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 £12,000 of gains made in 2019/20 are generally CGT-free.
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 tax year. This may be helpful from a cash flow perspective as any tax arising will not then be due until 31 January 2022.
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.Craig Hughes – Menzies Private Client Partner
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.”
Click on each button to expand.
One of the most generous capital gains tax reliefs remains that for main residence, or home. In broad terms, when you buy a house, 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 18 months of ownership are deemed to be CGT exempt whether you are living there or not, although this may be reduced to 9 months from 6 April 2020.
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.
From the 6th 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, nonresidents will be able to rebase their properties to the 6th April 2015 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).
Originally introduced to prevent non-residents simply electing for their UK properties to be their main residence, the regulations have knock-on implications for UK residents. 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 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 30 days of the sale or disposal of a UK property and a non-resident CGT return completed.
TAXATION OF GAINS MADE BY NON-RESIDENTS
The government announced in the 2017 budget that from April 2019 tax will be charged on gains made by non-residents on the disposal of all types of UK immovable property.
This measure expands the scope of the UK’s tax base with regard to disposals of immovable property by non-residents in two key ways:
- 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 6th April 2017 so that only the growth in
value after this date is taxable. HMRC must be notified within 30 days of the sale or disposal of a UK property and a non-resident CGT return completed.
Where an individual and/or asset qualifies for Entrepreneurs’ relief (ER), the capital gain will be taxable at 10%.
There are a number of important conditions, but generally ER 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 has been 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 ER.
If you do hold shares in a company, or have any property which you think may be effected, a regular review to ensure that ER will be available on ultimate disposal is recommended.
The minimum qualifying period has increased from 12 months to 2 years with effect from disposal after 6 April 2019.
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 regard 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 held for at least 3 years from 5 April 2016.
- 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 ER, 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 mitigate income tax.
However, such investments carry risk to your capital and may not, therefore, be suitable for you 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 ACCOUNT (ISAs)
Based on the current rates, up to £20,000 can be put into 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 at a later date without the replacement funds counting towards your ISA investment limit for the year.
The ISA deadline is 5th April 2019 and, as unused reliefs are not transferrable to future tax years, we recommend you take advantage of the full ISA allowance. A number of clients now have significant tax-free funds they are able to draw upon thanks to these ISA allowances.
There are many types of ISAs, each with the same, and sometimes more, tax benefits:
Help to Buy ISAs
These were introduced by the Government and will be available until the 30th November 2019, to help first time buyers aged 16 or over to save for a deposit on a home in the UK. As well as interest being tax-free, the Government will supplement the amount saved with a bonus of 25%. This is limited to £3,000 per person.
Introduced on the 6th 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. Help to Buy ISA account holders can transfer into the Lifetime ISA.
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 £4,368 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.
ENTERPRISE INVESTMENT SCHEME (EIS)
EIS allows income tax relief at 30% on new equity investment (in qualifying unquoted trading companies) of up to £1 million in 2019/20. As such, it can reduce your income tax bill by up to £300,000 for the tax year.
It is also possible to carry back relief to the 2018/19 tax year if the £1 million limit was not utilised last year.
There are additional tax benefits for qualifying EIS shares including:
- If held for at least 3 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 2 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 year.
Tax breaks include:
- Income tax – 50% tax reducer.
- Capital gains tax – free from CGT if held for 3 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, as well as deferral of the remaining tax until the SEIS shares are sold.
- 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.
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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.