A short introduction to

CAPITAL GAINS TAX

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CGT PLANNING

It’s easy to pay too much CGT by missing out on planning opportunities. Here are some ideas:

• Use your allowance every year by realising gains up to the annual limit

• If you have gains above the annual limit, realise some losses (if you have any) to reduce the tax

• If you are married or in a civil partnership, use both of your annual allowances each year. If one of you has a large gain, transfer some assets to your spouse or civil partner before selling. This can also help if only one of you is a higher rate taxpayer; by transferring the gain, CGT may be charged at 10% rather than 20%

• Making pension contributions can reduce the rate at which CGT is paid. If CGT would be payable at the higher rate of 20%, a pension contribution could reduce the rate to 10%. When you pay into a pension the threshold at which you start paying

higher rate tax increases by the amount you invest, so some or all of a capital gain could be taxed at the lower rate

• Remember, there’s no CGT on pensions or Individual Savings Accounts (ISAs).

These are just a few of the ways you can reduce the amount of tax you pay. For more information please contact us to speak with one of our fnancial advisers.

NFU Mutual has a long history of giving people sound fnancial advice. If you would like advice on investments, pensions or insurance, please contact your local agent or call us on 0800 622 323. NFU Mutual Financial Advisers advise on NFU Mutual products and selected products from specialist providers. We will explain the advice services we ofer and our charges.

This short introduction is based on our understanding of the law and HMRC guidance as at April 2019. You should not take or refrain from taking action based on this information, without frst taking professional advice based on your own circumstances.

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Capital Gains Tax (CGT) was introduced in 1965 and has undergone many changes over the years. Most commonly, it is a tax due when you dispose of something that has gone up in value, although there are many exemptions.

Careful planning can make a signifcant diference to the amount of CGT you pay. NFU Mutual Financial Advisers can ofer help in planning to reduce tax bills on investment gains.

WHO PAYS CGT?

CGT is payable by individuals and trusts. Charities and pension funds are exempt from CGT.

It is not paid by companies, although capital gains made by companies are subject to corporation tax.

WHAT IS IT CHARGED ON?

CGT is charged when a disposal is made of certain types of asset such as: • Property, other than your main home • Land • Shares • Most possessions worth £6,000 or more. It is not payable on: • ISAs • UK government gilts and premium bonds • Gambling wins • ‘Wasting assets’ with a predicted life of

50 years or less, such as machines and vehicles. This includes items such as antique clocks and most cars, even though these can increase in value

• Most insurance policies.

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WHAT IS A DISPOSAL?

The most obvious disposal is, of course, a sale. But assets can also be given away or sold at a price below market value, for example to a family member. In these cases, the disposal is deemed to be at the market value.

A disposal for CGT purposes does not include a transfer between spouses or civil partners. In these cases the person acquiring the asset is deemed to have acquired it at the same value as the donor. CGT is not charged on assets at death, although there may be inheritance tax to pay.

HOW IS A GAIN CALCULATED?

The gain is the diference between the disposal proceeds and the acquisition costs. The cost is not just the original price, but also any costs such as legal fees, stamp duty and spending to enhance value, such as an extension to a house.

If you have owned an asset since before 1 April 1982, the value at 31 March 1982 is used instead of the actual cost. This will usually be higher, meaning there is a lower taxable gain, although this is not always the case. The disposal proceeds are the price received less any associated costs, unless a higher market value is being used for the calculation.

CHATTELS

Chattels are ‘tangible, moveable property’, such as chairs, paintings and stamp collections. Gains of over £6,000 on non-exempt chattels should be declared to HMRC.

SHARES

An important part of CGT planning is to use your CGT allowance every year. The easiest way to do this used to be by ‘bed and breakfasting’ shares. The shares would be sold and bought back the next day to realise any gain and reset the base cost. New rules introduced in 1998 stopped this practice.

However, the same tax outcome as bed and breakfasting can still be achieved by:

• Selling shares and buying them back in an ISA • Selling shares in, say, one collective fund and using

the money to buy shares in a diferent collective fund • Selling shares and having one’s spouse or civil partner

buy them on the same day (but not direct from yourself).

The big advantage of resetting the price is that, at some future date when you do sell the asset, the tax liability will be lower.

CAPITAL LOSSES

Losses can be ofset against gains to reduce the CGT payable. Only losses made on assets that are subject to CGT can be used.

Losses made in a tax year are set against any gains in that tax year. If the losses are greater than the gains, then once the gains are fully ofset, the excess loss can be carried forward indefnitely to future tax years. With carried-forward losses it is only necessary to use as much as is required to reduce any gains down to the annual exemption fgure.

