This year has seen some important changes to capital gains tax on investments, notably the cut in the tax rates. We’ve outlined below some of the changes and how they might be relevant:
CGT is a tax on gains and applies on the disposal of assets. In the case of funds or shares, that is generally when the investment is sold. But giving away an asset is also treated as a disposal. Some gifts do not necessarily trigger a potential tax charge: for example, gifts between spouses or civil partners unless they are separated and did not live together at all in the tax year of the disposal (the donor’s original acquisition value is held over and used as the base cost for the donee’s final disposal). Gifts to charity are also exempt.
There is no CGT when someone dies – dying can sometimes be very tax efficient !
Some disposals are exempt including ISAs and, of course, main residences – and where gains are not taxable, losses will not be allowable either.
CGT has to be paid on worldwide disposals of assets if the owner is UK resident and UK domiciled.
The rates of CGT have changed for the current tax year and depend on whether the investor is a basic or higher/additional rate taxpayer, taking into account their income and their capital gains for the year.
Basic rate taxpayers pay a 10 per cent CGT rate, while higher rate taxpayers now pay 20 per cent tax on gains. Gains on residential property will be subject to CGT of 20 per cent or 28 per cent. If there are gains from both residential property and other assets, the annual exempt amount can be set against any gains that would be charged at their highest rates, for example, where the investor would pay 28 per cent tax.
There is also a special tax rate of only 10 per cent if the investor qualifies for entrepreneurs’ relief for business assets.
Calculating a CGT liability
After deducting allowable losses, CGT is payable on total gains realised during a tax year. Losses realised in the same year are deducted against gains. Tax only has to be paid on overall gains above the tax-free annual exempt amount, which is currently £11,100 for individuals and £5,550 for most trusts. It has been the same level since 6 April 2015.
If the total taxable gain is above the annual exempt amount, an investor can deduct their unused losses from previous tax years. If these losses reduce the total gains to the £11,100 exempt amount, the remaining unused losses can be carried forward to a future tax year.
The first step in calculating a person’s CGT liability is to work out the amount of their taxable income. This is their income less their personal allowance and any other income tax reliefs to which they are entitled.
The next step is to calculate their total taxable gains: that is gains less losses. It is then necessary to deduct the tax-free annual exempt amount of £11,100 from their total taxable gains. Finally, this amount of net gains above the annual exempt amount has to be added to their taxable income.
For example, Fred has a taxable income (his income after deducting his personal allowance and any income tax reliefs) of £40,000 and his taxable gains are £15,100. His gains are not from residential property.
After deducting the annual exempt amount of £11,100 from his taxable gains, this leaves gains of £4,000 on which he will have to pay tax.
This £4,000 is added to his taxable income. The combined amount of £44,000 is more than £32,000 (the basic rate band for 2016/17). Fred will therefore have to pay CGT at the higher rate of 20 per cent, that is, £800.
If the taxable amount is within the basic income tax band, the individual will pay 10 per cent on their gains. They will have to pay 20 per cent on any amount above this.
If you would like to discuss tax planning opportunities centred on your personal circumstances, please contact us >>