Capital Gains Tax

Capital Gains Tax

The annual exempt amount (AEA) is £6,000 for 2023/24, but is reducing to £3,000 in 2024/25. Gains above this level are taxed as follows:
• 10% if the gains qualify for Business Asset Disposal Relief (BADR), up to a lifetime limit of £1 million of qualifying gains;

• 10% if the gains qualify for Investors’ Relief, up to a lifetime limit of £10 million;
• 10% (18% for gains in respect of residential property or private equity carried interest) if the gains fall within any unused basic rate band; and
• 20% (28% on residential property or private equity carried interest) for gains above the basic rate band. Assets transferred between married couples or civil partners do not normally give rise to a CGT charge; instead, the recipient takes over the CGT cost of the donor. This means that, when the asset is eventually sold by the recipient. The gain or loss will reflect the combined ownership period. Gifts to other family members will produce capital gains or losses. Using the market value at the time of the gift as deemed proceeds. However, where the asset is a qualifying business asset (e.g. unquoted trading company shares). A joint ‘holdover relief’ election will enable any gain to be deferred. Non-residents are not generally subject to UK CGT. There is an exception to this rule, however, for disposals of UK immoveable property (i.e. land and buildings) and certain indirect interests in UK immoveable property.

Planning points

The AEA cannot be carried forward or transferred to a spouse, so where possible aim to make disposals before 6 April 2024 to utilise this year’s AEA, particularly as the amount of the exemption will decrease from this date.
• Consider transferring assets (wholly or partly) to your spouse or civil partner, to utilise their AEA or capital losses on a subsequent disposal. Such transfers must be made outright and without preconditions to be effective for tax purposes.

• Consider carefully when you will make any disposal, as the timing of a disposal will determine when any CGT is due and may affect the amount of CGT payable.

Example – David

David is a basic rate taxpayer (with £7,000 of basic rate band unused) in 2023/24 but expects to be a higher rate taxpayer in 2024/25. His sole disposal in 2023/24 of some nonresidential land realises a capital gain of £15,000.
• His taxable gain (i.e. after AEA) is £9,000 and his CGT liability will be £1,100 [(£7,000 @ 10%) plus (£2,000 @ 20%)].
• This would be payable on 31 January 2025. If, instead, the disposal is made in 2024/25:
• His taxable gain (i.e. after AEA) is £12,000 and his CGT liability will be fully at 20%, i.e. £2,400.
• This would be payable on 31 January 2026. Domicile status is a difficult legal concept and is very important for IHT. Broadly, it means one’s country of ‘natural or permanent home’.
• Individuals who are domiciled (or deemed domiciled) in the UK are subject to IHT on their worldwide assets.
• The main category of ‘deemed domicile’ is those who have been UK resident for at least 15 of the last 20 years.
• In contrast, non-UK domiciled individuals (‘non-doms’) are normally subject to IHT on their UK assets only. IHT is payable at 40% where a person’s assets on death, together with any gifts made during the seven preceding years, total more than the nil rate band (NRB). The NRB is £325,000 for 2023/24 and is fixed at this level until April 2028. Unused NRB can be transferred to a spouse or civil partner. So couples can enjoy a combined NRB of up to £650,000 on the second death. The amount transferable is the percentage of the deceased’s unused NRB at the time of their death. As applied to the NRB in force at the date of the second death. In addition, a ‘residence NRB’ is available in respect of a property that at some point has been the deceased’s main residence and which is passed on death to a direct descendant (or their spouse).
• For 2023/24, the residence NRB is £175,000 and is fixed at this level until April 2028.
• If unused, this relief will also be transferable to the deceased’s spouse or civil partner.
• The relief will be tapered where estates are over £2 million in size (before reliefs and exemptions), such that estates over £2.35m receive no benefit from the additional nil rate band.
• If an estate does not qualify for a full residence NRB. It may be entitled to a further relief known as a ‘downsizing addition’ if three
conditions apply:
1. The deceased disposed of a home on or after 8 July 2015 and either downsized to a less valuable property or ceased to own a home;
2. The former home would have qualified for the residence NRB if it had been retained; and
3. At least some of the deceased’s estate is inherited by his or her direct descendants or their spouses.

 

Planning points

Consider gifting assets during your lifetime to minimise the IHT payable on your death.
• Such gifts will fall outside the IHT net after seven years. Provided you do not reserve a benefit in the asset transferred.
• After three years, the amount of IHT potentially payable on the gift (should you die within seven years of making it) is reduced, based on how long you survive.
• The gifting of assets can give rise to CGT liabilities. However, some assets are exempt CGT (e.g. cash and gilts).
• If you have income surplus to your normal living expenses. Consider making use of the IHT exemption for regular gifts out of surplus income.
• Such gifts are tax-free, even where death occurs within seven years.
• Appropriate documentation should be retained to show that the gift is regular and made from income not required by the donor to cover their living expenses.
• Make use of other IHT reliefs and exemptions
• The annual exemption of £3,000 (£6,000 if no gifts were made during 2022/23);
• The small gifts exemption of £250 per donation; and
• Gifts made in consideration of marriage (£5,000 to children, £2,500 to grandchildren, and £1,000 to anyone else).
• Consider taking out life insurance to fund any contingent exposure to IHT. Although the availability and cost will depend on the transferor’s life expectancy.
• Consider increasing bequests to charities to 10% or more of your net estate. Which will mean that a reduced IHT rate of 36% applies to the remainder of your estate.
• If you sell your home (e.g. to move into care) or downsize, keep records of the transactions. So that on your death the downsizing addition may be claimed if you leave sufficient assets to direct descendants or their spouses.

Most importantly of all, make sure you have an up-to-date will, that is not only efficient from an IHT perspective but also distributes your assets based on your current family circumstances. For example, trusts that were due to be set up in your will while your children were minors may no longer be needed.

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