Capital Gains Tax
If you have disposed of assets for a sum in excess of that originally paid you may be liable to tax on the gain. It may even be that you have already paid the tax or that your accountant has informed you that Capital Gains Tax (CGT) is payable following a recent asset sale. In any case it may be beneficial to obtain professional independent advice in relation to your financial affairs and get an insight into the many tax mitigating products available.
Capital Gains Tax – The Basics
Individuals have an annual CGT allowance of £11,300 (17/18)
If you are a basic rate tax payer, CGT is currently charged at 10% on anything above the allowance (18% for residential property)
If you are a higher rate tax payer, CGT is currently charged at 20% on anything above the allowance (28% for residential property)
CGT can arise from selling an investment property, selling a second home, selling a business or even selling investments.
Capital Gains Tax – worked examples
We discussed options for managing their CGT liability, including the types of schemes that are currently available - such as Enterprise Investment Schemes (EIS). These schemes aim for capital preservation or investment growth whilst providing CGT deferral, Inheritance Tax (IHT) relief and income tax relief.
Scenario 1 – High Value Second Home
Mr and Mrs Jones own a second property in London. They bought this property for £100,000 but it has recently sold for £1,193,630. From the table, you can see that this has generated a gain of £1,093,630.
They each have an annual CGT of £11,100 so the chargeable gain is £1,071,430. As they are both higher rate tax payers 28% will be charged; meaning £300,000 will have to be paid.
As Mr and Mrs Jones had no immediate requirement for the money, we suggested an investment of £1,071,430 from the proceeds of the house sale into EIS with the aim to defer £300,000 of the CGT, achieve 30% income tax relief (capped at the sum paid) and also reduce their contingent IHT bill.
|1 - High Value Second Home|
|Original Purchase Price||£100,000|
|Tax Charge||28% (higher rate)|
|Amount to Pay||£300,000|
Scenario 2 – Buy-to-Let Property
Mr and Mrs Brown are selling their rental property. They have sold the property for £180,000. This has doubled from their original purchase price and, from the table, you can see that this has generated a gain of £90,000.
Again, they each have an annual Capital Gains Tax allowance of £11,100 so the chargeable gain is £67,800. Mr and Mrs L are basic rate tax payers so a 18% tax rate will be charged; resulting in a £12,204 bill to pay.
We discussed Enterprise Investment Schemes with Mr and Mrs Brown as a means of mitigating this liability, and having discussed the clients’ needs, suggested putting the whole amount (£67,800) into an Enterprise Investment Scheme.
|2 - Rental Property|
|Original Purchase Price||£90,000|
|Tax Charge||18% (basic rate)|
|Amount to Pay||£12,204|
Scenario 3 – Business Sale
Mrs Smith holds shares within a business. She purchased the shares for £10,000 but the business has recently been sold creating a gain of £990,000.
Like everyone else, she has an annual CGT allowance of £11,100, so the chargeable gain is £978,900. She is a higher rate tax payer and would normally be subject to the 28% tax charge. However, as one of the business owners, she was entitled to Entrepreneur’s Relief. Entrepreneurs’ Relief is a lifetime allowance that can be claimed to reduce CGT following the disposal of a business asset. This means the gain is taxed at only 10% rather than 28%. As a result, tax of £97,890 will have to be paid.
Mrs Smith wanted to use a substantial amount of the money for home improvements and income generation; therefore she only wanted to commit £200,000 for the EIS. This deferred £20,000 of the £97,890 liability, while also reclaiming all of her income tax paid over the past 2 years. In addition, she benefited from a reduction in her taxable estate for IHT purposes.
|3 - Business Owner|
|Original Purchase Price||£10,000|
|Tax Charge||10% (entrepreneurs’ relief)|
|Amount to Pay||£97,890|
These simple scenarios outline the benefits of careful planning, so whether it's CGT planning or general tax planning, there may be a number of options available to you.
If you feel CGT may be an issue for you now, going forward or even looking back, and you would like to discuss this further with our professionals, please call or email our financial planning team.
Please bear in mind these real client scenarios have been simplified for the purposes of presentation. The actual benefits of EIS investment will depend upon your personal circumstances and tax affairs.
If you have assets approaching the threshold for Inheritance Tax, then you may wish to obtain professional advice in relation to Inheritance Tax planning. Professional advice can save much more than it costs and ensure that those closest to you benefit as fully as possible from your estate on your death.
Inheritance Tax — The Basics
Inheritance tax (IHT) is currently charged at 40% on the value of your estate in excess of £325,000.
Married couples and civil partners can transfer their unused allowances to each other on death; this effectively means that for a couple who are UK domiciled up to £650,000 can be left free of Inheritance Tax.
Inheritance tax is calculated on the value of the deceased's net estate, i.e. the value of everything they owned at the point of death less money owed.
With rising house prices and a freeze on the Inheritance Tax allowance, it's important to remember that Inheritance Tax isn't something that only 'wealthy' people have to pay. A house worth £325,000 already takes up half of the allowance for a married couple (the full allowance if owned by an unmarried sole owner)
Inheritance Tax – An Example
Mrs B is aged 80, widowed and living off her state and private pension income. She recently downsized and moved home. Her current house is worth £160,000 leaving her with £625,000 from her old house. Including other assets, such as cars, personal effects and bank accounts, her total estate is worth £830,000.
Even though her husband is deceased, she is still subject to the joint allowance of £650,000. Based on these figures, Mrs B has an Inheritance Tax liability of £72,000 (£830,000 - £650,000 = £180,000 x 40% = £72,000) without even realising. She wanted to complete some renovations on her current house but did not know what to do with the remaining money or her tax issue so she spoke with us.
We first recommended that Mrs B invested £200,000 into an approved Inheritance Tax scheme with the aim to reduce her Inheritance Tax liability by £80,000– this scheme completely removes her liability within 2 years rather than 7 years if she were to gift money.
We then suggested that she puts £235,000 into a stocks and shares portfolio to put her money to work and potentially beat cash savings rates. We also suggested taking up the ISA allowance of £15,240 in order to improve the income tax and capital gains tax on the investments.
It’s important to know that her estate still totals £830,200 but in 2 years time £80,000 will be outside of her estate for inheritance tax purposes.
Many people do not realise that there are solutions to tackling inheritance tax. Some do not even know they have an inheritance tax liability at all. Seeking professional advice can help put your mind at ease knowing that your money is still yours.
Whether it's Inheritance Tax planning or general Estate Preservation, there are a number of options available to you. This is just an example used to explain what we can do. Through careful planning we can help you retain the value that you've built up within your estate.
If you feel inheritance tax is an issue for you and you would like to discuss this further, please call us or send an email. This is an area of practice to which our team at SWLaw Investment & Financial Planning Ltd can contribute by working together with our Private Client team at SWLaw Solicitors Ltd.