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Capital Gains Tax - planning imperatives ahead of a reducing allowance

Date: 25 January 2023

Where have we come from?

Unlike income tax (IT) and inheritance tax (IHT), capital gains tax (CGT) is a relatively modern tax, introduced by Chancellor James Callaghan as recently as 1965 because “…gains confer much the same kind of benefit on the recipient as taxed earnings… [and]… the present immunity from tax of capital gains has given a powerful incentive to the skilful manipulator.”

Since then, CGT has gone through numerous changes - remember indexation, tapering of gains, and when CGT rates equated to savings income rates? The current system, with an annual exempt amount (AEA) of £12,300, and just 10% for a basic rate taxpayer, and 20% for higher rate and additional rate taxpayers (plus an additional 8% for residential property and carried interest) is historically generous. Even without an AEA, the low rates would be compelling for many.

Where are we going?

Ahead of recent budgets, there had been concerns surrounding the possibility of major CGT changes following the Office of Tax Simplification CGT reviews of 2020 and 2021, commissioned by Rishi Sunak when Chancellor. He concluded in November 2021 that only technical and administrative issues should be carried forwards. Jeremy Hunt, incumbent chancellor, went further with his approach in November 2022, due to the growing need to cut the UK’s deficit, reducing the annual exempt amount to £6k in 2023/24 and £3k in 2024/25. This will more than halve the allowance in the next tax year and halve it again in the following year.

However, some of the fears of supporters of the current system did not emerge, such as the removal of the CGT exemption on disposal of principal private residences, uplift on death, and tax rates some way lower than IT, that could have been equalised. Given the lack of change here, many will breathe easy. Of course, it’s easier to focus on the disappointment of the changes that were announced, rather than the qualities of what, at least for now, remain.

Short-term planning

Ahead of the reduction in the AEA, using this year’s ‘generous’ AEA will be paramount. Remember the basics:

  1. Irrespective of age, or whether UK resident, everyone is entitled to an AEA when calculating their UK taxable gains. The exception is that those not domiciled, or deemed domiciled, in the UK and claiming the remittance basis for a year lose the AEA for that year.
  2. The AEA, where unused, cannot be carried forward or transferred to another person.
  3. For the AEA to be used, gains must be crystallized.
  4. Where gains are subject to CGT at multiple rates (for example shares and funds at 10/20%, residential property and carried interest at 18/28%) the taxpayer can choose which gains to use against their AEA.
  5. Gifts to a spouse or civil partner are treated as a no gain/no loss disposal, assuming the parties live together.
  6. Beware the ‘bed and breakfast’ rules within 30 days, due to the anti-avoidance share matching legislation rendering this ineffective.
  7. Pension contributions – the gross contribution can extend the basic rate band, potentially lowering the rate of CGT that applies.

And where losses are concerned:

  • Losses arising in the same year as a gain are netted off before the AEA is used. Deferring a loss to the next tax year may therefore preserve the AEA for the earlier year.
  • Allowable losses (where reported within 4 years following the tax year within which the loss occurs) can be carried forward indefinitely
  • Losses made by an individual can be carried back 3 years (where made in the tax year of death, but before death).

Longer-term considerations

Several techniques are available to defer gains. For example, gains can be held over when transferring certain business assets and also where transfers are made in and out of relevant property trusts. Additionally gains can be deferred by reinvesting those gains into an Enterprise Investment Scheme (EIS).

However, that’s not to say such a strategy will definitely help. Deferred gains will ultimately come back in to charge at potentially future higher rates, unless held until death, should the current uplift at that point remain. For those fearful of a Labour administration, surely the current historically low rates are not assured!

But for now, ensuring the current £12,300 AEA is fully used, and working with what we know for the coming two tax years, gains chargeable at a maximum of 20%, albeit with a much-reduced AEA, is not to be sniffed at.

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This material is not tax, legal or accounting advice and should not be relied on for tax, legal or accounting purposes. Quilter Cheviot Limited does not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting adviser(s) before engaging in any transaction.

This material is based on Quilter Cheviot’s interpretation of the law and tax practice as at April 2022. While this interpretation is believed to be correct, Quilter Cheviot can give no guarantee in this respect or that tax reliefs and the tax treatment of investment funds will remain the same in the future. The value of any tax reliefs will depend on individual financial circumstances.

Headshot of David Denton

David Denton

Technical Consultant

David’s primary role is to collate, simplify, regularly update and share technical knowledge, in a user friendly and practical way, within the Quilter group and with the adviser community. This is to assist with maximising financial planning post-tax investment returns given the complexity and fast changing legislation impacting wealth management.

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