Capital Gains Tax can be confusing for many business owners. Just what is subject to capital gains tax and how is it measured? And most importantly how can you reduce Capital Gains Tax? Capital Gains Tax is a tax applied to the net gains you make when you sell or offload an asset after the Annual Exempt Amount, currently £11,100 per person. So, it’s not just applied when you sell or exit a business, but also when you sell or otherwise dispose of assets such as property. It can even cover trademarks. It can seem like a minefield for the business owner but there are some reliefs and ways to reduce it.
1. Entrepreneur’s Relief.
If you qualify for Entrepreneur’s Relief, it can reduce your CGT to 10% from the standard rate when you dispose of qualifying business assets (not including investment assets). The relief is available to individuals (not companies) who must have owned at least 5% of the company for the previous twelve months and were an officer or employee of the company. It comes into play when disposing of whole or part of a business, assets from the business, shares or securities of the business, an interest in joint venture or a disposal of trust business assets. T&C’s apply. You can make more than one claim, up to a Lifetime Allowance, currently set at £10 million.
2. Investor’s Relief.
Like ER, IR has a lifetime cap of £10 million, but applies to gains made on disposal of investments in ordinary shares. The investee company has to be trading or the holding company of a trading group and like ER it reduces the rate of tax to 10% for higher rate tax payers. However, unlike ER investors cannot be officers of the company and there is no minimum shareholding requirement. Investments must be made after 17th March 2016 and held for at least 3 years and must not be an officer or employee at any time.
(Enterprise Investment Scheme/Seed Enterprise Investment Scheme). These schemes offer a double relief from CGT.
On investment: Investments qualify for roll-over relief (see point 4) and, in the case of SEIS, a 50% exemption from CGT.
On disposal: Any gain is on these investments is free from CGT.
By their nature, these shares a high risk. You must hold them for 3 years and you cannot receive any other remuneration from the company during that time.
4. Roll-over Relief
A company or individual can defer CGs made on the disposal of a business asset by investing the proceeds into the cost of acquiring a new asset, but the relief is lessened if not all the proceeds are re-invested. This is not available for shares.
5. Incorporation Relief
This form of roll-over relief is available to individuals upon transferring a business into a company. Essentially, the gain made on the disposal of a business and its assets (all assets must be included) is subtracted from the base cost of the shares that are issued by the new company.
6. Transfer an asset to your spouse or civil partner
There is no restriction on such transfers and the assets are deemed to have been acquired by the spouse on the date and price of the original acquisition. Spouses and civil partners each have their own Capital Gains allowance (£11,100 in 2016 -17). The transfer must be a genuine gift. There are some traps when it comes to property so always consult your friendly accountant.
7. Live in let property.
If you are letting out a property, you could potentially reduce the Capital Gains Tax Bill when you come to selling it by ensuring that you lived in the property for a time before letting it out. Make sure you keep evidence of having genuinely lived in the property (electoral register, council tax and other bills, etc.).
8. Get the timing right
Your tax-free allowance for capital gains tax is lost if not used. Splitting a disposal over 2 or more years could net you considerable savings. For example, selling shares in March 2017 at a gain of £50,000 would cost £38,900 @ 28% = £10,892 in CGT (allowing for £11,100 tax-free and assuming you’re a higher rate taxpayer with no other gains). Deferring half the gain until after 5 April, would reduce the tax to £13,900 @ 28% x2 = £7,784
Factor in transferring half the shares to your spouse before you sell and the tax drops to £1,568. And if either of you earns less than £43k, it drops even further.
N.B. The numbers in this article were correct at time of original publication and may have changed slightly since then.
Contact us for more info on reducing capital gains tax