The decision to sell capital assets should first of all be driven by investment considerations rather than tax. As such we’d recommend a chat with a Menzies Wealth Management (MWM) Independent Financial Adviser.
Provided it makes investment sense, you may wish to consider the following points before the tax year end:
- The first £12,300 of gains made in 2022/23 are generally CGT-free. From 6 April 2023 this exemption reduces down to £6,000 and then to £3,000 from 6 April 2024.
- Each spouse has their own annual exemption, as indeed do children. As the annual exemption cannot be carried forward, it will be lost if not used.
- Similar to the above, transferring assets to a lower earning spouse may create an opportunity to utilise their basic rate band so that CGT applies at 10% rather than up to 20%. (These rates are 18% and 28% for residential property).
- A Bed & ISA will allow you to utilise the current years ISA Allowance by moving investments from an unwrapped environment to the ISA Tax Wrapper. This is achieved by disposing of the unwrapped investment and repurchasing it via an ISA. The disposal of the unwrapped investments may be liable to CGT but once inside the ISA, the investments are sheltered from CGT in the future.
- You could also “straddle” a disposal across tax year end to make use of two annual exemptions. Alternatively, where you are planning on selling an asset, you may simply wish to consider delaying the disposal until after the end of the 2022/23 tax year. This may be helpful from a cash flow perspective as any tax arising will not then be due until 31 January
- 2024, unless you are selling a residential property, the tax on which is due within 60 days of completion.
Sale by one spouse and repurchase by the other (Bed & Spouse). This technique may also be used to establish a loss that can be set against any gains.
Your BrighterThinking next steps
“Try and use your annual capital gains tax exemption. Use it or lose it. Consider “Bed and Spouse” or else “Bed and ISA”.
Consider delaying any further disposal into the next tax year, to use the future annual exemption, utilisation of lower rate tax bands, or simply delaying payment by a year. Claim any capital losses, even if an asset has not necessarily been sold (i.e. it has become of negligible value). Consider whether the loss can be carried back. Ensure any losses that are carried forward are correctly recorded.”Craig Hughes – Private Client Partner
Click the below to access each part of our Capital Gains Tax (CGT) planning guide:
Taxation of gains on property:
Taxation of gains made by non-residents:
Taxation of gains on property
One of the most generous capital gains tax reliefs remains that for main residence, or home. In broad terms, when you buy a house and live in it as your main home and then sell it, any gain is generally exempt from capital gains tax.
When selling a property that has been your main residence at some point, the final nine months of ownership are deemed to be CGT exempt whether you are living there or not.
If you have more than one home, you should consider the timing of a sale or making a main residence election. As there are time restrictions on making the main residence election, we strongly recommend you speak to us should you think this could be an issue or if your circumstances change.
UK residential property
From 6 April 2020, where CGT is due on the disposal of UK residential property by a UK resident individual or trustees, a new standalone online return will need to be filed, together with payment on account of the CGT due. From 27 October 2021, this needs to be done within 60 days (previously 30 days) of the date of completion of the transaction.
Taxation of gains made by non-residents – Residential
From 6 April 2015, the CGT legislation changed so that non-residents are liable to tax on disposals of UK residential property. As part of the regime, non-residents will have the option to rebase their properties to 6 April 2015 value so that only the growth in value after this date is taxable.
Under the new regulations, the criteria for when a main residence election can be made will be possible ONLY if one of the following conditions is met:
- The individual is a tax resident in the same country as the property they wish to make the main residence election; or
- The individual spends at least 90 nights in the property (or if he or she owns more than one property in that country, 90 nights between all the properties).
This was originally introduced to prevent non-residents simply electing for their UK properties to
be their main residence. However, the regulations have knock-on implications for UK residents since a UK resident individual who owns a property overseas will be able to elect for that property to be their main residence, only if they spend at least 90 midnights there.
If you are already a non-UK resident or are considering moving abroad, you should consider your CGT position in advance of either selling or relocating overseas. HMRC must be notified within 60 days of the sale or disposal of a UK property and a CGT return completed.
