As the UK’s fiscal black hole deepens due to the economic impact of COVID-19, the question of how we will pay for it has become a hot topic. As was flagged in the article, The Deep Divides in Perceptions of Wealth, this prompted the Chancellor of the Exchequer to commission the Office for Tax Simplification (OTS) to conduct a review of the current capital gains tax (CGT) rules. The first report was published on 11 November, with a second report due out early next year.
As a reminder, CGT is a tax on the profit you receive when you dispose of an asset (land, buildings or shares) that has increased in value. The disposal could be a gift or sale, even if it is intentionally sold at less than the market value. CGT rates are currently between 10-20% (or 18-28% for residential property), based on your income tax band, on gains above an individual’s annual tax-free allowance, currently £12,300.
The OTS recommendations include:
While the impacts of these changes may be felt most prominently by small business owners and wealthier individuals selling second homes or investment portfolios, the changes could also significantly increase the number of individuals paying CGT. However, it is worth remembering the government does not always choose to implement OTS recommendations.
Whether or not some, or all, of these recommendations are implemented, it is an excellent time to take stock and consider taking some action now, not least as the end of the 2020/21 tax year is rapidly approaching.
The easiest option could simply be to organise disposals over a number of (tax) years so that the gains fall within the annual tax-free allowance.
You can also transfer the ownership of the assets into joint names, given ‘gifts’ to your spouse/civil partner are exempt from CGT. This will allow you to take advantage of two annual tax-free allowances. You could also consider transferring the assets into the name of the lower taxpayer so that any future disposal will be subject to the lower rate of income tax.
Meanwhile, if you have incurred any previously unreported losses in the last four years, you may use those losses to offset any gains you make on disposals now. If you have exhausted all losses made within the last four years, you can also claim for losses made before 5 April 1996.
If you’re thinking about estate planning for the long term, you may consider:
Setting up a property discretionary trust
Transfers (seen as disposals) made by the individual(s) into a discretionary trust are not subject to tax so long as they fall below the nil-rate band (NRB) for inheritance tax (IHT) purposes. Currently set at £325,000, this is significantly more generous than the CGT allowance. Additionally, if you set up a discretionary trust with your spouse/civil partner, you benefit from both individuals’ NRB, bringing the limit to £650,000.
It is important to note that your NRB is affected by relevant transfers made in the previous seven years, and any transfer that exceeds the NRB is subject to an immediate 20% charge to IHT.
For example, if you transfer £300,000 into a discretionary trust and have made no relevant transfers in the previous seven years, this falls within the NRB and no tax is payable. If you transfer £300,000 into a discretionary trust, but have made a previous relevant transfer of £100,000 in the last seven years, the NRB is exceeded by £75,000 prompting a 20% IHT charge of £15,000 that is immediately due
Further, if you die within seven years of setting up the discretionary trust, a liability to IHT is also triggered to bring the total up to 40% (being the current death rate), subject to a tapering relief. This taper sees the bill drop by 20% in the third year, 40% in the fourth year, 60% in the fifth year and 80% in the sixth year.
The use of hold-over relief
This is effectively a deferral of CGT from the person gifting or selling an asset to the person who acquires it. For example, you are giving a piece of land to your son which you acquired ten years ago for £50,000, which is the ’base cost’. Today, it is worth £80,000, i.e. the ‘market value’. Without relief, you would pay tax on the gain of £30,000. If your son later sold the land, his base cost would be £80,000. However, when you apply hold-over relief, you are treated as disposing of the land for £50,000, but are not charged, and when your son later sold the land, his base cost would be £50,000
When assets are gifted from a trust, in most circumstances, there is an immediate charge to IHT. In order to ensure that the gift is not subject to both IHT and CGT, hold-over relief is available to defer CGT. This is the case even where the gift falls within the NRB, making the rate of IHT payable 0%. However, in circumstances that do not result in an immediate IHT charge, hold-over relief is not available as this would not result in double taxation.
Hold-over relief must be claimed jointly with the person receiving the assets and both parties must sign the claim form sent to HMRC, as well as include the details in their self assessment tax returns. If the recipient of an asset where hold-over relief was claimed becomes non-resident within six years, HMRC is able to claw back the tax from the person making the gift.
Tax rules and calculations are complex and peppered with potential unintended consequences, e.g. ensuring that multi-jurisdictional clients are advised of which taxes they are liable for, and which exemptions may or may not apply to them.
It is always worth seeking professional advice to ensure that you fully understand the risks and benefits involved, and the potential long-term implications.
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Greenwoods GRM typically helps clients by working with their other professional advisers to provide a holistic, bespoke approach to its advice and to the implementation of any recommended wealth planning.
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Any examples of investments and structures used are for illustrative purposes only. The inclusion does not constitute an invitation or inducement to buy any financial investment or service. None of the content constitutes advice or a personal recommendation. Nedbank Private Wealth does not provide individual tax advice, and instead works with clients’ existing advisers or can provide an introduction if needed. Individuals should seek professional advice, based on their jurisdiction and personal circumstances, before making any financial decision.
Gareth is a partner at Greenwoods GRM and has over 15 years of experience. He acts for high-net worth UK-domiciled and non-UK domiciled clients on a wide range of estate planning and tax matters.
He advises on structures to potentially hold, protect and pass on the wealth of his clients to minimise the tax and maximise the protection against non-tax threats, for example, remarriage of the survivor, divorce of beneficiaries, family disputes and financially vulnerable or immature heirs. He has a particular interest assisting clients with US connections.
Gareth can be contacted by email.
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