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Capital Gains Tax
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There was much talk prior to the recent emergency budget regarding what may or may not happen to Capital Gains Tax (CGT). The general consensus seems to be that it could have been worse as rates as high a 50% had been suggested beforehand.
Clients are often surprised that they need to consider CGT at all and are often unsure how the tax applies to them.
CGT is defined by the Revenue as “tax on the gain or profit you make when you sell, give away or otherwise dispose of something that you own, such as shares or property”.
Before you start to panic that the last time you sold your property or the shares you received in a demutualisation you never considered CGT, there are various exemptions, reliefs and allowances to take into account.
Generally speaking, your main home is often your biggest asset and whilst on the face of it this is liable to CGT, so long as you qualify for Private Residence Relief (PRR), there will be no tax to pay. This will usually be available if the property has been your only home and you have not used it for any other purpose.
However, if you own a second property, which for example is rented out, then CGT may well be applicable should you choose to dispose of this.
The CGT charge is triggered by a disposal of a particular asset and this disposal can be due to you selling the asset, but can also be applicable if you simply give it away, to children or someone else. There is not usually a CGT charge if the recipient of the gift is a spouse.
Prior to the budget, CGT was charged at a flat rate of 18% with an annual allowance of £10,100 each. Now, the annual allowance remains the same but from 23rd June 2010 the way in which the tax is calculated has changed and the gain is effectively added on to your annual income. If the total of your gain and income amount to less than the income tax basic rate band (which is currently £43,875), then the 18% rate continues to be chargeable. However, if your annual income is already over £43,875, the gain will be taxed at 28%, and if the amount of the gain falls in part below this limit, and in part above it, then the part of the gain falling below the basic rate band will be taxed at 18% and the remainder at 28%.
Gains arising in trusts and estate of people who have recently died will all be liable to the rate at 28% and Trustees and Personal Representatives have their own rules relating to their annual exemptions.
If you are at all concerned about CGT it is worth taking advice as often simple steps such as transferring part of an asset into a spouse’s name, thus accessing two annual allowances, may be sufficient to reduce any tax payable. For trusts and estates it may be worth considering transferring assets to beneficiaries who are only liable to the 18% tax charge rather than 28%.
Business assets may also qualify for Entrepreneur’s Relief and the recent budget was in fact quite helpful in respect of this, substantially increasing the limit on gains.
If you are at unsure as to whether CGT is applicable to your particular circumstances, you should seek the appropriate advice.
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