Chartered Accountants
& Business Advisers
Capital Gains Tax
Planning for Higher
Rate Taxpayers
Over the years since the introduction of capital gains
tax in 1965, there have been a number of different
regimes applying to the tax. Initially there was a flat
rate of 30%.
Indexation relief was subsequently introduced so as
to provide a broad mechanism by which capital gains
attributable purely to inflation would not be taxed. There
was, for a time, a regime under which gains were added to
income and charged to tax at income tax rates but as from
5 April 2008, a form of the original flat rate regime was reintroduced. At the same time, indexation relief was abolished
so that the system no longer recognises the unfairness of
taxing gains purely attributable to inflation.
There are currently two flat rates of capital gains tax. An 18%
rate applies to those whose gains for a year are lower than the
higher rate income tax threshold when added to gross income
for the year. A 28% rate applies to all those who are higher rate
income tax payers. A combination of the two flat rates applies
where gains are partly within and partly in excess of the higher
rate tax threshold when added to other income.
A 28% rate without relief for inflation can be seen as a heavy
and perhaps excessive charge on gains and it will always
be worth looking into possibilities for reducing the liability.
Mitigation of capital gains tax can work in a number of ways
and these can fall under three broad headings which are:
exemptions, reliefs and making best use of available tax rates.
Exemptions
The Seed Enterprise Investment Scheme
This is a useful exemption available for gains on any assets by
which the gain may be ‘held over’ into a subscription for shares
in an unquoted trading company which qualifies for SEIS
purposes. Hold over relief enables the gain realised on an asset
to be matched with an amount invested in the newly acquired
asset, in this case the unquoted shares. Any capital gain
which qualifies for hold over into an SEIS investment becomes
completely exempt from capital gains tax, so long as the SEIS
investment is held for the three year period, with no event taking
place in that time to cause withdrawal of reliefs on the shares.
There are very detailed conditions and hence professional
advice should be obtained before an investment is made.
For 2012/13 the full amount subscribed for the shares
qualified for capital gains tax hold-over relief, subject to the
annual investment limit of £100,000. With effect from the
2013/14 year onward, instead of 100% of the gain being
eligible for hold-over, this was reduced to 50% of the gain.
There is a one year carry-back relief, so the investor can
claim the carry back relief for an investment made in 2014/15
and treat the investment as having been made in 2013/14.
Going non-resident
Historically, those who left the United Kingdom to become
resident abroad, for tax purposes, escaped the capital gains tax
net if they sold assets after departure. There was no charge to
capital gains tax when a person became non-resident (subject
to some very limited exceptions). In some other countries, an
‘exit charge’ applies. Going non-resident therefore provided a
means of avoiding the tax completely. However, in the 2013
Autumn Statement, the Government introduced a proposal for
new rules extending the scope of capital gains tax to apply
to non-residents disposing of UK residential property. The
proposed change will come into effect from April 2015 and
only apply to gains arising from that date.
It is necessary to remain non-resident for a considerable
period of time if the liability to tax is to be fully avoided on
the non-excluded assets. There are provisions in the capital
gains tax legislation which apply to those who become
temporarily non-resident, defined as residence for fewer than
five tax years between the year of departure and the year
of return. Those who fail this test will find that capital gains
realised whilst non-resident, in respect of assets held when
they left the United Kingdom, will become chargeable in the
year of return to the UK.
Private residence relief
As is well known, the gain on a property which has been a
person’s principal private residence, is exempt from capital
gains tax. The rules contain apportionment provisions so
that if a property was not the main residence throughout
the period of ownership, then only part of the gain would be
exempt, subject however to a provision which says that in
all cases the final eighteen months of ownership are exempt
where there is any period of time during which principal
private residence exemption applies. Prior to 6 April 2014
this period of exemption was three years and this level of
exemption remains if the person is going into care.
Where someone buys a holiday home it will normally be
advisable to submit an election for the second property to
be treated as principal private residence for a short period
of time, say one week or one month. This will then provide
at least the eighteen months of exemption for that property,
even though the election will be switched back to the original
main residence after the short period for which it applies. This
is essentially the means by which Members of Parliament
have rather notoriously dealt with capital gains tax issues
on their constituency properties. It should be noted that
these elections must be submitted within two years of the
second property being used as a residence. After that time
limit it is no longer possible to make election. Changes to the
main residence rules propose that the ability to elect which
property is a homeowner’s main residence be removed in
April 2015.
Reliefs
Rollover relief
This applies where a business asset is sold and a capital gain
arises. In very broad terms, it is possible to claim rollover
relief if the proceeds are invested in a further business asset
and which is bought within one year before or three years
after the disposal. Subject to certain conditions, the gain can
be ‘rolled over’ depending on the extent of the reinvestment
so that the tax is not payable until the new asset is sold. This
can be particularly helpful if a person has been using an
office building for a business and the building is then sold
and alternative premises acquired. The relief also covers the
situation where a person moves house and both their old and
new houses are (or were) used partly for business purposes.
