Good and bad news regarding Capital Gains Tax

Recent changes to Capital Gains Tax (CGT) legislation has cast a small shadow for home owners meaning they could end up paying thousands of extra pounds in tax. The good news is that general tax planning around CGT could help the overall situation.

The bad news – changes for homeowners

In the 2014 Budget a clause was uncovered relating to capital gains tax and those taxpayers who own two or more homes. Currently, there is an option to select which of two properties you want to be eligible for the Principal Private Residents relief however, from April 2015, this is to be removed.
MP’s were accused, somewhat unfairly, of “flipping” which of their properties they classed as their main residence when it came to selling a second property, despite this being legitimate tax planning. This has spurred the Chancellor to make changes to the system. This new change could bring several issues for people who say move house but are unable to sell their current home immediately. One of the properties could get taxed under CGT if a gain is made. There are expected to be some concessions available following April 2015 but the long and short of it is, anyone with a second home should keep an eye on further changes to avoid a nasty surprise.

The good news – increasing CGT exemptions

HMRC in general have many rules and regulations that prevent you allocating income your children to reduce your own tax. However, CGT is an exception and something that can work in your favour. Here is how. Everyone is given an annual allowance to offset against any CGT payable (13/14: £10,900). Anything over this allowance is subject to tax at 28%. One effective tax planning method for CGT is to work out ways to increase your CGT allowance.

Married?

If you are married and can give a proportion of the assets for sales (shares / property etc) to your spouse before selling them, this will mean that both yours and their allowances can be used to reduce any tax liability.

Unmarried with partner?

Unfortunately, the above method only works for married couples, although there is an unmarried CGT exemption to be considered but typically it needs to be planned more in advance as a long-term strategy. In this case you simply transfer assets to your partner in the hope that they will increase in value by a future date and upon sale your partner can then use their allowance to reduce the CGT in the same way as a married couple.

Children?

Interestingly, what many people are not aware of is that all children have a CGT allowance from the day they are born. Whilst there are many anti-avoidance rules to prevent you diverting income to your children to avoid paying tax, it doesn’t affect their CGT allowance. Again, savings can be made on a long-term arrangement by transferring assets, such as shares, to your children so at a later date, upon sale, they can use their CGT allowance to reduce overall tax. Now is considered to be a particularly good time to transfer assets into your children’s name, based on predictions of the stock market. Cashing in on tax free gains could be useful to pay for school fees or indeed the cost of care. This is legitimate tax planning with no anti-avoidance rules you will be pleased to understand.