HOW TO CUT AND MITAGE YOUR CAPITAL GAINS TAX
If you dispose of an asset such as a house, shares, an antique or even part of your garden, you may have to pay tax on the increase in its value. This is known as capital gains tax (CGT), and as we will see, it is at least as complicated as any other personal tax. At my money on line we are able to completely mitigate your entire capital gains tax liability by using loop holes in the current tax law. PAY NO CGT TAX NOW APPLY FOR MORE INFO.
Tax exempt investments
For a start, some kinds of asset are tax-free altogether. These include cash held in sterling, foreign currency for holidays or other personal expenditures, your private car, your own home, personal belongings worth less than £6,000, personal items not expected to last 50 years when you bought them (such as computers or machinery), UK gilts, savings certificates, premium bonds, betting or lottery winnings, and damages awarded for personal injury.
They also include tax-exempt or tax-favored investments, for example National Savings investments, shares or funds held in ISA s and PEP s, shares in qualifying venture capital trusts and shares bought under the Enterprise Investment Scheme .
Disposing of assets
'Disposing' of an asset (assuming it is not tax exempt), for CGT purposes, may mean selling it, giving it away, exchanging it or even losing it. If you sell your asset, the gain on which you could be taxed is the difference between the selling price and its value when you acquired it (which could be the sum you paid for it, or its market value if you were given it).
If you give the asset away, or sell it for less than its full price, or exchange or lose it, then you use its market value at that point to gauge the potential capital gain or loss. If you dispose of something you inherited, its market value at the time of the previous owner's death is used.
Transferring assets
Remember, assets can be transferred between husband and wife if they are living together, without attracting any CGT; if you give an asset to your spouse and he (or she) later sells it, he will have to refer back to its value when you first acquired it in order to work out the CGT. You cannot give assets to your children (or anyone else), or sell them cheaply, without the risk that you will incur CGT.
Calculating the tax
It is most important to keep records so that you can work out the gain on each asset. You need the following information: the date of acquisition and original cost, plus the date of disposal and amount received.
Once you have worked out the chargeable gain on the asset, you may be able to reduce it by deducting any expenses incurred in the course of buying, improving and disposing of it, for instance, legal fees, stamp duty or the cost of an extension or other enhancement to a property. (But be warned, you cannot offset any costs against your capital gain which could be offset against your income for income tax purposes, for example, routine maintenance work or agent fees on a second property that you let out.)
In addition, if you find you have made capital losses on the disposal of some assets that normally attract CGT in the course of a tax year , these can be offset against any gains made on others, to reduce the total chargeable amount further.
Annual exemption
Everyone is entitled to make a certain amount of capital gains each year without paying CGT; the annual exemption is £8,500 in the 2005/06 tax year. If your total gains after you have deducted expenses and any allowable losses are less than the annual exemption, then you are off the CGT hook for that tax year.
But even if your gains, after expenses and allowable losses, exceed the annual exemption, there are several kinds of tax relief by which you can reduce or defer CGT payment. Taper relief , introduced from April 1998, is the most widely applicable reduction mechanism. It means that the longer you own an asset, the lower your tax bill. (For assets held before that date, indexation allowance is used to calculate the reduction in tax.)
Non-business assets
Non-business assets receive less generous taper relief than business assets. Basically, after you have owned the asset for three complete tax years, your capital gain will be reduced by 5%, and then by a further 5% per year until, after 10 years of ownership, your taxable gain has been reduced by 40%. So, for example, a capital gain of £1,000 on a sale of shares would be fully chargeable if the shares have been held for three years or less; but if they were held for more than 10 years, only £600 of the gain would be chargeable.
Business assets
Business assets which include, among other things, shareholdings in unquoted trading companies (see AIM ) and shares held by employees or by shareholders with at least 5% of voting rights in quoted trading companies are treated in a much more open-handed fashion. After the first full year of ownership, taper relief at 50% is applied to any gain, and after the second full year this rises to a maximum level of 75%.
Reliefs
There are other kinds of relief that may be applicable, for instance, if you make a gift of certain types of asset you can benefit from holdover relief , which allows you to postpone the chargeable gain until the recipient parts with the gift. Other gifts are exempt from CGT altogether, for example gifts to charities. The Inland Revenue helpsheet gives more information about reliefs for gifts.
How much CGT will you pay on taxable gains? It depends on your overall income: any taxable gains are added to your taxable income for the year and treated as the top slice of that total. The tax rates mirror those for investments and savings: 10% for gains below the starting rate limit for income tax (£2090), 20% from the starting to the basic rate (£32,400) and 40% thereafter. If you intend to make your own CGT calculations, consult the HMRC guide
Keep your CGT bill down
Be sure to deduct all your allowable expenses from any gain; similarly, add them to any loss to increase the amount you can offset.
1) Aim to keep each year's gains below the annual exemption by selective disposal of your assets.
2) If you make an overall capital gains loss one year, you can carry it forward to set against gains in subsequent years, so you need to keep a clear record.
3) Husband and wife can make gifts freely between themselves, to maximise the use of both annual exemptions each year.
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