Capital Gains Tax (CGT) can get a little complex at times, but with a little planning it is possible to avoid paying it a lot of the time.
Let’s start with exemptions. That is, situations and types of security that are not liable to CGT. Here is a list of some common areas:
- Government securities e.g. gilts
- Qualifying corporate bonds – broadly, interest-based corporate loan stocks, excluding convertibles
- Venture capital trusts – subject to conditions
- Enterprise investment schemes – subject to conditions
- Gifts to charity
- Transfers between spouses
Apart from these, the disposal of shares and other securities will in general give rise to a potential capital gains tax liability, or an allowable loss. A disposal does not necessarily mean a market sale. Gifting the shares in general to any person other than a spouse is deemed to be a disposal at market value, whatever the amount of money changing hands.
Every person, including minors, is exempt from CGT on the first slice of their net gains in any tax year – up to a figure called the ‘personal exemption’. For the 2016/17 tax year it was £11,100, and for 2017/18 it is £11,300.
Net gains means profits minus losses made in that tax year, after deducting all other reliefs that may be available (such as losses brought forward from previous years). Following on from that, net losses in a year can be carried forward indefinitely and will be set against gains as they arise in future. The personal exemption is given for each tax year alone, and cannot be carried forward.
Disposals of shares where new securities are received in exchange for the shares are not treated as disposals for CGT purposes. This happens often in takeovers and company reorganisations. In such a case you are deemed to hold the new paper at the original cost of the old paper. No CGT disposal occurs until you sell the new shares for cash. If all cash is received in the deal, though, this is like any other sale for CGT purposes. If, as sometimes happens, it is a mixed cash and paper deal then there may be a partial CGT disposal or, if the cash element is small, then it is not treated as a sale but as a reduction of cost.
Capital Gains Tax rates
The capital gains tax rate depends on what income tax bracket you fall into:
- For 2016/17 and 2017/18 the rate for quoted shares is 10% for basic-rate taxpayers and 20% for higher-rate taxpayers.
Be aware that if you are a basic-rate taxpayer and you make a gain that is large enough to put into a higher-rate band, then you’ll pay the higher rate (i.e. 20% for 2016/17 or 2017/18) on this part of the gain.
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