Day 1 – Essential Year End Tax Planning – Capital Gains Tax
In this week’s blog series our Tax and Wealth Management specialists will be discussing essential tax and financial planning tips which should be considered prior to the end of the tax year on 5th April 2013. In the first of a series of 5 blogs, David Bennett talks about Capital Gains Tax.
Use your Annual Exemption
The annual exemption for 2012/13 is £10,600. This is a ‘use it or lose it’ allowance: it cannot be carried forward to future years. It therefore makes sense to crystallise gains each year to the extent of the annual allowance, if possible.
Note that it is not possible to utilize the exemption through ‘bed and breakfasting’ of shares (i.e. selling shares and repurchasing the same shares within 30 days). However, the annual exemption can be used by selling shares in one company and buying shares in another. Alternatively, a married couple can effectively ‘bed and breakfast’ shares in the same company where one partner sells shares on the open market, and the other partner buys the same number of shares.
Rates of Tax
The rate of capital gains tax is 18% where taxable gains plus taxable income are less than £34,370. Any excess is taxed at 28%.
Use (or crystallise) Capital Losses
Capital losses may be offset against capital gains in the same year. Unused losses may then be carried forward indefinitely, and offset against future gains.
A formal claim is required. The claim must be submitted to HMRC within four years of the end of the tax year of the loss, otherwise it will be time-barred. Hence, claims must be made by 5 April 2013 in respect of 2008/09 tax year losses, if they have not already been filed.
When an asset becomes valueless or virtually so, it is possible to make a negligible value claim in order to crystallise a capital loss. The claim can be related back up to two tax years in certain circumstances, allowing the loss to be offset against gains made in earlier years.
Can your capital gains qualify for Entrepreneurs Relief (ER)?
CGT is charged at 10% where ER applies, subject to a lifetime limit of gains totalling £10m.
ER applies to the sale of a business, or to the sale of shares in an unquoted company, subject to a number of conditions being met. However, it is all too easy to inadvertently breach the conditions, so early advice should be taken from your adviser before making a disposal of assets which might qualify to ensure that the criteria are met.
Determine your Main Residence
The gain on your principal private residence is exempt from CGT. If you have more than one private residence, your ‘main’ residence is, by default, the one you spend more time in. But it is also possible to determine that matter by nominating one of them as your main residence. This requires careful planning, since the flip side of a gain on one residence being treated as exempt is that a gain on the other residence will become chargeable. Written nominations must be submitted to HMRC within 24 months of any change in residences becoming available.
The main residence exemption is not available on development projects, where a property is acquired with the overriding motive of selling at a profit, particularly where improvement works are carried out.
This is an extract from our Essential End of Tax Year Planning Guide 2012/13