Capital Gains Tax (CGT) is often a tax that is forgotten about until an event takes place to remind us that it is there. This ‘event’ is usually the selling of an asset or assets. Invariably the asset is sold with little or no thought to tax planning which, if undertaken timeously, could ensure that as little CGT as possible is paid. The reason for this lack of planning is that the asset is sold for some other reason - usually to obtain ready cash quickly, or to get rid of a property that is loss making.
However, a little forethought might produce an increase in cash retained and a reduction in tax. For example, if one property is standing at a loss, that loss could be utilised against the gain made on the sale of another property sold at a profit if known about in time for the contract date to be before 5 April in the tax year.
CGT is a relatively ‘new’ tax in comparison with say, Stamp Duty Land Tax (or even its predecessor - Stamp Duty) but it was, in fact, introduced over 40 years ago as part of the never ending fight by HMRC against tax avoidance. Many of the tax cases brought before the courts prior to the introduction of CGT dealt with situations where a gain was made on the selling of property. Under the law at the time any such gain was exempt from tax unless it could be proved to have been made ‘as an adventure in the nature of trade’. There were many tax planning schemes in use, not all successful it must be said, that intended to make taxable income change form to become exempt capital gain. The imposition of CGT ensured that these gains were now taxable without the need to go to the expense of a hearing.
Probably the worst feature of CGT is the many and varied special rules - no other tax has quite so many complex reliefs for individual situations nor so long a list of partial or complete exemptions as are to be found under CGT. With any tax planning (CGT or otherwise), the principle in the tax case of Furniss v Dawson should always be borne in mind. Although the principle has undergone some changes since, the basic principle still remains, such that where there is a scheme comprising a number of preordained steps, one or more of which has no purpose other than to avoid or defer tax, then such steps are to be ignored for tax purposes.
CGT Planning Steps
So with this in mind how do you start a CGT tax planning exercise?
The first step is to identify when a charge arises. The basic rules are that before a transaction can produce a chargeable gain all of the following must be present:
• a chargeable person and
• a chargeable asset and
• a disposal.
Generally a chargeable person is someone who is resident in the UK for at least part of the year or is ordinarily resident (TCGA 1992, s 2(1)); a chargeable asset includes all forms of property and land as well as chattels and legal rights (unless specifically exempt from tax or the gain taxed as income); a disposal occurs when ownership changes or part or all of the asset ceases to exist.
Most important in any tax planning exercise is timing - especially if the transaction needs to be made quickly to ensure that the date of disposal is before the end of the tax year. Usually the actual date is easy to ascertain because with most assets the date of disposal is the actual contract date even though the monies may not come through until some days later or the asset is not conveyed, delivered or transferred until a later date.
However, if a contract includes any conditions or perhaps is subject to the exercise of an option, then the disposal is not deemed to have occurred until those conditions have been met and satisfied as finalised.
One of the fundamentals of CGT planning which, should timing be at a premium, be quick to expedite is the transfer of assets to a spouse. Each spouse is entitled to his/her own annual exemption and as transactions between spouses usually occur on a ‘no gain, no loss’ basis any transfer of assets from one spouse to the other prior to disposal can ensure both allowances are fully utilised.
Care should also be taken where a couple take advantage of this ‘inter-spouse exemption’ and then get divorced. The exemption remains in place and is only applied to assets transferred in the tax year that they live together. Further, they remain ‘connected persons’ under the rule in the case Aspen v Hildesley until the decree absolute comes through. This rule could have an impact on assets standing at a loss because if the couple are still deemed ‘connected’ then any loss accruing on the disposal of an asset can only be offset against chargeable gains arising on further disposals to that particular person.
Another basic tax planning exercise is to make full use of the annual CGT exemption by other members of the family. Children, parents and grandparents each have their own annual exempt amount and if it is known that specific assets will increase in value over the years consideration should be given to gifting those assets to other family members, thus enabling them to utilise their annual exemptions over a period of years with no tax liability. For the plan to work there needs to be a reasonable amount of time between the date of the gift and the actual date of sale. It should also not be a condition of the transfer that the asset is sold at a later date, and obviously the transferor cannot benefit from the sale proceeds when the time does come to sell.
Many young persons currently cannot purchase a property without financial assistance from their parents. Where the house is in the name of the child, principal private residence (PPR) relief is possible in the name of the child(ren).
Recently, many taxpayers have taken advantage of buying a property in need of renovation, doing it up and selling it. So long as this is not undertaken on a serial basis (such that the profit is taxed as under business rules) advantage can be taken of the annual CGT exempt amount. For example, a non-PPR house with land owned by a couple can use four lots of annual exemption by selling the land separately in one tax year and the house in another tax year but preferably not to the same buyer. If the renovation project is undertaken by a number of people then a number of annual exemptions can be used.
Practical Tip :
Care must be taken that the transaction is not caught by income tax anti-avoidance provisions which relate to development gains and purchases with a view to making a gain (ITA 2007, Pt 13, Ch 3). If those tax rules apply, an asset (including property) bought with a view to the realisation of profit are taxable as income rather than under the CGT rules. Professional advice should be obtained if in any doubt.
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