Capital Gains Tax Revenue Increase
November 9th, 2016
Latest figures published by HMRC show that £6.9 billion of capital gains tax was paid by more than 220,000 individuals in 2014/15. Here we look at some simple planning strategies that might help to reduce the burden
While capital gains tax (CGT) has historically earned comparatively little for the exchequer, over the last few years CGT receipts have been increasing steadily, with recent figures from HMRC reporting a 22% increase to £6.9 billion in 2014/15. With inheritance tax producing a yield of just £3.8 billion in the same period, CGT is clearly no longer the poor relation and the haul for subsequent years is likely to be even greater as investors continue to take advantage of a buoyant stock market and landlords (who continue to pay CGT at the higher rates of 18/28% on residential property disposals) sell to cash in on rising house prices.
Fortunately, there are a number of simple things that taxpayers can do to reduce their chances of being one of the 220,000 or so individuals lining the government’s coffers. These include:
- Minimise tax on realised gains – there is an appreciable difference in the rate of CGT paid by basic and higher rate taxpayers. For married clients, it can therefore be beneficial to ensure that taxable gains are made by the lower-taxed spouse where this is possible (remember that transfers between spouses or civil partners living together are made on a ‘no gain/no loss’ basis). With an annual exemption of £11,100 in 2016/17, even if both spouses are taxed at the same rate, there may still be the opportunity to use two annual exemptions rather than one.
- Make additional pension contributions – as the rate of CGT paid is determined by the level of combined taxable income and capital gains, those who are not married or in a civil partnership can still reduce the rate at which they pay CGT on non-exempt gains by reducing their level of taxable income. One way that this can be achieved is by making additional pension contributions. As higher rate tax relief on a pension contribution continues to be given by the extension of the basic rate band payment of an allowable pension contribution could result in an equivalent amount of a capital gain that would otherwise be subject to CGT at the higher rate of 20% now being taxed at 10% – reducing the rate of CGT paid by up to 50%.
- Make full use of the annual exemption – the annual exemption is given on a ‘use it or lose it’ basis. So if individuals are relying on certain investments for additional income, re-balancing asset allocation within their investment portfolio could provide the opportunity to use their annual exemption. In some cases considering a phased sale of shares over two tax years can prove to be beneficial as it is possible to benefit from the use of two annual exemptions.
- Make the most of reliefs – entrepreneurs’ relief, for example, can be very valuable, potentially reducing the capital gains tax on the sale of a business from a rate of 20% to 10% for the first £10 million of cumulative lifetime gains. However, the relief is only available as long as the qualifying conditions are met. Timing and advice will both be essential in order to maximise the relief available.
- Retain investments showing substantial gains – selling or gifting assets during lifetime could result in a CGT liability that would otherwise be wiped out altogether if the investments had been held until death. Where the taxpayer is elderly or in ill-health, a lifetime gift of chargeable assets may be particularly detrimental given the enhanced possibility that the donor may fail to survive the seven year ‘PET’ period and so make no IHT saving either.
With the average CGT bill now at £28,500, and possible changes to existing reliefs being mooted as the Autumn Statement approaches, the importance of planning ahead with the benefit of informed advice should not be underestimated.