Although income tax will be top of the tax planning agenda for most, and comparatively few people actually pay capital gains tax, when it is payable it is usually payable at the highest rate of tax, capital gains being added to taxable income to determine the level of capital gains tax payable.
The availability of the following can reduce a potential CGT bill dramatically:
Tax-free transfers between spouses.
An annual exemption of £7,500 per individual.
Taper relief for individuals.
Retirement relief (albeit diminishing).
The ability of an individual to set capital losses against capital gains.
The following are the key planning opportunities that are available.
The annual capital gains tax exemption is £7,500 for individuals and £3,750 for most trustees in 2001/02. Any part of the annual exemption that has not been used cannot be carried forward.
If a taxpayer has investments with inherent gains, consideration should be given to making disposals to realise any gains within the annual exemption. Remember, the old bed-and-breakfast techniques no longer work so, if a taxpayer wishes to sell and repurchase stock, this must take place over a period of more than 30 days or with somebody else, say, a spouse or an Isa manager, buying back the stock.
The annual exemption is available to both a husband and wife so, between them, capital gains of up to £15,000 this tax year can be realised without any CGT liability. Unconditional transfers between a married couple will not trigger any chargeable gain.
Gains under a bare trust (even for a minor unmarried child of the settlor) will be treated as having been made by the beneficiary regardless of who the settlor is. Thus, that beneficiary's annual exemption will be available on gains made on trust assets.
Transfers between spouses are on a no-gain/no-loss basis so, as long as any transfer is outright and unconditional, a prior transfer to a spouse could effectively double the potential use of the annual exemption. It should be noted that, for taper relief purposes, the combined period of ownership for both spouses is taken into account on a subsequent disposal.
Capital losses could also be crystallised for tax purposes if gains in excess of the annual exemption have arisen in the same tax year. Remember, losses cannot be used if generated solely by virtue of the indexation allowance, which is frozen at April 1998.
If a disposal is contemplated in the near future which will trigger a capital gain in excess of £7,500, if legally and practically possible, it may be worthwhile spreading the disposal across two tax years in April. Alternatively, if the disposal cannot be spread or is very substantial, delaying the disposal until after April 5, 2002 will result in payment of CGT being delayed until January 31, 2004.
If a capital gain has been made within the last three years, consideration should be given to taking advantage of deferral relief available on investments in an EIS.
Alternatively, if a gain has been realised within the last 12 months, it may be possible to take advantage of deferral relief via an investment in a VCT. Both these investments also offer the prospect of income tax relief at up to 20 per cent.
The introduction of taper relief from April 1998 meant the system of pooling shares ceased. Each share is treated separately, which means the time of each purchase must be recorded. New rules were introduced for matching up shares disposed of with those acquired. Shares disposed of after April 5, 1998 are first identified with those acquired on the same day, then those acquired within the next 30 days, then acquisitions preceding the disposal in a defined order.
It is necessary to track carefully the acquisition history of each share. Provided acceptable flexibility and portfolio management can be secured, a form of pooled inv- estment within which the share management takes place may simplify matters. It may also enable greater taper relief to be secured. Such an investment could be a unit trust, Oeic or investment trust, each of which provides freedom from CGT for the fund manager who realises gains in managing the portfolio.
The phased abolition of retirement relief over four tax years beginning in 1999/2000 means the timing of a disposal is important in maximising relief. For example, a £250,000 gain where the business has been owned for at least 10 years and other conditions have been satisfied could attract retirement relief of £175,000 if the disposal is on April 1, 2002 and business assets taper relief at 50 per cent maximum. This would leave a net chargeable gain of £37,500.
If the disposal occurs five days later, retirement relief falls to £125,000. Though the difference of £50,000 will be reduced by the availability of an extra year's taper relief, with maximum taper being available for disposals on or after April 6, 2002 after just two years' ownership, the chargeable gain would be £62,500.
For those making more substantial gains from the sale of a business, taper relief for gains arising on the disposal of business assets will result in a more attractive tax position than retirement relief. Which relief is best in practice will, of course, depend on the facts of each case.