Earlier this month Chancellor Rishi Sunak commissioned The Office of Tax Simplification to investigate whether captial gains tax (CGT) is “fit for purpose”. The review will look at features such as allowances, exemptions and reliefs for individuals and small businesses. And because of the massive amount of government money that has been spent on trying to mitigate the economic effects of the coronavirus pandemic, some tax specialists believe the review will lead to rises in CGT.
"It is highly likely that there will be a tax increase either in the autumn Budget or shortly after," warns Julia Rosebloom, partner, private client tax services at Smith & Williamson. She also points out that CGT rates are at historic lows, with basic-rate taxpayers paying 10 per cent, and higher and additional-rate taxpayers paying 20 per cent on profits over the annual CGT allowance. Sales of properties that are not your main residence, meanwhile, attract tax of 18 per cent for basic-rate taxpayers and 28 per cent for higher and additional-rate taxpayers.
| Personal tax rates |
| Band | CGT | Income tax | Dividend tax |
| Annual exemption/personal allowance | £12,300 | £12,500 | £2,000 |
| Basic rate | 10% (18% property) | 20% | 7.50% |
| Higher rate | 20% (28% property) | 40% | 32.50% |
| Additional rate | 20% (28% property) | 45% | 38.10% |
| Source: www.gov.uk |
However, Jo Douglas, financial planner at Brewin Dolphin says: “We would not recommend making changes on account of anticipated changes, although we understand people are nervous [about a possible CGT hike]."
And also bear in mind what your future tax rate might be. For example, even if you are currently a higher or additional-rate taxpayer, when you are retired you might be a basic-rate taxpayer.
However, if you had already been thinking about making some sales or changes to your investments that could incur CGT she says it might be worth doing them now while rates are fairly benign. If any changes are made to the CGT regime it is expected that they would take effect from the start of the new tax year in April.
This also applies to entrepreneurs who have been thinking about selling their businesses.
“With CGT rates set at the time of contract exchange rather than completion, business owners may wish to look to exchange contracts as soon as they can but delay completion dates to iron out final details,” suggests Rod Smith, partner at Royds Withy King.
But you should only do this if now is the right time to sell your business and you can find a buyer willing to pay the right price.
Regardless of any changes to the tax regime, it is always important to manage your finances and investments in as tax efficient a way as possible, so that you do not unnecessarily lose the benefit of any investment gains.
So below are some steps to make your assets more tax efficient.
Hold your investments within tax-efficient wrappers
Assets held within tax-efficient wrappers do not incur CGT or income tax. You can invest up to £20,000 a year in an individual savings account (Isa). If you have used up your annual Isa allowance then consider whether a spouse, partner or children could put the money into their Isas.
“A family of four, collectively, has an annual Isa allowance of £58,000 – £20,000 for each adult and £9,000 for each child – so look at your finances as a family,” suggests Rebecca O’Keefe, head of investment at interactive investor.
Most people can invest up to £40,000 or a sum equivalent to their annual salary – whichever is lower – into a pension each year. Investments held within pensions do not incur CGT when sold within the wrapper, and contributions into pensions get tax relief in line with your marginal rate of income tax. So basic-rate taxpayers get 20 per cent tax relief on pension contributions, and higher earners get 40 or 45 per cent.
After age 55 you can withdraw 25 per cent of the value of your pensions tax-free, above which you pay tax at your marginal rate.
So Ms Douglas often advises clients to invest in their pension while they can as the tax relief on these might also become less favourable at a future date.
Use your annual CGT exemption
You can make profits on sales of investments held outside tax-efficient wrappers of up to £12,300 in the current tax year without incurring CGT. So you could sell assets on which you have a profit of up to £12,300 and reinvest the money, in effect resetting the tax base. However, you cannot reinvest the proceeds of the sale in the same asset for at least 30 days unless you repurchase them within an Isa or Sipp, and the assets are listed equities or other securities such as funds.
If you have sold assets at a loss in previous years, meanwhile, you can offset these against gains, regardless of how long ago you made the losses. “There are very few reliefs that you can carry on indefinitely – most are restricted in some way,” says Ms Rosenbloom.
But she adds that you should only sell assets if it is the right thing to do from an investment point of view – not just because you can offset tax on them due to past losses.
Transfer assets
You can transfer assets to a civil partner or spouse without incurring CGT, enabling both of you to take advantage of the annual CGT allowance. This means that a couple could take profits of £24,600 without incurring CGT. And if one of you has a lower marginal rate of income, even if that person has used up their annual CGT allowance, they will pay a lower rate of tax on any profits.
If you or your partner holds assets that have made large gains and has a short life expectancy it might be better not to pass on the assets to children or other relatives. CGT is not charged on death, instead estates are subject to inheritance tax (IHT). If you gift assets and die within seven years, both CGT and IHT are payable on those assets.
If you give large sums to charity, Charles Calkin, financial planning consultant at wealth manager James Hambro & Partners, suggests doing this by transferring shares with built-in gains. You can give HM Revenue & Customs-qualifying shares to charity without selling them. The charity then makes the disposal and, because charities are exempt from CGT, there is no tax to pay. The market value of the shares on the day they are given can be deducted from your total taxable income.
“So if you are a 45 per cent taxpayer giving shares worth £10,000 to a charity, and have at least £10,000 of income subject to tax at 45 per cent, you can claim back £4,500 via your self-assessment tax return,” explains Mr Calkin. “It means a £10,000 donation costs you just £5,500 and saves you any built-in CGT liability on the gifted shares.”
Tax-efficient structures
If you have a large amount of money it could be worth setting up a private investment company, especially if taxes rise. Assets held within a private investment company do not incur CGT but rather corporation tax, which is charged at 19 per cent on profits. Although this is not very different to the CGT rate for higher-rate taxpayers of 20 per cent, it could be less punitive if CGT rates rise.
However, Ms Douglas points out that the administrative expense of setting up a private investment company means that it is probably not worthwhile unless you have at least £500,000 to transfer into it.
Offshore bonds could also be a way to mitigate higher rates of CGT. You can hold a variety of assets, including direct shareholdings and funds, within these tax-efficient wrappers. Because the wrapper is provided by an offshore insurer, the assets within it are not subject to UK income tax or CGT, although they may incur some withholding tax that cannot be reclaimed. You can withdraw up to 5 per cent of the original value of the assets held in the bond every year free of tax, but any withdrawals in excess of that are subject to income tax at your marginal rate.
