As the tax year draws to a close, it is worth spending a little time taking stock and making sure opportunities to save tax are not lost. As far as capital gains tax (CGT) is concerned, there are some simple steps that can be taken to ensure that your tax bill is not higher than it need be.
Don’t waste your annual exemption
Each individual has a tax free allowance for CGT each year, known as the annual exempt amount. CGT is only payable to the extent that net gains (i.e. chargeable gains less allowable losses) exceed the exempt amount. The exempt amount is £11,000 for 2014/15.
If you are thinking of disposing of an asset, maybe an investment property, that will realise a gain and you have yet to use your annual allowance for 2014/15, you may want to make the disposal before 6 April 2015 rather than afterwards, where practical, to get the benefit of the 2014/15 annual exempt amount.
Inter-spouse transfers
Special rules apply to married couples and civil partners for CGT purposes which allow spouses and civil partners to transfer assets between them at a value that gives rise to neither a gain nor a loss. Essentially the transferee assumes the transferor’s position as regards the acquisition cost of the asset.
This can be particularly useful if one spouse has used up his or her annual exempt amount, yet the other spouse or civil partner exempt amount remains available.
Example 1 – Transfer asset to spouse prior to sale to save CGT
Andrew has been married to Jane for a number of years. In May 2014, Andrew sells a buy-to-let property, realising a chargeable gain of £10,000. He also has a painting which he wishes to sell before the end of the 2014/15 tax year, which he purchased seven years ago for £3,000. He expects to realise a gain of £8,000.
Jane has made no disposals in the 2014/15 tax year, and has no plans to do so.
If Andrew sells the painting, and realises a gain of £8,000, only £1,000 of his annual exempt amount will be available to shelter the gain (£11,000 less £10,000 already used). He will pay CGT on gains of £7,000 and assuming he is a higher rate taxpayer, this will cost him £1,960 in tax.
However, if he transfers ownership of the painting to Jane prior to sale, the gain will be covered by her annual exemption and will be tax free.
Strategic timing of disposal
If you are planning on selling assets around the tax year end, delaying or accelerating the disposal date can save tax, depending on whether you have already used your annual allowance for the current tax year.
Example 2 – Andrew delays sale to save CGT
Assume the facts as in the example above, except that Andrew is single. If he sells the painting on 3 April 2015, he will trigger a CGT bill of £1,960.
However, by delaying the sale until 7 April 2015, the gain will be covered by his annual exemption for 2015/16.
Tip:
Delaying the disposal until after 5 April will also delay the CGT payable by one year, from 31 January 2016 to 31 January 2017.
Don’t waste losses
Although there is no time limit for carrying forward capital losses, they must be claimed.
As losses are set against chargeable gains before applying the annual exempt amount, some thought should be given to timing when crystallising a loss. If there are no other disposals in the year or gains are in excess of the annual allowance, it may be worthwhile to crystallise the loss before the end of the current tax year. However, if gains have been realised below the annual exempt amount, it may be better to wait until after 5 April.
Practical Tip:
To ensure opportunities to save tax are not wasted, review your CGT position before 5 April 2015.
