Capital Gains Tax (CGT)

Capital Gains Tax is a tax on the gain or profit you make when you sell, give away or otherwise dispose of something that you own, such as shares or property.

There's a tax-free allowance of £10,600 for an individual for the tax year 2011/2012 and therefore most individuals are unlikely to end up paying tax on their gains. For gains on or after 23rd June 2010, Capital Gains Tax is charged at a rate of 18% for those who basic rate income tax and 28% for higher and additional rate taxpayers.

What this means is that making capital gains is often a more attractive option than producing additional income as the tax-free allowance is lost if not used and the CGT rates are lower than their equivalent income tax rates.

Capital gains tax is a highly complex area and your Lansdown Place adviser can fully explain the implications of any disposals you have or plan to make. There are a number of strategies which can be employed to either reduce your CGT bill or in order to make capital gains rather than increase your income tax liability.

Individual Savings Accounts (ISA)

ISAs provide investors with the opportunity to build up assets which are not subjected to CGT within a holding or upon withdrawal. Cash and a broad range of investments such as Unit Trusts and OEICs can be held and there is no restriction on when or how much money can be withdrawn.

No more than the annual amount limit (£10,680 for 2011/12) can be paid in and the amount that can be in cash is restricted (£5,340 for 2011/12). Any amount not used for cash can be used in a stocks and shares ISA.

Unit Trusts, Open-Ended Investment Companies (OEIC), Exchange Traded Funds (ETFs) and Investment Trusts

When held outside of an ISA these investments can allow an individual to make use of their CGT allowance each tax year. This is done by realising any gains up to the tax-free allowance in order to realise the gain. The money can then be reinvested if desired, rebasing the cost of the asset for gain calculations in future years.

Investment Bonds

Any ‘gains’ made on an investment bond are taxed as income, never as a capital gain. They can therefore be useful for individuals who regularly use their full CGT allowance each year. However, the underlying funds are subject to tax on income and gains. An ‘offshore’ bond is liable for no UK tax and therefore grows virtually tax-free at a potentially higher rate.

Venture Capital Trusts (VCT)

VCTs are highly tax efficient collective investment schemes designed to provide private equity capital for small expanding companies and capital gains for investors.

Investors who purchase either newly issued or second-hand shares can enjoy an exemption capital gains tax on disposal of shares in VCTs

Enterprise Investment Schemes (EIS)

The EIS offers capital gains tax reliefs to investors who subscribe for shares in qualifying companies. Deferral of gains realised on a different asset can be made where disposal of that asset was less than 36 months before the EIS investment or less than 12 months after it. This relief is not limited and can be claimed by investors whose interest in the company exceeds 30%.

There is no Capital Gains Tax payable on disposal of shares after three years (after five years for investments made before 6 April 2000) provided the EIS initial income tax relief was given and not withdrawn on those shares.

Entrepreneurs' Relief

There are various CGT reliefs for business assets but the most common of these is Entrepreneurs' Relief. This allows individuals and some trustees to claim relief on qualifying gains, up to a maximum lifetime limit, made on the disposal of all or part of a business, the assets of a business after it has ceased or shares in a company.

The relief is available for you as an individual if you are in business, for example as a sole trader or as a partner in a trading business; or if you hold shares in your personal trading company.

There are certain conditions which must be met to qualify but if successful the first £10 million of gains from 6th April 2011 will be taxed at 10% rather than 18% or 28%.