- 22% rise in CGT collected (from 2013/14 to 2014/15)
- 15% rise in the number of people paying CGT
- 223,000 individuals paid £6.118 billion in 2014/15
- Total of £6.903 billion collected
- April 2016 CGT changes – Buy to regret
- How and when CGT is charged
- Entrepreneurs relief
- 5 Ways to reduce CGT
Source: HMRC 2014/15 provisional figures
Capital gains tax stats are out today, you can find them here.
In the tax family, CGT is often seen as little cause for concern, but receipts have been climbing of late, and HMRC receives much more in CGT than IHT. CGT has been cut recently for shares and funds, but not for second properties and buy to let.
Danny Cox, Chartered Financial Planner, Hargreaves Lansdown:
"Investors ignore the impact of capital gains tax on their investments at their peril. The perception that few people pay capital gains tax is simply wrong and the number is now over 220,000. The increase in the ISA allowance from £15,240 to £20,000 in April gives investors more scope to shelter their investments from tax.
Unfortunately it looks more like it will be buy to regret for those investing in property, with taxes rising, while shares and funds see tax improvements.
Taxes can distract investors from making good decisions and taking profits at the right time. The recent cut in CGT helps share and fund investors make better decisions.
As we saw from the last time the rate of CGT changed, low tax rates stimulate activity and tax generation. However the personal tax system no longer recognises the length of time an investment is held for. Since taper relief was abolished in April 2008, which itself took over from indexation relief in 1998, investors have been faced with paying CGT on their inflationary gains."
Changes to CGT from 6th April 2016
For funds, shares outside of ISA and SIPP, capital gains tax rates have dropped:
- Higher rate cut from 28% to 20%
- Basic rate cut from 18% to 10%
These cuts don’t apply to disposals from buy to let property or second homes, which remain at 28% for additional and higher rate taxpayers and 18% for basic and non-rate taxpayers.
How and when CGT is charged
Capital gains tax 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 2016/17) there is no tax to pay.
When gains are realised, CGT will be charged at either 10% or 20% depending on an investor’s other taxable income. Provided combined taxable income and gains don’t exceed £43,000 (2016/17), 10% CGT on gains above the annual allowance is paid. Where gains and taxable income exceed £43,000, 20% CGT is paid.
If gains fall into two bands, taking the investor from the basic rate into the higher rate, capital gains tax is paid at 10% on the amount which falls in the basic rate band and at 20% 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 an individual works for. They have to hold at least 5% of the shares to qualify. Entrepreneur’s relief, where available, reduces the capital gains tax rate to 10% for the first £10m of profit.
This will now be extended to include long term investors in unlisted trading companies purchased on or after 17th March 2016. A further £10 million of gains will be subject to a lower tax of 10% providing that the investment is held for 3 years after 6th April 2016.
5 top tips to save CGT
- Use the annual exemption
- Offset losses against gains
- Transferring assets before selling
- Reduce taxable income
- Never sell
A married couple (or those in a registered civil partnership) can make gains of £44,400 in this tax year and next without any charge to tax. Investments can normally be transferred between spouses without an immediate tax charge to make full use of two allowances. The annual exemption for capital gains tax cannot be carried forward or back into other tax years, and is therefore lost if not used.
If an investment is sold at a loss, the loss must be offset against any gains made in the same tax year. If there are more losses than gains, the net losses can be carried forward indefinitely to set against future gains in excess of the annual exemption, provided those losses are registered with HMRC on the individual’s tax return.
Married couples (or those in a registered civil partnership) where one spouse pays tax at a lower rate than the other, may have the option to transfer investments into the other’s name before selling to lower the rate of CGT paid.
The rate of capital gains tax is now charged based on the rate of income tax paid. Therefore lowering taxable income in any one year could reduce the CGT rate from 20% to 10%. Reducing taxable income can be done in a number of ways: waiting for retirement and a change from earnings to pension income; the strategic limiting of income withdrawals from a flexible access drawdown; deferring the state pension; greater use of ISA (income from ISA does not count towards taxable income calculation); or transferring taxable income bearing assets such as cash deposits to a lower earning spouse.
Providing there is no disposal, gains and their liability to tax can be deferred indefinitely. Since CGT is washed out on death, it is a tax which can be avoided altogether. This becomes especially useful for IHT planning where the assets qualify for IHT relief under Business Property Relief, e.g. a portfolio of qualifying AIM stock or unquoted companies held for 2 years or more
NOTES TO EDITORS
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