Guides: savings
Capital gains tax (CGT)
Before buying or selling any investment, you need to bear in mind the tax implications of what you are doing.
A number of investment vehicles, such as venture capital trusts (VCT’s), enterprise investment schemes (EIS’s) and alternative investment market (AIM) shares, provide significant tax breaks, but you should never allow ‘the tax tail to wag the investment dog’. If the underlying investment is unsuitable, all the tax breaks in the world are not going to help you make a profit.
It is always a good idea to take tax advice before embarking on any large investment or sale. An IFA should be able to advise you on the tax implications of any transactions that you are considering. Both accountants and IFAs have regulatory bodies, which will give you the option of recourse if needed.
Capital gains tax (CGT) – The basics
Each individual is allowed to make a certain amount of gains each year before tax becomes liable. This is known as the ‘annual exempt amount’. For individuals the amount for the tax year 2009/2010 is £10,100 (this also applies to personal representatives and trustees for the disabled). The annual exempt amount for other trustees in 2009/10 is £5,050.
Since 6 April 2008, taxable capital gains for individuals are taxed at a flat rate of 18%.
Assets liable to CGT
- Most assets are liable to CGT, including:
- Most stock exchange securities;
- Property and land that is not your main residence;
- Personal possessions worth more than £6,000; individually, or as a collection or set;
- Business assets such as premises, ‘goodwill’ or registered trademarks;
- Overseas assets are usually taxable, although the rules on residency and domicile may have an effect and expert advice needs to be sought.
Assets potentially exempt from CGT
- In most cases your main home, using private residents relief
- Your car
- Personal possessions up to £6,000 (e.g. paintings, jewellery, antiques)
- Normally taxable assets held within some tax ‘wrappers’ such as ISAs
- UK government securities such as gilts and national savings
- Betting, lottery or pools winnings
- Personal injury compensation.
Gifts
CGT liability depends on who the gift is given to and how much the gift is worth. Gifts to a spouse or civil partner are usually exempt; as long as you have been living together and it is not ‘trading stock’. When the spouse comes to sell the asset, tax liability can date back to March 1982 and will include the period the person making the gift owned it.
Visit the HM Revenue and Customs (HMRC) page for more details: http://www.hmrc.gov.uk/cgt/intro/gifts-inherit-divorce.htm
Are there exceptions to the 18% flat rate of CGT?
In January 2008, Alistair Darling announced a new ‘entrepreneur’s relief’. This enables anyone selling a business, or businesses, after 6 April 2008 (worth up to £1m in total) to be taxed at 10%, providing they own at least 5% of the company.
The £1m allowance is a lifetime allowance, so you could sell several small businesses worth up to £1m in total during the course of a business career.
Holiday lettings
If you own a qualifying furnished holiday let it is regarded as a business asset and is liable to CGT at 18% on sale.
AIM-listed shares and Save as You Earn (SAYE) share option schemes
Since 6 April 2008, you are liable to CGT at 18% on capital gains, which are in excess of the prevailing CGT threshold.
AIM shares bought as part of inheritance tax-planning
Provided that you held AIM shares, that were eligible for business asset taper relief for a minimum of two years prior to 6 April 2008, the original investment, plus any subsequent growth, will remain outside your estate for inheritance tax purposes.
However, if you disposed of shares held for two years, and the sale took place after
6 April 2008, you would have to pay CGT at 18% (rather than the 10% you would have paid under the pre-April 2008 rules).
Individuals with smaller estates may decide that an AIM portfolio is not worthwhile now that the IHT threshold for married couples and registered civil partnerships has risen to £650,000 (2009-10 tax year).
Venture capital trusts and enterprise investment schemes
If you took advantage of the pre-April 2008 rules that allowed you to defer your capital gains by investing in a venture capital trust before 2004, you will be a winner. Under the old rules, you would have had to pay CGT at 40%, but since 6 April 2008, you are liable to pay only 18%.
If, however, you rolled over capital gains, with a 10% liability into shares in an EIS, you are worse off. If you sell EIS shares now, the rolled-over gain is taxable at 18%, rather than the 10% that you would have paid had you not done the rollover in the first place. Gains made on the EIS itself remain free of CGT.
Does CGT apply to offshore investments?
There is considerable confusion surrounding offshore investments because of the perception that they are ‘tax free’.
This may be the case if you are non-domiciled for UK tax purposes or plan to retire outside the UK and take the gains or income in a foreign jurisdiction. However, for individuals who are UK resident for tax purposes, CGT will normally have to be paid.
If you are putting money in an offshore bank or building society deposit account, bear in mind that HMRC is taking a close interest in offshore accounts for cases of tax evasion. Even with gross roll-up accounts, income still has to be declared and is liable to income tax.
