Advisers must ensure all available reliefs and exemptions are used as far as they can be
As announced in this year’s Budget, the capital gains tax annual exempt amount will increase from £11,700 in 2018/19 to £12,000 in 2019/20.
The annual exempt amount available to trustees will increase from £5,850 to £6,000 – although this per-trust limit is diluted where the settlor has created more than one trust, subject to a minimum of £1,200 per trust for 2019/20. The rates of CGT are unchanged.
One of the most cherished reliefs for UK homeowners is main residence relief, so hearts may have been in mouths when chancellor Philip Hammond referred to it in his Budget speech. We can rest easy though, as the relief is not going to be fundamentally changed.
That said, it is worth noting, from April 2020, lettings relief, which is currently available on disposals of property that qualifies for an element of main residence relief, will be restricted to cases where the landlord and tenant share occupation.
The final period exemption for main residence relief will be reduced from 18 to nine months.
There will be no changes to the 36-month final period exemption available to disabled people or those in a care home.
Reassuringly, the government will consult on these changes.
Turning to non-UK residents owning UK assets. Following a consultation on proposals originally announced in the autumn Budget of 2017, the government has confirmed that, from April 2019, tax will be charged on gains made by non-residents on disposals of all types of UK immovable property, extending the existing rules which have applied to residential property since 6 April 2015.
The new rules will also apply to certain disposals of interests in “property-rich entities”, i.e. non-resident companies that derive, directly or indirectly, 75 per cent or more of their gross asset value from UK property (although exemptions will exist for investors in such entities who hold a less than 25 per cent interest and where the entity uses the land in its trade).
Special rules will apply to collective investment vehicles investing in UK real estate which agree to certain conditions, including reporting to HM Revenue & Customs. Non-resident companies will pay corporation tax.
Even these relatively minor changes should act as a prompt to ensure available reliefs and exemptions are used as far as they can be. Here are a few reminders as we run up to the end of the year.
Making use of the annual exemption
The annual exemption is given on a use-it-or-lose-it basis. Disposals driven by a desire to trigger gains within the exemption need to be such that they circumvent the “bed and breakfasting” anti-avoidance provisions.
Of course, in the ordinary course of ensuring a portfolio adheres to a specified asset allocation model, investors may naturally use some or all of their annual exemption as a useful and tax-effective by-product of rebalancing.
In some cases, where a disposal is ascertained to be the right thing to do and you are near the end of a tax year, phasing the disposal (for example, of shares or collective investments) over two tax years can prove to be beneficial, as it may then facilitate the use of two annual exemptions.
It may also be possible to maximise the tax-free element of any gain by ensuring investments are held jointly with a spouse or civil partner, so that two annual exempt amounts are available to offset against any gain on disposal.
Maximising the use of losses
Despite the generally positive investment performance across a range of assets, some holdings could still be standing at a loss and, as such, those who either make a capital loss or have carried forward losses need to understand how these can be used. If a taxpayer has realised a gain and a loss in the same tax year:
- The loss will be set off against the gain, even if the gain is within the taxpayer’s annual exempt amount. Some or all of the exemption may be wasted.
However, if the taxpayer carried forward a loss from a previous tax year:
- The carried forward loss is only used up to the extent it reduces their overall gains to the level of the annual exempt amount.
- The loss is therefore only partly used when necessary, with the balance carried forward to set off against gains in later tax years.
Care should always be taken before realising gains and losses together in a single tax year so as not to inadvertently waste all or part of the annual exemption.
Where a large gain has been made on disposal of an asset, consideration could be given to investing all or part of the gain into enterprise investment scheme shares to benefit from capital gains tax deferral relief.
The deferred capital gain will not then be brought into charge until the EIS shares are sold or otherwise disposed of – and may be wiped out altogether if the shares are still owned by the investor at the date of their death.
Of course, EIS investments carry a certain level of risk not all investors will be comfortable with. However, this can be offset to an extent by the potential tax savings available.
Tony Wickenden is joint managing director of Technical Connection (a St James’s Place Wealth Management group company). You can find him Tweeting @tecconn