Eight ways to reduce your CGT bill

Friday, August 20, 2010 | Posted by: Sue Knight
Categories: Protecting your wealth | Tags: tax, tax planning, capital gains tax, CGT, Sue Knight, reduce, strategies, minimize

The capital gains tax (CGT) changes in the Emergency Budget have been covered in some detail over the past six weeks but, as the dust settles, what CGT planning strategies are available to enable individuals to protect and maximise personal and family wealth?

You can read a summary of the recent CGT changes and who is affected in our Budget review. Essentially, the new 28% CGT rate for higher and additional rate taxpayers seems to have been favourably received, but only against fears of a 40% or even 50% rate. For many, 28% will still be too high, especially when taking into account inflationary gains that are no longer protected by indexation relief or taper relief. So, what are the options for affected taxpayers?

Planning strategies to reduce your CGT bill

1. Re-allocation to spouses: Review the allocation of investments between spouses and civil partners to make maximum use of annual exemptions and basic rate bands, as this could save a married couple around £6,500 per annum.

2. Offset losses, log worthless shares: Don’t forget to carry forward unused capital losses and if you own shares that have become worthless, or almost worthless, you might be able to make what’s known as a negligible value claim, http://www.hmrc.gov.uk/helpsheets/hs286.pdf ie a claim where the value is negligible (almost nil). This increases your capital losses, which can be set against other capital gains to reduce the CGT liability.

3. Entrepreneurs’ Relief: Entrepreneurs should consider whether their business interests currently meet, or could be adjusted to meet, the conditions for entrepreneurs’ relief. The conditions need to be met for a period of at least 12 months before any sale, so review your position now to ensure you can take advantage of a potential tax saving worth up to £900,000.

4. Keep it in the family: Consider also whether business interests can be restructured so that spouses and civil partners (or other family members) could also benefit from entrepreneurs’ relief, which could double the tax saving to £1.8 million. The requirement to be an officer or employee is not particularly onerous, and a director of a dormant subsidiary may well suffice.

5. Defer your CGT: There is an opportunity to defer CGT arising on the sale of an unincorporated business or assets from within any business, which can be further enhanced for non-UK domiciled individuals who can potentially benefit from an absolute CGT saving.

6. Be bold when selling up: Entrepreneurs selling their businesses for more than £5 million will be worse off following the introduction of the 28% CGT rate, and for those with a greater appetite for tax risk, there are planning opportunities to secure a potential 0% CGT rate. These are not for the faint-hearted!

7. Defer gains against EIS: Serial entrepreneurs could consider structuring their new business so that their investment qualifies for the Enterprise Investment Scheme (EIS), which enables gains arising on the disposal of any asset to be deferred against an EIS share subscription. The tax on any gain rolled over in this way only becomes due on disposal of the EIS shares, or if the individual ceases to be UK resident within three years of issue of the shares. However, the new entrepreneurs’ relief rules, which came into effect on 23 June 2010, mean you can no longer defer your gains into an EIS asset and receive entrepreneurs’ relief when it crystallises.

8. Leave home! Drastic, but those willing to leave the UK for at least five complete tax years may be able to sell their businesses, while non-UK tax resident, thereby avoiding UK CGT. If you leave the UK, other than under the full-time work abroad rule or the full year out rule, you need to make a distinct break with the UK and sever all UK social and family ties. Remember to also check your tax position in your new country of residency.

The CGT rates for 2011/2012 will be decided in the 2011 Budget. There is much speculation as to whether this means further rate rises but, as illustrated, above, with careful planning and appropriate advice, the CGT burden can be reduced.

As always, I am pleased to take questions about CGT planning and to hear your views.

Need help on how to protect your wealth? Then visit our Personal Tax Services page for more information.

You might also like:
* How to minimise tax in a property downturn
* Income, capital gains and how to beat the 50% top tax rate
* Five ways to reduce your inheritance tax