Significant changes have been made to the rates of capital gains tax (CGT) in 2016/17:
for disposals prior to 5 April 2016, CGT rates were 18% on gains falling within the basic rate band. Gains or any parts of gains above the basic rate band limit were charged at 28%
from 6 April 2016, CGT is charged at the rate of 10% on gains falling within the basic rate band. Gains or any parts of gains above the basic rate band are charged at 20% with a few exceptions. The main exception is a gain on residential property that does not qualify for private residence relief where the previous 18% and 28% rates continue to apply.
Other areas have remained the same as in prior years:
gains (after deduction of an annual exemption) are added to income to determine the rate of CGT
Entrepreneurs’ Relief gives a 10% tax rate on the first £10 million of qualifying business gains, for each individual over their lifetime.
The first £11,100 of gains are CGT free being covered by the annual exemption. Each spouse has their own annual exemption, as indeed do children. A transfer of assets between spouses may enable them to utilise their annual exemptions. Consider selling assets standing at a gain before the end of the tax year to use the annual exemption. Bed and breakfasting (sale and repurchase) of shares is no longer tax effective but there are two variants which still work:
sale by one spouse and a purchase by the other
sale followed by repurchase via an Individual Savings Account.
These techniques may also be used to establish a loss that can be set against any gains.
A capital loss can be claimed on an asset that is virtually worthless. Where the asset is of ‘negligible value’ by 5 April 2017 the capital loss can be used in 2016/17. There is no need to claim for the loss in the year in which the asset has become of negligible value - if substantial gains are going to be realised in a future tax year, the claim can be delayed until the tax year in which the gains are made.
A new 10% rate has been introduced in 2016/17. It is aimed at external investors in unlisted trading companies whereas Entrepreneurs’ Relief is targeted at directors and employees of such companies. Scenarios in which IR may be attractive to the company raising funds and the investor include:
asset backed trades which are excluded from EIS and SEIS such as hotels, property development and farming
larger companies on the Alternative Investment Market. These companies are not regarded as ‘listed’ and so potentially qualify. Some of these companies could qualify for EIS but EIS is restricted to companies with gross assets of less than £15 million before a further share issue.
Please contact us if you would like further information on Investors’ Relief.