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CAPITAL GAINS TAX
Given the reduction in the tax-free annual exemption from a high of £12,300 in the 2022/23 tax year to £3,000 in the 2024/25 tax year and rising Capital Gains Tax ('CGT') rates from 10% to 18% for basic rate taxpayers and 20% to 24% for higher rate taxpayers, effective CGT planning has become more important than ever.
This article will highlight planning points you may wish to consider to reduce your exposure to CGT:
1. Take advantage of the £3,000 annual exemption whenever possible. The annual exemption cannot be carried forward or backward to other tax years.
2. Consider transferring assets to your spouse/civil partner prior to sale to use any remaining annual exemption and basic rate band. Transfers between spouses or civil partners who are living together are treated as no gain/no loss transfers. The individual receiving the asset who later disposes of it will be treated as having paid an amount equivalent to the total of your costs. Before doing this, it is important to consider the impact on any CGT reliefs.
3. If you maintain an investment portfolio, consider using your annual exemption each
year by selling shares that yield a gain equal to the annual exemption and:
a) Ask your spouse or civil partner to buy the same number of shares on the same day, resulting in a higher base cost when selling in the future.
b) Buy the same number of shares back in a stocks and shares ISA. Gains arising from stocks and shares ISA are CGT exempt. Note the annual ISA limit is currently £20,000.
c) Buy the same number of shares in your pension.
4. Review the order in which you sell assets. CGT losses can't be carried back to offset gains from previous tax years. To optimise your tax position, sell assets generating a capital loss in the same tax year you sell an asset generating a gain or in a prior tax year. CGT losses can be carried forward and used in later tax years.
5. The Government announced major changes to Business Asset Disposal Relief ('BADR') and Investors' Relief ('IR'). The taxable rate has increased from 10% to 14% for disposals made on or after 6 April 2025 and will increase again to 18% for disposals made on or after 6 April 2026.
Business owners may wish to consider the below points to reduce their future CGT liability:
d) Utilise your basic rate band and take additional dividends from the company. The basic rate tax on dividends is 8.75% while CGT due on company reserves is currently 14% and is increasing to 18%.
e) Take advantage of tax free/exempt benefits available to company directors to reduce company reserves.
f) Accelerate your plans so that your disposal occurs pre 5 April 2026.
g) Consider company pension contributions pre sale.
h) If you are planning to sell your business in the future you should consider reviewing your succession planning strategies.
If there is anything in this article that affects you – or somebody you know – please speak to Steven McVitty for independent professional advice. 028 9032 5050.
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