Top tips to reduce your capital gains tax liability

HM Revenue & Customs have recently confirmed they are currently actively seeking to identify taxpayers who have underpaid capital gains tax on the sale of a second home. Significantly, they have said they will be investigating potential incidences of non disclosure dating back over the past twenty years. Currently, 2.4 million people in the UK own a second home and if you have sold a second home without declaring the gain you will be vulnerable to an enquiry. It is therefore advisable to take the opportunity to make a voluntary disclosure which, with advice, will enable you to negotiate a reduced penalty.

A number of tax reliefs may available on the disposal of second properties therefore seeking expert advice in calculating the gain, making a disclosure and negotiating penalties is likely to prove invaluable.

On an ongoing basis, increasing numbers of clients are seeking alternative investments to traditional savings, and capital gains tax planning is an area clients regularly enquire about.

Capital gains tax is payable where an asset owned by an individual is disposed of at a gain. For instance, a painting originally purchased for £2,000 and sold for £12,000 will give rise to a capital gain of £10,000. This gain is liable to capital gains tax (CGT), with the rate payable being dependent on the level of the individual’s total income and gains. For basic rate taxpayers, the rate of CGT is 18%, and for higher rate taxpayers, the rate is 28%.

CGT is payable on the disposal of possessions that are individually worth more than £6,000, unless they are ‘wasting assets’, i.e. assets with a limited lifespan that often lose their value over time, such as cars. It should therefore be remembered that items such as jewellery, paintings, antiques, coins and stamps will give rise to a CGT liability if disposed of at a gain.

If you sell a business or shares in a qualifying company and you qualify for entrepreneurs’ relief, the rate of CGT is reduced to 10%.

Top CGT planning tips to reduce your capital gains tax bill

1. Ensure you qualify for entrepreneurs’ relief (ER)

If you own a business or shares in a company and believe you qualify for ER, make sure that both you and the business asset satisfy all of the qualifying criteria for a complete 12 month period prior to a disposal. This will avoid making a disposal and later finding you are not entitled to the relief.

2. Use your annual exemption

Every taxpayer is entitled to an annual CGT exemption which is £10,900 for the 2013 / 2014 tax year. Where assets are owned jointly, the gain will be allocated between the owners with each being entitled to their own annual exemption;

3. Shelter savings using an ISA

If you sell shares in order to utilse your annual CGT exemption, you may consider purchasing them back within an ISA. Although there will be dealing charges to pay, this effectively moves assets into a CGT-free environment and as an ongoing tax planning strategy, has the potential for substantial CGT savings.

4. Offset capital losses

If you own capital assets which are standing at a loss, the capital loss arising on sale can be offset against other capital gains of the same or future tax years.

5. Bed and spousing

‘Bed and breakfasting’ of shares is caught by anti avoidance legislation. If however you have sold shares in order to utilise your annual CGT allowance and the ISA route outlined above doesn’t appeal, consider arranging for your spouse or civil partner to re-purchase the shares at their current value. This offers an opportunity to use your annual CGT allowance to cover the initial gain and then shelter the asset, at a higher acquisition price, from further tax in the future.

6. Make a negligible value claim

If you own an asset that is worthless, it may be possible to make a ‘negligible value’ claim and claim a capital loss based on the acquisition price.

7. Invest into SEIS or EIS companies

One way to shelter gains from CGT is to reinvest them into tax efficient businesses. These enable an individual to invest a defined amount into a young or start up business venture and take advantage of the opportunity to receive tax free gains in the future whilst ‘rolling over’ or entirely eliminating current gains. Although this is a tax efficient option, these investments can be risky and should only be considered after taking expert advice. We discuss this topic in greater detail in one of our other blogs this month.

Whilst no one wants to pay tax, we all know that it is a moral and legal obligation. Our advice to clients is to look for ways to limit your tax liabilities in ways that are not regarded as ‘aggressive tax avoidance’, or examples of ‘tax evasion’. Discuss your individual circumstances with us and we will help you identify the best strategy to suit your long term objectives.

For more information on tax planning to reduce capital gains tax, please contact Lesley Stalker by emailing las@rjp.co.uk.