Q: Exactly what are the new CGT rules?
A: The capital gains tax (CGT) rate for individuals with income and chargeable gains – after allowable losses, reliefs, personal allowances and annual exemptions – below the upper limit of the income tax basic-rate band of £37,400 remains at the Pre-Budget rate of 18 per cent. The new 28 per cent CGT rate applies to chargeable gains above this limit. The rate of CGT for capital gains which qualify for Entrepreneurs’ Relief is 10 per cent and the lifetime limit is £5m. All taxpayers benefit from the CGT annual exempt amount of £10,100 for 2010/11.
Q: How do I know if I am a ‘basic-rate’ taxpayer?
A: Taxpayers who have total taxable income and chargeable gains, after taking into account any allowable losses, reliefs, personal allowances and annual exemptions, of up to £37,400 are subject to CGT on their chargeable gains at the rate of 18 per cent. The interaction of reliefs and losses may in some cases mean that it can be difficult to establish at the time of a chargeable disposal if gains will be subject to CGT at 18 per cent or 28 per cent.
Q: What is Entrepreneurs’ Relief?
A: Entrepreneurs’ Relief was introduced in April 2008 and enables qualifying gains to benefit from a reduced rate of CGT of 10 per cent. Each taxpayer has a lifetime limit on gains that can qualify for Entrepreneurs’ Relief and, with effect from 23 June 2010, this limit was increased to £5m. In order to be a qualifying disposal for the purposes of Entrepreneurs’ Relief, assets must have been held for at least 12 months and involve the sale of all or part of a trading business or the sale of shares representing more than 5 per cent of the company’s market capitalisation.
Q: Should I time when I dispose of assets to reduce CGT on the gain?
A: Some people paying higher-rate tax may be able to fluctuate their income in one tax year to bring it and the gain they want to realise below the threshold for higher-rate tax. This could be a good solution if you’re drawing your pensions, or for self-employed people who have more control over their incomes.
Q: Can I give assets to my wife to take advantage of a lower tax threshold?
A: Assets can be transferred to a spouse or civil partner or held in joint names to minimise CGT liabilities. Holding an asset in joint names means the annual exempt amount (currently £10,100) of each individual is deducted from the gain before tax is due. Also, it may be appropriate to transfer full ownership to a spouse or civil partner where their income places them in the lower-rate tax band, thus leading to a lower CGT liability after allowances have been taken into account.
Q: How can I increase the value of the lower CGT band?
A: Because pension contributions are deducted from your income before tax is assessed, making additional contributions into pensions can extend the limits of the lower tax rate band. Then, any gains realised from other assets are taxed in accordance with this extended band after allowances have been taken into account.
Q: What about CGT-exempt assets?
A: Many assets can grow in value free of CGT. For example, any asset held in an Individual Savings Account (ISA) is CGT-free.
With the government’s announcement to align CGT rates for non-business assets with income tax rates for higher-rate taxpayers, you may have a number of concerns if you hold capital-appreciating assets. To discuss your individual requirements, please contact us for further information.
Thresholds, percentage rates and tax legislation may change in subsequent finance acts. Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investment can go down as well as up and you may not get back the full amount invested.
