Capital Gains Tax Part 3 ~ Some Tax Planning Opportunities
It identifies some common tax planning opportunities and tips to ensure that any capital gains tax (CGT) payable is minimised or delayed and that any available exemptions and reliefs are used in the most effective manner.
Note that any points mentioned below concerning transfers between a married couple equally apply to transfers between members of a recognised civil partnership.
- Generally the aim should be to utilise an individual's annual CGT exemption, currently £10,900.
For a higher rate tax payer paying CGT at 28% this could potentially save £3,052 of CGT for 2013/14.
- Where an annual CGT exemption has already been utilised the taxpayer should consider deferring any further disposals until the following tax year.
A disposal deferred from say late March to mid-April could result in a delay of 12 months in any CGT eventually payable on the later disposal as well as utilising the annual exemption for the later tax year.
- Gains can effectively be transferred 'tax free' between husband and wife in order to utilise the annual exemption of the other spouse.
This could also potentially reduce any CGT payable from 28% to 18% where the other spouse is a basic rate taxpayer.
Note however that the period between the transfer of the asset and the sale should be as long as possible.
- Owning assets jointly between husband and wife automatically ensures that each spouse's annual exemption is utilised in the same proportion.
- Ensure any capital improvements to an asset during ownership are claimed as part of the allowable costs in arriving at the capital gain on disposal.
Legal costs etc on the purchase of the asset can also be claimed as a deduction on disposal.
- Where an asset was originally acquired following the death of the previous owner ensure that market value of the asset at the date of death is determined as this provides the base cost (even though nothing was actually paid to obtain the asset!)
- Any capital losses brought forward from an earlier tax year can be used efficiently by setting them only against capital gains standing above the annual exemption.
Note however gains and losses of the same tax year must be netted off against each other.
- Where a loss is incurred on the disposal of certain shares in an unquoted trading company, an option exists to use the loss more tax efficiently by setting the loss against a taxpayer's income rather than capital gains.
- Where an asset has become of negligible value the loss can be claimed against capital gains without actually disposing of the asset.
Negligible value claims can be backdated up to two tax years provided the asset was of negligible value at the earlier date.
- Ensure that any capital losses are set against normal gains in priority to those eligible for ER, thus maximising the amount of CGT payable at the special 10% ER rate.
- Where assets qualifying for ER are transferred to a spouse, ensure that any transfer is carried out at least 12 months before any planned disposal to ensure that the minimum ownership criteria is met.
- The ER rules contain many traps for the unwary and it is therefore essential that business owners take professional advice to ensure that they qualify for this valuable relief not only prior to a disposal but also throughout their ownership period.
This could be particularly important where owners are considering changes to a business structure or where they are considering introducing other family members into their business.
- Where a PPR has only been occupied for part of the period of ownership it is important that any deemed occupation periods are identified and claimed.
These can include periods where the owner is required to work away and the last 36 months of ownership.
- Where a second home is acquired it is important to make a written election to determine which property is to be regarded as the private residence.
Making such an election provides flexibility at a later date where the owner wishes to 'flip' which property is regarded as the PPR on a disposal.
- Where a PPR has for some period of ownership been let out as residential occupation then 'letting relief' could exempt gains up to £40,000 on disposal.
- A donor may choose NOT to claim gift relief in order to crystallise a gain and utilise their CGT annual exemption.
- Not claiming gift relief may also be beneficial to allow a gain eligible for Entrepreneurs' Relief to be taxed at 10% currently rather than potentially at a higher rate later.
- Where the trader wishes to retain personal ownership of some of the assets (such as the business premises which is to be occupied by the new company) then incorporation relief is denied as not all the assets of the business are being transferred.
In such cases the trader may instead use gift hold-over relief on the chargeable assets being transferred to the company thus deferring any capital gains arising
- Following an appeal in favour of the taxpayer at a recent Tax Tribunal, it was decided that residential property letting is regarded as a business for the purpose of incorporation rollover relief (subject to appeal by HM Revenue & Customs)