1. Let a home that is no longer your main residence
When you sell a home that has always been your main residence since the day you bought it, the main residence relief ensures no CGT is payable on any gain.This relief extends for 18 months after you move out of the property so that owners who struggle to sell are not penalised.
Property owners who have moved to a new main residence but have yet to sell their former home should consider their position carefully. If the property is not to be sold within the 18 month period, letting it can help to minimise CGT exposure. When your former home is let to a tenant, you should be entitled to a further type of main residence relief for let periods. A time apportionment calculation is carried out looking at the whole period you owned the property.
Relief for the letting period is limited to the lower of either that part of the gain for the periods it was your main residence or £40,000.
2. Use past capital losses
Capital losses arising in the year are deducted from gains before net gains are reduced by the annual exemption or any entrepreneurs' relief (ER) due. Crystallising a loss that wastes the annual gains exemption should be avoided. Once losses have been claimed on your tax return, any losses that are not set against gains in the same year can be carried forward indefinitely to be set against capital gains in future tax years to reduce your potential CGT liabilities, but remember no relief will be given unless the loss is claimed on your tax return.
3. Use annual exemptions
Everyone can realise capital gains up to the £11,700 annual exemption tax free in 2018/19 and £12,000 inn 2019/20. The exemption is available to each individual, including minor children but any exemption unused in a year cannot be carried forward.
Married couples and civil partners can transfer assets between them on a no gain/no loss basis and such transfers should be considered to ensure that the annual exemption can be fully used. In addition, if one spouse or civil partner is a higher rate taxpayer but the other will not have used his or her basic rate band in full, similar transfers should be considered to ensure that at least some of any taxable gain is liable at 10% rather than 20%. As always, it is important to ensure that any such transfer is outright and unconditional
4. Use paper loss to reduce CGT but retain investment
Whilst 'bed and breakfasting' of shares is, in general, not effective for tax purposes, where your rate of CGT is unlikely to vary in future years, it may still be possible to crystallise gains to mop up losses.
This could be achieved by a sale followed by a repurchase after 30 days or immediately by an individual's spouse or civil partner, or within an ISA or trust.
Alternatively, the balance of a portfolio of quoted shares can be maintained by selling shares in one company, crystallising either a gain or loss, and reinvesting in another company in the same sector.
5. Use investors’ relief and pay only 10% CGT
Investors’ relief (IR) will offer a 10% CGT rate on gains and a lifetime gain limit of £10m will apply (a completely separate limit to ER).
It will only apply to shares subscribed for by individuals themselves (or their spouse or civil partner). If the investor (or anyone connected with them) is an employee or paid officer of the company, the investment will not qualify for IR. However, an unpaid director (eg a ‘business angel’) can still qualify.
Finally, the shares must be ordinary shares that have been subscribed for and fully paid in cash and held for at least three years from 6 April 2016 (we understand that ordinary shares purchased when taking up a rights issue will normally qualify as ‘subscribed’ for). There are no rules relating to the number of shares held but the company must be a trading company or the holding company of a trading group (eg a property letting company would not qualify as it is classed as an investment business).
6. Aim for entrepreneurs' relief to pay only 10% CGT
For disposals of businesses or business assets, entrepreneurs' relief (ER) may be available on the first £10 million of an individual's lifetime qualifying gains meaning that CGT is suffered at a rate of only 10%. Any excess is taxed at 20% (with some taxed at 10% for those on low incomes in the tax year of disposal). As with most reliefs, there are a number of qualifying conditions to be met. The relief is intended to benefit business owners and can be given on the sale of a qualifying business or shares in a qualifying business (you must have held over 5% of the shares and voting rights for at least 12 months).
Shares acquired through a qualifying enterprise management incentive plan can also qualify and there is no need to have a 5% holding.
It is vital to check that the asset qualifies for the relief before any disposal is made – remedial action to secure the 10% rate can only be taken before a disposal.