Your #BrighterThinking next steps
“Where you have more than one property, consider whether a main residence election should be filed with HMRC. If you are not UK resident, but have a UK property, consider whether you can claim for this to be treated as your main residence for tax purposes. All election forms need to be filed with HMRC.”Sehjal Gupta – Private Client Director
Taxation of gains made by non-residents – All types of property
Gains made by non-residents on the disposal of all types of UK immovable property are taxable in the UK. This includes:
All non-resident persons’ gains on disposals of interests in UK land will be chargeable and;
Indirect disposals of UK land will be chargeable. This refers to the disposal of businesses that derive at least 75% of their asset value from UK land.
As part of these changes, non-residents are able to rebase properties not previously within the rules, to the 6 April 2015 value so that only the growth in value after this date is taxable. HMRC
must be notified within 60 days of the sale or disposal of a UK property and a CGT return
BUSINESS ASSET DISPOSAL RELIEF
Where an individual disposes of an asset that qualifies for Business Asset Disposal Relief (BADR) – formerly Entrepreneurs’ Relief, the capital gain arising will be taxable at 10%.
The lifetime limit decreased from £10m to £1m of capital gains with effect from disposals on or after 11 March 2020.
There are a number of important conditions, but generally BADR applies to:
- The sale of all, or part of a trading business
- The sale of shares in a qualifying company where you hold more than 5% of the nominal
- share capital and voting rights. From 29 October 2018 this was extended to also require you to be entitled to 5% of the distributable profits and assets, or alternatively, to receive 5% of the proceeds if the company’s ordinary shares were to be sold
- You are an officer/employee of the company
Planning may be necessary in order to adjust shareholdings so that the 5% requirement is held or so that other family members may also qualify for BADR. There is a two year ownership and trading requirement in all cases so early planning, ahead of an exit, is important.
If you do hold shares in a company, or have any property which you think may be affected, a regular review to ensure that BADR will be available on ultimate disposal is recommended.
Your #BrighterThinking next steps
“If you have any gains which you think qualify for BADR, ensure you review the rules and conditions for the relief so that you are in a position to take advantage of them particularly if there may be any share options in existence.”Andrew England – Corporate Tax Partner
Investors’ Relief provides a further separate lifetime limit of £10m with a 10% rate of tax on qualifying investments.
There are a number of important conditions with regards to the relief:
- It can apply to disposals of shares in unquoted trading companies or the holding company of a trading group
- The shares must be ordinary shares, subscribed for and fully paid in cash
- The shares must be issued on or after 17 March 2016 and disposed of on or after 6 April 2019
- There are restrictions on investors being employees or directors of the company
- The shares must have been issued and subscribed for at arm’s length
Unlike BADR, there is no minimum qualifying percentage.
Tax efficient investments
It is possible to obtain additional tax reliefs by acquiring tax efficient investments. For some high income individuals who are restricted in their ability to make pension contributions, they may find that such investments are the only realistic options to reduce income tax.
However, such investments carry risk to capital and may not, therefore, be suitable, even if they are tax efficient. Particular care should be taken when investing in EIS, Seed EIS or VCTs. A Menzies Wealth Management Independent Financial Adviser will be invaluable when considering this.
Individual savings accounts (ISAs)
Based on the current rates, a maximum of £20,000 can be saved in an ISA. The ISA wrapper ensures that any growth is both free of income tax and capital gains tax.
This is a useful technique for converting taxable interest and dividends into non taxable income. To further increase the flexibility of an ISA, it is possible to withdraw funds from your ISA and replace them, later, without the replacement funds counting towards your ISA investment limit for the year.
The ISA deadline is 5 April and, as unused reliefs are not transferrable to future tax years, we recommend you take advantage of the full ISA allowance where possible. A number of clients now have significant tax-free funds which they can draw upon as a result of these ISA allowances.
There are many types of ISAs, each with the same, and sometimes more, tax benefits, including:
Introduced on 6 April 2017 to encourage young people to save. Where an individual between 18 and 40 saves up to £4,000 each year, the Government will contribute a bonus of 25%. Funds may be withdrawn for use to purchase a first home or for retirement.
