qualifying assets must be held is extended from one year to two years. It is easy to miss out, so early advice should be taken to ensure that the gain qualifies for relief.
ER rules can easily be broken, especially with the recent changes announced in the 2018 Budget, so if you are disposing of an asset and ER may apply, please seek advice as soon as possible. Some of the conditions need to be met for 12 months prior to the disposal (extending to 24 months from 6 April 2019), therefore the earlier you seek advice, the greater the chance of qualifying for ER
- Multiple Home Ownership
Ownership of two homes in the UK is becoming more commonplace as couples who both own houses marry, houses are inherited, parents buy houses for their children to live in, or people just buy a place in the country, either to let or to escape to at weekends.
The gain on your principal private residence is exempt from CGT. If you have more than one private residence, your ‘main’ residence will normally be, by default, the one in which you spend the greatest time.
However, it is also possible to determine that matter by nominating one of them as your main residence. This requires careful planning, since the flip side of a gain on one residence being treated as exempt is that a gain on the other residence will become chargeable. Written nominations must be submitted to HMRC within 24 months of any change in residences becoming available.
If you own more than one home, consider whether a principal private residence election is needed. You have two years to make an election so the sooner you speak with us, the better the position we will be in to advise on which property the election should be made over.
- Spousal Separation
If you have permanently separated from your spouse during this tax year, you may want to consider dealing with transferring assets between you before 6 April 2019. This is because assets can pass between separated spouses without capital gains tax in the year of permanent separation. Transfers taking place on or after this deadline may attract capital gains tax.
All the articles in this blog series have been written to provide general advice that relates to all our clients. If you have questions regarding your own personal or commercial circumstances, please contact a member of the team today.
The tax year ends on 5th April, but please be aware that some changes may come into effect on 1st April. Plan ahead.