Capital Gains Tax is usually payable where a profit has been made on the disposal, gift or transfer of an asset. However, through Capital Gains Tax Planning, there are ways you can reduce your tax liability with the help of your partner, even after you have signed the contract on a sale of an asset. Although Capital Gains Tax (CGT) is calculated on the profit and not on the assets entire value, the cost can still be excessive especially for the higher rate tax payer; under the basic tax rate band, an individual can expect to pay 18% on the sale or transfer of the asset whilst a higher rate tax payer will be subject to 28% tax on the profits made. However through effective planning of your CGT annual allowance, you can offset some of the tax and save significantly.
CGT ANNUAL EXEMPTION ALLOWANCE
Individuals can save themselves £1,998 for the basic tax payer and £3,108 for the higher rate payer each year by using your annual allowance. However, if you have exhausted your personal annual CGT allowance of £11,100 a year, you could look to your partner to help reduce your CGT. This is done by transferring a share of the asset over, which can be particularly helpful if your partner is a basic tax payer or/and they have any capital losses from the past. This can best be explained in this example: Jonathan is selling his residential property and will receive a capital gain of £50,000. However, Jonathan is a higher rate tax payer and has used his entire annual exemption for the 2015/2016 tax year. The table below explains the outcome before the transfer of shares:
Jonathan before Transfer
|Capital Gain before tax||£50,000|
|Tax to pay(28%)||£14,000|
However Jonathan is advised by his accountant to transfer 25% of his gain to his wife, Whitney. Whitney is a basic rate tax payer and has her entire exemption of £11,100 unused. To add further, Whitney has a capital loss of £2,500 which is carried forward from the last tax year.
With Transfer Jonathan (75%Share).
|Capital Gain Before Tax||£37,500|
|Tax to pay (28%)||£10,500|
|Annual Exemption left||£0|
Whitney (15% Share)
|Tax to pay (18%)||£2,500|
|Annual Exemption left||£11,100|
|Capital loss remaining||£100|
Combined carried forward balance: £39,500
We can see that Jonathan has made a save of £3,500 on CGT by transferring a portion of the gain to his wife.
Although CGT planning is extremely effective when it comes to saving you money, timing can have a massive influence when dealing with HM Revenue & Customs (HMRC). Although it is argued that tax planning cannot begin once the a contract has been signed, Underwood v HMRC 2008 and Jerome v Kelly 2004 reaffirm that a transfer can still be made by the seller.
However, HMRC are particularly wary of those who anticipate tax-saving methods during the time of a sale. If you do happen you start you CGT tax planning whilst you have started the sale of your asset, you should provide supporting evidence and a document which outlines that you will be transferring a proportion of your asset to your spouse with a witness to testify to this. It is important to remember that trying to escape tax is a breach of the law, and individuals who do so can expect to face financial and criminal sanctions. If you require any further information, or would like to seek advice on your personal situation, please contact Paul Dell at Paul@raffingers.co.uk