Capital Tax Planning
For individual taxpayers and corporations, the overarching objective of capital tax planning is the minimisation of tax liabilities resulting from capital gains. Capital Gains Tax (CGT) is the focus of capital tax planning.
CGT is incurred by individuals and companies for any gains from disposing of personal and corporate assets, respectively. Disposing of the assets may entail selling, exchanging, gifting or donating them. For individuals, these assets include personal possessions, property and shares. For corporations, the assets include business franchises, shares, goodwill, land, buildings, fixtures and fittings. Individuals and companies are not liable to pay CGT on the entire proceeds from the disposal of assets: the CGT applies only to the profit gained from the disposal.
In disposing of assets, individuals and companies will benefit from capital tax planning that includes deliberate strategies for minimising the CGT payable. Some of these strategies are shown below.
- Take Maximum Advantage of Annual Allowances
In this fiscal year, 2014/2015, an individual taxpayer has a tax-free allowance of £11,000 for capital gains. This exemption must be used during the year, otherwise the exemption will be lost: it can not be carried forward. Disposals can be planned so that taxpayers may maximize their benefits from this allowance. Capital losses from one financial year may be offset against subsequent capital gains.
- Optimally Time the Disposal of Assets
Since April 5 is start of the fiscal year for individuals in the United Kingdom, capital tax planning for these persons may include the strategy of delaying disposals until after April 5 of each year. Similarly, corporations may time the disposal of assets so that their CGT can be reduced or eliminated.
- Be Aware of which Assets are exempt from the CGT
Some assets are exempt from the CGT. These assets include an individual taxpayer’s main residence, which must have had this status during the period of ownership by the taxpayer. Astute capital tax planning should include the individual taxpayer deliberately deciding which of several dwellings will be the main residence that will qualify for exemption from CGT. Exemptions from the CGT also apply to jewellery, paintings, lottery winnings, cars, betting proceeds, government securities and depreciable assets such as race horses. The cost and selling prices of the jewellery and paintings must be below the stipulated threshold if CGT exemptions are to be applicable.
- Separate Business Assets from Personal Assets
Entrepreneurs’ relief, hold-over relief and roll-over relief are among the types of relief that are advantageous in the determination of the CGT for business assets. Business owners who are planning to sell their enterprises, or retire from them, should engage in capital tax planning that will result in the relevant CGT being minimized.
Entrepreneur’s relief may allow individuals to claim relief, when disposing all or part of their business, so that individuals pay tax on any gain at 10% on the first £10m, subject to certain conditions.
Business asset roll-over relief applies when you dispose of some types of business assets which you intend to replace. In essence, subject to certain conditions, you can roll-over (or postpone) any gain on disposal so that there is no tax to pay at that time.
You may be able to get hold-over relief if you give away (or gift) a business asset, which effectively postpones any gain. The person who has received the asset will take the relief into account when they work out their gain.
- Utilise Allowances for Spouses
No CGT is applicable to the transfer of assets between a husband and wife or between civil partners. However, this exemption is effective only if the spouses are living together during the fiscal year in which the transfer is made. If one spouse exhausted his or her annual allowance for CGT, that spouse may transfer an asset to the other spouse before the asset is sold. Thus the CGT will relate to the transferee and the couple will minimize its liability for CGT. Divorce/separation is another matter…
- Claim Losses for Worthless Assets
Another capital tax planning strategy is to claim losses on assets that have no market value. Such assets include worthless stocks, bonds and other items that cause capital losses for their owners. In some cases, such capital losses can be converted into income tax losses.
- Claim Enterprise Investment Scheme Relief
In the United Kingdom, the Enterprise Investment Scheme (EIS) allows deferral relief to business owners who acquire new shares in high-risk trading companies that seek financing. The deferral relief enables investors to defer gains on the disposal of chargeable assets and offset them against new ordinary shares in the trading company. EIS may also attract income tax relief.
Generally, individual business owners and partners use the Self Assessment tax return to declare their capital gains and losses. Companies report such gains and losses as part of their total profits that are subject to corporate taxation.