It has long been speculated that the rate of capital gains tax (CGT) might rise to close the gap between the rates of income tax and CGT. In a surprise announcement the top rate of CGT will reduce from 28% to 20% with the basic rate falling from 18% to 10% on gains. This will affect disposals made on or after 6 April 2016.
It is interesting that the reduced rates will not apply to gains realised on residential property (that do not qualify for private residence relief) and “carried” interest. With the forthcoming hike in SDLT on second homes, it at least avoids ‘fisticuffs’ between a purchaser angling for completion by 31 March and a seller who would want to defer it post 6 April!
Whenever there is a rate change, it opens up timing opportunities to secure either lower tax or higher relief. These are just a few examples that we have thought about:
- Individuals, trustees and personal representatives should consider postponing disposals until after 6 April 2016 to secure a potential 8% saving.
- If capital gains have already been realised in the current tax year, it may be possible to crystallise capital losses prior to 5 April 2016 in order to obtain relief at the higher CGT rates.
- Non-UK domiciled individuals should consider delaying remittances of foreign capital gains to the UK until after 6 April 2016 so that they benefit from the lower tax rate. This could make a big difference on a significant sum!
- Where an EIS investment has been made, it is possible to defer capital gains arising on the disposal of other assets equivalent to the amount of the EIS investment. The deferral can cover gains which arose in the period 36 months before or 12 months after the EIS investment.
Let us consider this example:
George disposed of a listed shareholding on 6 October 2015 (2015/16) realising a capital gain of £300,000. Ignoring his annual exemption, he would pay CGT at 28%, which equates to £84,000. George has 3 years to make an EIS investment (i.e.5 October 2018) to defer all or part of this CGT liability. He actually makes an investment of £100,000 in June 2016 and is therefore able to defer capital gains equal to his EIS investment (i.e. £100,000) and reduce his CGT bill by £28,000, which would otherwise be payable on 31 January 2017.
The capital gains deferred are effectively ‘frozen’ and these will then crystallise in the year of a ‘chargeable event’, which is most commonly the sale of the EIS shares. In which case, George will pay CGT on the deferred gains at the new lower rate of 20% (i.e. £20,000). The opportunity to defer and pay later has enabled George to save CGT of £8,000. This is of course subject to any future changes to the rate of CGT.
Although George made his EIS investment in the following tax year, there is still scope for him to make further EIS investments. The other possibility is that he could revisit the position with regards to claiming deferral relief in relation to EIS investments made in earlier tax years. In some cases deferral relief may not have been originally claimed due to the risk of an increase in the CGT rate in the future (which could still occur) or because it only created a cash flow advantage. Because the drop in rate allows scope for a tax saving, it turns previous thinking on its head.
A claim for EIS deferral relief must be made within 5 years from 31 January after the end of the tax year in which the EIS shares are issued. This means there is still time to claim deferral relief in relation to EIS investments made as far back as the 2010/11 tax year. Where a claim is made to defer a gain which has already been subject to CGT, a repayment can be claimed.
- In certain circumstances, distributions from offshore trusts to UK resident beneficiaries can be taxed at CGT rates in the hands of the beneficiaries. If payments are delayed until after 6 April 2016 this may help the beneficiary to pay less tax on the distribution. We are expecting the Government to implement changes to the taxation of benefits received from offshore trusts from 6 April 2017 and so there may only be a one year window in order to take advantage of the lower CGT rates in this scenario before a new (and as yet unknown) regime applies.
- While the reduced rates of CGT will not apply to the sale of residential property, a sale of shares in a company that owns residential property may benefit from the lower rates (although the associated risk and due diligence often makes this route unattractive for the vendor). This appears to present an unusual advantage for investors holding UK residential property via a corporate structure, which the Government has strongly discouraged in recent years. New legislation is also being considered to secure liability to UK tax where profits from dealing in or developing land is concerned (please see Alison Palmer’s article on Developments in UK property).
- Individuals returning to the UK can be taxed on gains which arose in a non-UK resident period. Deferring their arrival to a time when lower rates apply is likely to work to their advantage.
For completeness, there are other gains where the rates are unchanged. These include the rates applicable to ATED-related gains (28%), non-resident CGT gains accruing to companies (20%) and entrepreneurs’ relief (10%).
To discuss this further, please contact Gill Tallon or another member of the Private Client Team.