Your IndustryMay 5 2016

Helping your clients mitigate CGT bills

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Helping your clients mitigate CGT bills

Your clients need to use their annual exemption or lose it, as James Badcock, partner for Collyer Bristow, points out.

He explains: “Individuals with portfolios of investments will wish to ensure they use their annual exempt amount each year.

“Spouses should ensure they use both their exempt amounts, which may involve reallocating investments between spouses, bearing in mind assets can be transferred from one spouse to another free of tax.”

When it comes to a sale, Sue Moore, technical manager for private client in the tax faculty of the Institute of Chartered Accountants in England and Wales, says it could be worth your client’s while to “split the sale of the asset over two tax years to get the annual allowance and lower-rate tax bands”.

I would hazard a bet Osborne wasn’t thinking about making structured products more attractive for people seeking retirement income. Ian Lowes

Furthermore, as Mr Badcock points out, “Losses can be set against gains, and unused losses carried forward to be used in future years, as long as HM Revenue & Customs has been notified of the loss within a certain time limit”.

What a relief!

Many investments are not subject to capital gains tax, such as Isas - from which there are now six different flavours for your clients to choose - pensions and certain insurance wrappers.

Scott Gallacher, director with Rowley Turton, says for those individuals with share or investment portfolios, it could be worth making yearly changes.

He explains: “People should look to buy and sell investments each year to trigger gains up to the CGT allowance. This effectively rebases the purchase cost and prevents portfolios becoming pregnant with gain.”

But even if clients do not wish to carry out annual turnover to their portfolios to avoid triggering CGT, there are many reliefs available with certain investments and assets, as Mr Badcock explains:

Your client’s home

■ Principal private residence relief is an important relief for someone’s main home. Where a property has not always been used as a home, or where a client may own more than one, care should be taken about the amount of relief available. Non-UK resident individuals may only claim relief for a home they use in the UK if they spend at least 90 nights a year here.

■ Enterprise investment schemes (EIS) are efficient in mitigating CGT, because there is no CGT payable on disposal of qualifying shares. Also, if a gain has arisen on another asset, but the proceeds are invested in qualifying shares, CGT may be deferred.

Ms Moore adds that Seed EIS (SEIS) can relieve up to 50 per cent of the gain and defer the balance.

■ Entrepreneur’s relief. According to Mr Badcock: “This allows the rate of CGT on the disposal of business assets to be reduced to 10 per cent, up to £10m worth of gains during a person’s lifetime.

■ CGT is not chargeable on personal possessions disposed of for less than £6,000 (items forming part of a set must be aggregated) or on wasting assets, including cars.

■ CGT is not chargeable when an asset is given to charity (and income tax relief may also be available on the gift).

Non-doms

Budget 2016 deliberately excluded the CGT reduction for residential property, whether for domiciled or non-domiciled persons. This was a disappointment.

Mr Badcock says: “Non-UK domiciled individuals may be eligible to claim the remittance basis of taxation, whereby they only pay tax on foreign gains if the gains are remitted to the UK. Once someone has been resident in the UK for more than seven years there is a charge for claiming the remittance basis.”

However, following a change in the law, in April 2017 it will not be possible to claim the remittance basis at all after 15 years in the UK. “Individuals expecting to realise large gains may decide to cease to be resident in the UK before making the disposal and move to a country which will charge less tax on the gain,” he adds.

Unintended boosts

Some investments have also become more tax-attractive since March’s Budget, when the CGT reductions were announced, according to Ian Lowes, founder of StructuredProductReview.com.

Mr Lowes, who is also owner of Newcastle-based Lowes Financial Management, says structured products have been given a tax fillip.

He says: “When George Osborne announced he was reducing the rates for CGT for basic and higher- rate taxpayers, I would hazard a bet he wasn’t thinking one of the unintended consequences would be to make structured products more attractive for people seeking retirement income – but that is exactly what he has done.”

Mr Lowes says the reductions have created a potential tax advantage for clients with capital growth investments wanting income, and who have already made full use of their annual tax allowances and exemptions.

“For retirees in that situation, who have growth investments outside a tax wrapper, using them as a form of income has now become much more attractive.

“Rather than pay 20 per cent (or more) income tax on any income received outside of an Isa, by building up portfolios which can provide regularly spaced capital gains to be drawn as income, tax can be reduced on those payments to 10 per cent or 20 per cent for higher rate taxpayers - or nothing if within the annual CGT allowance.”