In his November budget, the Chancellor made a significant alteration to the annual exemption for capital gains.
At present, the annual exemption is £12,300, but this will reduce to £6,000 on 6 April 2023 with a further reduction to £3,000 on 6 April 2024. Above the annual exemption, gains are subject to tax at 10%, 20%, 18% and/or 28%, depending on the nature of the assets sold and on the individual's own taxable income position.
As the nil rate band for inheritance tax has been frozen since 6 April 2009 and will continue to be at its current level until at least 2026, lifetime estate planning is becoming increasingly important to mitigate the charge. This means, an individual who makes gifts but survives them by seven years will not be charged inheritance tax on its value on death.
Where gifting an asset to remove it from your estate would make good all-round sense, it will almost always be our advice to make such a gift as soon as possible to get the seven year clock ticking. The change in the Capital Gains Tax (CGT) allowance makes this urgency all the greater.
Where assets are gifted, there is a deemed disposal for CGT purposes, with the market value being treated as proceeds. Accordingly, the CGT allowance is valuable. The allowance at its current level is worth up to £3,444. Once fully reduced, it will be worth a maximum of £840. This reduction greatly diminishes the value of the allowance as a planning tool.
With a budgetary black hole to fill, there is speculation that CGT will be a budget focus again, potentially increasing the rates to be more in line with the rates of income tax. We have the benefit of advance warning regarding the reduction of the allowance, but CGT rates have changed on budget day before, as we saw with the 2010 Summer Budget. It is therefore vital to be prepared for the same to potentially happen again.
So, what should you do?
If you were already thinking of effecting some gifts, it is worth giving some serious thought to doing so ahead of the reduction in the allowance.
As each individual has their own annual exemption and transfers between spouses are free of CGT, the benefit can be doubled when making a joint gift. Always bear in mind the CGT is only on the increase in value, while the inheritance tax potential saving is on the whole value of the asset.
To put this into context, consider the example of a rental property owned in the sole name of Julie, who is married to Daniel. It is currently worth £200,000, and it was purchased for £150,000. If Julie gifted half of the property to Daniel and together they gifted the whole property to their daughter, they could remove the £200,000 from their estates, saving up to £80,000 in inheritance tax (provided that they survive the seven years).
If the gift took place on or before 5 April 2023, the gain of £50,000 is reduced by the two annual exemptions, leaving £25,400 chargeable, the maximum CGT on which being £7,112.
If they took this same action in May 2024, the annual exemptions would reduce the gain to £44,000, upon which the CGT could be up to £12,320 at the current rates. Even a 5% rise in rates would increase this to £14,520.
While discussing CGT, it is a timely reminder that compliance obligations must be adhered to. For most assets, this will include reporting in your annual self-assessment tax return. However, for residential property resulting in a gain (or almost any UK property, regardless of the tax position, if you are non-resident), a return must be submitted and any tax paid within 60 days of completion.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.