Here at Williamson & Croft, when it comes to your business or personal accounts, we are passionate about ensuring you have as much knowledge as possible to make the correct decision for you. Be it the current income tax rate, the latest news from the Chancellor and the UK Government, or the different ways people, be they business owners or entrepreneurs, can save money, restrict losses and keep the value of their assets steady.
Which is why, in today’s blog, we’re going to be looking at the subject of Capital Gains Tax (CGT). From what Capital Gains Tax is, how much Capital Gains Tax is, and what the current Capital Gains Tax allowance is in 2021, we’ll cover it all. We’ll also be looking at potential changes to CGT, that were announced by the Chancellor Rishi Sunak as a result of the Covid-19 pandemic, and how you can act now to avoid big increases on your taxable income.
As well as tax, we have experience in other areas of accounting such as Auditing, and R&D Tax Credits, as well as bespoke advisory services. We’ve helped a number of sectors from Property, Construction and Professional Services to Digital & Creative businesses, Retail & eCommerce companies and Technology & Software firms. All this makes us confident that we can help you, simply call us on 0161 399 0121, if you operate in Manchester, or 0151 303 3112, if your headquarters are in Liverpool.
What Is Capital Gains Tax (CGT)?
Let’s begin our guide by looking at what Capital Gains Tax actually is. CGT is a tax on any profit you make during the disposal of an asset and generally applies to almost all assets, such as a second residential property, the sale of shares, or a business, and other niche items such as antiques. There are exemptions, such as the sale of your main/only residential property, personal possessions, or ‘chattels’, that have a capital value of £6,000 or less, and items that have a ‘useful life’ of 50 years or less, such as a boat.
The current Capital Gains Tax allowance in 2020/2021 is £12,300, which is a £300 increase from the previous year. In terms of CGT rates, they depend on the amount of your taxable income. By calculating this you can determine your rate of tax, which are as follows:
- 10% or 20% tax rates for individuals (this doesn’t include residential property).
- 18% or 28% tax rates for individuals, residential property and carried interest.
- 10% for gains that qualify for Entrepreneurs Relief.
When it comes to calculating your CGT bill you first must work out how much taxable income you’ve earned from the money you made, be it a salary, pension or other income. You can do this by deducting your tax-free personal allowance (which, as we mentioned, is £12,300) from the profits. It’s important to note that you only pay CGT costs on the profit, or gain, you make from an asset, not from its sale price. This means you can deduct the price you originally paid as well as the costs of improving the asset. The final step involves adding your taxable capital gain to your taxable income. If the two figures combined are less than £37,500 you’ll pay basic-rate CGT which is 10% on investments and 18% on second homes. If, however, they are over that figure, you’ll again pay the basic rate on the part up to the threshold and the higher rate on the rest.
There is no denying that calculating CGT is tricky which is why we’d strongly recommend you get in touch with the team of experts here at Williamson & Croft who can help guide you through the process to ensure you pay the level of tax that you should, and not a penny more. But for now, let’s provide a quick example so you get an idea of what it is you have to do.
So, let’s say your taxable income is £60,000 and your taxable gains are £50,000 once we have taken away the CGT allowance of £12,300 (the current rate for 2020/2021) you’re left with £37,700 that will be taxed. Add this £37,700 to the £60,000 taxable income and you have £97,700.
This final figure is above the higher rate threshold meaning you have to pay 18% on the capital gains. All in all, your CGT bill is £6,786 (£37,700 x 18%).
8 Ways Of Reducing CGT
As we spoke about in another of our recent blogs, Rishi Sunak recently announced that there could be big changes to CGT and the publication of two reports (which you can read about more in the aforementioned blog) did nothing to quell those rumours that something could happen before 6th April 2021. These changes could result in new CGT rates of 20% to 45%, a figure that, as we’re sure you’ll agree, presents a significant, seismic rise in the amount of taxable capital gains, and the volume of capital losses, one could face if they fail to act now and get a handle on their capital assets.
In addition to this, there are rumours of the possible abolition of Entrepreneurs Relief. This tax relief currently entitles business owners to a reduced CGT rate of 10% on the first £1m of capital gains they make when selling a business.
We’re determined to ensure people’s hard work goes unpunished by increased rates which is why we have detailed 4 different ways that you could reduce your CGT now.
- Transfer assets to a spouse before disposing of them – By gifting an asset to a spouse you can avoid CGT rates as this type of transfer is exempt. It is important to note that separate Capital Gains Taxes may apply if they sell that asset in future.
- Staggering disposals – By delaying, or staggering, your disposal you can take advantage of the tax-free allowances and avoid one big tax liability.
- Bring forward a disposal – Alternatively, bringing forward a disposal before the potential changes in April could see you save money and avoid the increased rates. For instance, corporate restructure or incorporation now, as opposed to say September of 2021, could be hugely beneficial.
- Consider offshore structures – By holding retained profits and/or investments in offshore accounts or similar structures to avoid British CGT laws.
- Capital losses planning – Sometimes an investment will make a loss when you sell it. Losses can be valuable so they shouldn’t be ignored, they can be set against any capital gains you make in the same year or carried forward.
- Consider the use of Employee Ownership Trusts – The disposal shares to employees may result in CGT exemptions.
- Use family investment companies – An alternative to a family trust, an FIC is a private company whose shareholders are family members. Capital gains released by an FIC are chargeable to Corporation Tax, not CGT, which is now 19%, not 20%, or the potential 45% that could be introduced. This makes that 26% saving very significant.
- Defer capital gains using SEIS investments – This may be something you consider after the new changes come into force, but by delaying disposals you can take advantage of lower rates in the future if the current CGT rate equals the income tax rates.
How Williamson & Croft Can Help You
We would hate for you to pay an increased amount should you be looking to sell your business, buy-to-let property or shares held outside a pension or ISA. The kind of tax liability that is being mooted is significant and should not be ignored. Here at Williamson & Croft, we can offer you bespoke advice in relation to your specific CGT situation. From the moment you get in touch with us, we’ll work hard to understand your scenario before applying our decades of collective experience to ensure your setup is optimised for the new changes, and beyond.
If you’re concerned about the upcoming changes and want to get a handle on your affairs before April, then we strongly encourage you to get in touch with us on 0161 399 0121 if you live in Greater Manchester or 0151 303 3112 if you live in Liverpool or the surrounding areas of St Helens, Southport & Warrington.