You can use losses provided that they are reported up to four years after the tax year in which they occurred, unless they were before 5 April 1996, in which case they can be used even if they weren’t reported.

WHAT IS THE ANNUAL EXEMPT AMOUNT?

Everyone has an annual exemption, with £12,000 (2019/20) of gains tax-free. Trusts generally have an annual exemption of half this amount.

The exemption must be used in the tax year – it’s not possible to use any unused amounts from previous years.

WHAT ARE THE RATES OF CGT?

Most CGT is charged at 10% or 20%.

Gains on residential property such as Buy-to-Let or second homes are charged at 18% or 28%

Entrepreneurs’ relief is available on certain business assets, which reduces the rate to 10%.

Trusts pay CGT at 20%.

HOW IS THE TAX CALCULATED FOR INDIVIDUALS?

The rate of CGT charged depends upon the individual’s other taxable income. If the gain doesn’t push the taxpayer into the higher rate band, it will all be taxed at 10%. Someone who is already a higher rate taxpayer would pay CGT at 20% on the whole chargeable gain.

In other cases some of the gain could be taxed at 10% and the rest at 20%.

CGT Calculation (2019/20)

What would be the CGT on a £25,000 capital gain if you have other taxable income of £40,000?

First, calculate how much of the gain will be taxed:

Gain £25,000 Less annual allowance (£12,000)

Taxable gain £13,000

Second, determine how much of the basic rate income tax band is available: Income £40,000 Less annual allowance (£12,500) Taxable income £27,500

Basic rate income tax band £37,500 Taxable income (£27,500) Available basic rate band £10,000

Finally, calculate the tax on the £13,000 taxable gain: £10,000 at 10% £1,000 £3,000 at 20% £600

Total £1,600

Tax thresholds difer in Scotland

ENTREPRENEURS’ RELIEF

An individual disposing of a business, or part of a business, may qualify for Entrepreneurs’ Relief and pay CGT at the reduced rate of 10%.

To qualify the individual has to meet all the qualifying conditions throughout the two years up to the disposal.

The main types qualifying disposals are:

• The whole of a business, or a distinct part of a business, carried on by the individual alone or in partnership

• The whole or part of an interest in a partnership • Shares in a trading company where the individual is

an ofcer or employee of the company and held at least 5% of the ordinary share capital with at least 5% of the voting rights, and an entitlement to 5% of the distributable proft and net assets of the company.

Everyone has a lifetime limit of £10 million of gains that can qualify for this relief.

If disposing of part of a business, it must be a distinct part. For instance, a farmer selling some farmland would not qualify, but were he or she to sell an entire dairy operation, while continuing with other farming, it may.

Please be aware that this is only a brief overview and it is important to take advice based on individual circumstances.

HOLDOVER RELIEF

It is possible to defer the CGT liability on certain disposals.

Holdover relief may be claimed for:

• Gifts of qualifying business assets • Gifts of unlisted shares in trading companies • Gifts of land that qualifes for agricultural

property relief • Gifts which are immediately chargeable for

inheritance tax, which typically, are gifts to most types of trust.

The person receiving the asset is deemed to have acquired it at the original cost to the donor. If the recipient emigrates within six years of the gift without having sold the asset they will be chargeable for the held-over gain. There would, though, be no liability for CGT on death.

ROLLOVER RELIEF

Business asset rollover relief allows the CGT due on the disposal of certain assets to be deferred if other qualifying assets, costing the same or more, are bought. If the new assets cost less, it is possible to get partial relief.

Relief can be claimed if:

• You are trading or carrying on a profession or vocation

• You are carrying on a business of furnished holiday lettings

• You are occupying and managing commercial woodlands

• You have disposed of land by compulsory purchase. For trading businesses, the relief can be claimed if the old and new assets are for use in the same trade, or another trade that is carried on at the same time as the old trade, or started within three years after it ceased.

There is a range of business assets on which the relief can be claimed, including:

• Land and buildings • Plant and machinery • Goodwill. A claim can be made if the new asset is bought up to one year before, or three years after, the sale of the old asset.

PRINCIPLE PRIVATE RESIDENCE RELIEF

Full relief from CGT is available on your home, provided that:

• It has been your only or main residence throughout the period of ownership, or from 31 March 1982 if that is later

• No part of the home has been used exclusively for business purposes

• You haven’t been absent from the home other than for qualifying periods or because you have stayed in job-related accommodation elsewhere

• The garden is not greater than the permitted area of half a hectare, although relief might be available for larger gardens dependent on the size and character of the house.

Some of the rules, particularly around absence and ownership of more than one house, can be complex and can reduce the amount of relief available. It is important to take advice.

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