The rates of Capital Gains Tax (CGT) were cut in the March 2016 Budget, opening up potential opportunities for investors to diversify how they invest their money, and save tax in the process. Read more about how to calculate Capital Gains Tax and what reliefs may be available to you.
Rules and regulations still apply though, particularly for buy-to-let investment property, so it is important to understand how you can maximise your tax position across your different assets.
How much is Capital Gains Tax?
CGT applies to the sale of assets where a financial profit is gained. Typically, for contractors, this could include the sale of shares, or the sale of investment property.
The CGT calculation makes up part of your business or personal tax return, depending on the ownership of the asset, and is broadly calculated using the sale proceeds less original costs, giving a taxable gain, to which the relevant tax rate is applied.
For 16/17, the tax rates have been cut from 28% to 20% for higher rate tax payers, and from 18% to 10% for basic rate tax payers.
Other reliefs are available too, which can lower your CGT liability further. An accountant can help determine if you qualify for these. A couple of relevant reliefs are discussed later in this article so keep reading for more insight.
Capital Gains Tax on Property
Selling your home, i.e. where you actually reside, allows you to claim Principal Private Residents Relief (PPR), which effectively exempts you from having to even declare any gain on a tax return. However, if you are unable to claim PPR then the higher CGT rates of 18% and 28% apply.
This is part of the continued efforts from the government to curb investment in rental properties.
Therefore, this could be another reason that property investors are turning their tactics to property “flipping” rather than property “letting”. Property “flipping” is a term used where investors buy a property, usually in need of renovation, which they sell to make a quick profit.
Capital Gains Tax Relief
Entrepreneurs and Investors relief – do you qualify?
ER has been available for a while. With a lifetime allowance of £10 million, a 10% tax rate applies for gains that qualify. ER applies to the sale of assets through a limited company, of which you must be an employee or an officer, holding a 5% shareholding minimum.
IR is a new opportunity for external investors to also access a 10% rate of tax. Unlike ER, to qualify you must not be an employee or an officer of the company, and the rules around the shareholding are more complex. Shares must be:
- Newly issued, and acquired wholly in cash
- Purchased for genuine commercial reasons
- Held in an unlisted trading company, or group
- Issued on, or after, 17 March 2016
- Held for a continuous period of three years, starting on, or after, 6 April 2016
This relief comes with it’s own £10 million lifetime allowance, separate to the lifetime allowance for ER.
The difficulty with this new Investors Relief is that, at present, it isn’t useful to existing shareholders, as it only relates to shares issued post 17 March 2016. Also, in case you were wondering, it isn’t possible to transfer shares to a spouse to incur a more recent subscription date, as in this situation, the original date applies.
However, on the plus side, should you acquire new shares now, after a three year period of retention, any sale of shares will prioritise qualifying shares over non-qualifying shares, meaning the 10% rate of tax can be accessed more effectively.
It is a complex area of tax planning though, so it always best to seek the help of a professional accountant for capital gains tax advice.
Diversifying your investment strategy
If you sell an asset with a £100,000 gain you will now save over £7,000 in tax. This means more post-tax profit for you.
This makes the proposition of selecting investments for capital growth more attractive than before and may encourage investors to diversify their strategy away from just focusing on generating income.