Special rules apply if one or both of the properties is
leasehold and the lease runs for less than 60 years.
If an asset was not used for business purposes throughout
the period of ownership, only an appropriate proportion of
the gain can be rolled over. However it is possible to reset
the rollover clock by transferring the asset to a spouse who
then uses the asset in a business for the whole of his or her
period of ownership up to sale. The spouse will then achieve
full rollover relief.
Entrepreneurs’ relief
This relief was introduced from 6 April 2008 and the lifetime
limit was increased to £10 million with effect from 6 April 2011.
The relief is available when an individual makes a ‘qualifying
business disposal’ which typically falls into one of the
following categories:
• A gain made on the disposal of all or part of a business
• A gain made upon the disposal of assets following the
cessation of a business
• A gain made by certain individual shareholders (broadly a
former employee with at least 5% of the issued share capital)
quoted shares are sold realising a gain of £200,000 and
within three years of that sale, the person invests £200,000
in a subscription for shares in a new trading company, the
gain can be ‘held-over’ against the subscription. The gain
does not then become taxable until such time as the shares
in the new trading company are disposed of. If the shares
are retained until the death of the shareholder, the held-over
gain never becomes taxable. The shares will usually qualify
for 100% business property relief from inheritance tax as well.
It should be noted that the conditions for EIS reliefs are very
detailed and professional advice should be taken in every
case before going ahead. Qualifying companies must not
engage in a long list of activities, including farming, property
dealing, managing hotels or nursing homes.
Gifts
Normally, on a gift of an asset, the donor is treated as if the
asset had been sold for full market value at the time of the
gift. This does not apply to gifts to charities. In other cases,
it is possible to hold-over the gain by transferring the asset
into a trust from which the transferor, his or her spouse and
infant children are excluded from benefit. If the trustees later
transfer the asset out to the original intended beneficiary,
once again hold-over relief applies. By this means, therefore,
a gift of an asset can be made to an adult family member
without capital gains tax liability arising. This is normally only
suitable for gifts within the transferor’s available inheritance
tax nil rate band (£325,000) as gifts into trust are chargeable
transfers for inheritance tax purposes.
Minimising the rate of tax
As the rates of capital gains tax are geared to the level of the
taxpayer’s income, it is clearly best, wherever possible, to
realise gains within a year when gross income plus the gains
will not exceed the higher rate income tax threshold. Another
important point to remember is that losses cannot be carried
back for capital gains tax purposes and so if a loss is to be
utilised, gains must be realised in the same year that the loss
is realised or a later year with the loss brought forward.
• From 6 April 2013 a gain made by an employee on shares
acquired under the Enterprise Management Incentive
scheme, so long as the date on which option to acquire
the shares was granted is more than 12 months before the
date of disposal of the shares.
If a person has an asset which has become valueless, it is
possible to make a claim for the loss on that asset to be
treated as having been realised. This particular claim can be
backdated for up to two years.
In order to qualify for the relief an individual must meet all the
qualifying conditions for a full year prior to the gain arising.
If, say, a husband has some shares showing a large accrued
gain and his wife has some shares standing at a large loss and
both want to sell the holdings, the best tax result will be achieved
if one transfers his or her shares to the other before they are
sold. The transfer is neutral for capital gains tax purposes but
on sale the loss will then be deductible from the gain.
Gains which qualify for entrepreneurs’ relief are charged
at a rate of 10%.
The total amount of entrepreneurs’ relief is limited to a
‘lifetime’ limit of £10 million of gains. Therefore the actual
amount of relief available will depend initially on the extent
to which gains relate to disposals of qualifying assets
and then the total amount of relief previously received on
qualifying gains.
Enterprise investment scheme
Where a person sets up a new company in order to conduct a
trade which qualifies under the enterprise investment scheme
rules (EIS), so long as the funding for the company is in the
form of a subscription and/or shares, this subscription will be
eligible for hold-over relief for other gains, along similar lines
to those described above for SEIS. So for example, if some
Husbands, wives and civil partners
Alternatively if the wife has no losses but just has her annual
CGT exemption available for the year, a transfer of some of
the shares to her by the husband before the sales take place
can reduce the overall tax liability. Sufficient shares could be
transferred so that she could then sell them and realise gains
to use up her CGT exemption.
FOR GENERAL INFORMATION ONLY
Please note that this Memorandum is not intended to give specific technical advice
and it should not be construed as doing so. It is designed to alert clients to some of
the issues. It is not intended to give exhaustive coverage of the topic.
Professional advice should always be sought before action is either taken or refrained
from as a result of information contained herein.
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