RegulationNov 24 2015

Keeping your eye on the tax ball

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Keeping your eye on the tax ball

Rising asset values and an increase in transactions have seen the amount of capital gains tax (CGT) collected by HMRC double since 2008/9 and up 43 per cent between 2012/13 and 2013/14 according to HMRC. Also to blame is the lack of reward for long-term investment. Since taper relief was abolished in April 2008, which itself took over from indexation in 1998, investors have been faced with paying CGT on their inflationary gains.

Despite this, once tax breaks have been fulfilled it usually makes sense to invest in the CGT regime, rather than the income tax regime as the headline CGT rate paid is lower than the headline rate of income tax paid. See Table 1 for more.

CGT charging

CGT is charged on the profits made when certain assets are sold, or transferred. If all gains in a tax year fall within the annual CGT allowance (£11,100 for 2015/16) there is no tax to pay.

Providing there is no disposal, gains and their liability to tax can be deferred indefinitely, and since CGT is washed out on death, it is a tax which can be avoided altogether.

When gains are realised, CGT is charged at either 18 per cent or 28 per cent depending on an investor’s other taxable income. Provided combined taxable income and gains don’t exceed £42,385 (2015/16), 18 per cent CGT on gains above the annual allowance is paid. Where gains and taxable income exceed £42,385, 28 per cent CGT is paid.

If gains fall into two bands, taking the investor from the basic rate into the higher rate, CGT is paid at 18 per cent on the amount which falls in the basic rate band and at 28 per cent on the amount which falls in the higher rate band.

Business assets continue to be treated more generously through entrepreneurs’ relief. Business assets are generally a share (or interest) in the company or firm at where an individual works. They have to hold at least 5 per cent of the shares to qualify. Entrepreneur’s relief, where available, reduces the CGT rate to 10 per cent for the first £10m of profit.

Annual exemption

The annual exemption for capital gains tax cannot be carried forward or back into other tax years, and is therefore lost if not used. Therefore it makes sense to use this annual exemption to take the opportunity to reduce the level of taxable gains from a portfolio.

Care needs to be taken when doing so, not least due to the transaction costs of a sale and repurchase and the anti- “bed and breakfasting” rules.

Anti-bed and breakfasting