Junior Individual Savings Account (Junior ISA)
Introduced to replace Child Trust Funds (CTF), can be used to fund higher education by allowing parents, other family members or friends to invest up to £9,000 annually in a tax-free fund for a child. There are no Government contributions and no access to the funds until the child reaches 18. Changes were made for 2020/21 onwards to permit savings in maturing Child Trust Funds (CTFs) to retain their tax advantaged status and to be transferred into an ISA without impacting the annual ISA limit.
Enterprise investment schemes (EIS)
EIS allows income tax relief at 30% on new equity investment (in qualifying unquoted trading companies). A maximum investment of up to £1 million in any one tax year can be made and this can be increased to £2 million provided at least £1 million is invested in Knowledge Intensive Companies. As such, it can reduce your income tax bill by up to £600,000 for the tax year.
It is also possible to carry back relief to the previous tax year, i.e. 2021/22, if the £1 million limit was not utilised in the previous year. Where the £1m investment has not been reached in the
current or previous tax year, investors can choose the tax year to claim the relief to maximise the tax relief due, (this will depend on their income position in the current and previous tax year.
There are additional tax benefits for qualifying EIS shares including:
- If held for at least three years, EIS gains are exempt from capital gains tax.
- EIS losses could be set against your taxable income (rather than capital gains).
- Other capital gains can be deferred to the extent that you invest in EIS investments. You could have sold an asset up to 3 years before the EIS share issue, and look to defer that gain, and claw back any capital gains tax previously paid.
- Where you hold the shares for two years, they are effectively free from inheritance tax.
Given the tax benefits on offer to investors, we have assisted many companies looking to attract investment in completing and obtaining HMRC approval for an EIS application.
Seed EIS (SEIS)
The SEIS is essentially the little brother to EIS and is aimed at smaller companies. The additional risks associated with such investments are reflected in the more generous tax breaks.
The maximum which can be invested under the SEIS in one year is £100,000. However, it is possible to carry back the income tax relief to the previous tax year.
Tax breaks include:
- Income tax – 50% tax reducer.
- Capital gains tax – free from CGT if held for three years.
- Losses – In the event of a capital loss, this can be set against your general income.
- Reinvesting gains from other non-SEIS investments into an SEIS investment can result in 50% capital gains tax relief on the original gain.
- Inheritance tax – The shares are not liable to inheritance tax on death if owned for more than two years.
Venture capital trust (VCT)
A VCT is a collective investment fund which invests in unquoted trading company shares. VCT dividends and capital gains can be tax free.
Income tax relief (currently at 30%) is available on subscriptions into VCT shares up to £200,000 per tax year so long as the shares are held for at least five years.
Social investment tax relief (SITR)
The SITR is designed to support social enterprises seeking external finance by offering income tax reliefs to investors who invest new shares or qualifying debt investments. Making a qualifying investment may deliver a 30% income tax deduction of the value of the investment, up to a ceiling of £1 million.
CGT on chargeable gains may be deferred to the extent which you reinvest the profits in social enterprises, such as charities or community interest companies.
It is possible to treat all, or part of the investment, as made in the previous tax year. It is intended that these reliefs will cease to be available from April 2023.
Your #BrighterThinking next steps
“Whilst there are tax incentivised investments available, it is important that any investment decision is made with a view to all relevant circumstances – each case will be different. Investment advice is a regulated activity, so you should speak directly to an Independent Financial Advisor. If you do not already have an IFA, we would be pleased to introduce you to Menzies Wealth Management.”Sehjal Gupta – Private Client Director
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Menzies Private Client Team
Personal tax planning can be complex. We would always recommend that you seek professional advice when undertaking a review to ensure all changes are processed and managed effectively. Please do speak with your Menzies contact who will be delighted to meet with you to discuss ideas, opportunities and the appropriate action.
To discuss your capital gains tax (CGT) planning arrangements for the tax year ahead, contact Menzies Private Client Team below: