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Capital gains tax planning for higher rate tax payers

Capital gains tax (CGT) is a tax on the increase in value of your assets such as a second home, antiques or shares, during the time you have owned them. Any tax is due when you sell or give them away. Higher rate taxpayers will pay 28% on gains from residential property and 20% on gains from other chargeable assets. Mitigating CGT can work in a number of ways through reliefs, exemptions and making the best use of available tax rates.

Seed Enterprise Investment Scheme (SEIS)

SEIS provides great tax-efficient benefits for investors purchasing shares in very early stage start-up businesses in the UK. Under SEIS, an investment limit of £100,000 provides an income tax relief of 50%.

A CGT break is provided where gains are re-invested into a SEIS company (known as ‘SEIS Reinvestment relief’). To qualify, the investment must be held for at least three years without withdrawal of reliefs on the shares.

Going non-resident

CGT applies to non-residents disposing of UK residential property on capital gains arising from disposals. This includes property which is being built or adapted to be used for residential purposes. In most cases you don’t pay tax for any tax years in which you, your spouse or civil partner spent at least 90 days in your UK home.

Private residence relief

The gain on a property which was the owners’ principal private residence is CGT exempt. If the property was not the main residence throughout the ownership period then only part of the gain would be exempt. In all cases the final 18 months of ownership are treated as exempt. Example:

Property owned for 60 months (main residence for 40 months and let out for 20 months). Capital gain on the property sale = £50,000. Therefore £48,350 of the gain is tax-free. Calculation: 40 + 18 = 58 months. 58/60 months = 0.967. 96.7% of 50,000 = £48,350)

Assuming the ‘Annual Exempt Allowance’ (£11,300 for 2017/18) has not been used elsewhere, this allowance can be used against the chargeable gain of £1,650 reducing the charge to zero. ‘Letting Relief’ may also be available.

Rollover relief

Available when the gain from the sale of a business asset is invested in a new business asset which is bought within one year before, or three years after the disposal. Subject to certain conditions, the gain is ‘rolled over’ so that CGT on the original asset is not payable until the new asset is sold.

Entrepreneurs’ relief

Entrepreneurs’ relief means you’ll pay 10% tax on all gains on the disposal of qualifying assets:

  • All or part of a business – including the business’ assets after it is closed;
  • Shares – where you have at least 5% of the issued share capital;
  • Shares you acquired through an Enterprise Management Incentive scheme after 5 April 2013.

Investors’ relief (‘IR’)

Acquiring shares in non-listed companies can qualify for IR on later disposals, you’ll pay 10% tax on qualifying gains. The shares must be issued after 17 March 2016 and held for at least 3 years before disposal. There must be no connections with the company (e.g. employed or connected to employee). The shares must be ordinary, fully paid-up shares in a trading company (or the holding company of a trading group).

Enterprise Investment Scheme

See our Tax facts – Enterprise Investment Scheme

Gift hold-over relief

If you give away a business asset e.g. from a trading business or shares in an unquoted trading company you don’t pay CGT. If you sell an asset for less than market value to help the buyer but still make a gain on what you paid for it then you may have to pay CGT. You may jointly elect to ‘holdover’ any gain with the person receiving the gift. This means upon disposal they accept liability for any chargeable gains arising when you owned the gift. Holdover relief can apply to agricultural land and the gift of assets into and out of trusts.

Download the PDF version Tax facts – Capital gains tax planning for higher rate tax payers

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