Tax planning for year end – Capital Gains Tax
With year-end not far away, all business owners and canny investors will be looking to minimise their tax bill. First to focus on is Capital Gains Tax (GCT). This was subject to a routine review by the Office for Tax Simplification (OTS) and there could be changes to CGT in the much-anticipated Budget, due on 3 March – some have suggested the system could be “simplified”, or CGT rates will be increased, to align more closely to income tax rates, but at time of writing this is speculation.
For the financial year 2020/21, the first £12,300 of any capital gains will be tax-free. Most gains above this will be taxed at 20%, or 28% for residential property gains. When it is a business that is being sold, and your interest qualifies for Business Asset Disposal Relief (BADR), which replaced Entrepreneur’s Relief in 2020, tax will be at 10% of the first £1 million per taxpayer, per lifetime.
Good planning means aiming to utilise your annual exemption amount of £12,300 by making any disposals before 6 April. If your gains already exceed the annual CGT exemption, you might even be able to create a tax loss, if you can dispose of any investments that are making a loss, before this date.
Timing is everything
If your disposals so far this year have resulted in a net loss, your decision to make any more, and realise gains will depend on the sums involved – also, timing is everything. If your disposals have made a net loss in the current tax year, it might be more prudent to make further disposals either side of 6 April, for example.
Married couples and civil partners might be able save on CGT by transferring assets between them, if one half has not fully used their annual exemption/their basic rate tax band or they have other capital losses. It is a good idea to ensure plenty of time between transfer and disposal.
CGT is generally paid on 31 January, after the end of the tax year on which your disposal was made. So, delay a sale until after 5 April, and you’ll get more time to settle the bill. If the disposal relates to a residential property (unless it is an exempt principal private residence) payment on account of CGT must be made within 30 days of the disposal – therefore in such cases, delaying does not have an advantage.
If you have a shareholding, or other chargeable asset, that has lost nearly all its value, you could claim this loss against your capital gains, without disposing of the asset. This involves making a negligible value claim. Loss relief can be backdated, to one of the two tax years before you make the claim (providing you owned the asset then, and it was already of negligible value). If you are backdating a claim to the 2018/19 tax year, the deadline is 5 April 2021.
With another month or so to go before year-end, at Figurit we recommend careful planning to make decisions easier, once we know what changes there will be to CGT in the Budget, if any. We are experts at tax planning and give practical advice to help you optimise your business, and your personal finances. We’re hopefully entering a more optimistic period, and good preparation will give you the freedom to realise your potential.