As a business owner, you may well choose to plan for the future by investing some of your profits in other assets.
Many investors assume that Capital Gains Tax (CGT) only affects professional investors and large businesses but it is easy to be caught out. Basically, any asset or investment, such as stocks and shares or property (with the exception of your main residence), which is sold at a profit, can potentially give rise to a CGT liability.
Currently, individuals are taxed on any capital gains at 18% while inside the basic rate of tax, after first taking account of your taxable income, and 28% at the higher rate. Small companies are taxed at the corporation tax rate, currently 20%.
Losses incurred on the sale of an asset or investment can be offset against profits from other sales, to reduce the amount subject to tax.
In terms of a few pointers to reduce the potential tax bill arising from your investments.
1. Use your annual allowance
Every taxpayer has an annual CGT allowance, which is currently £11,000 per year. Any capital gains up to this allowance are not subject to tax. However, if you are a resident but not domiciled in the UK and you pay tax on a remittance basis, then this allowance may not be available to you.
If you leave this allowance unused for a given tax year, you’ll lose it forever.
2. Use your spouse’s allowance
Transfers of assets or investments between married couples are not subject to CGT. So, if your spouse has not used part or all of their CGT allowance in a given tax year, you could consider transferring investments to him or her.
If you both sell some investments before the end of the tax year, you can both realise gains up to the limit of your individual allowances, without paying CGT on the proceeds. In other words, you can effectively double your CGT allowance every year.
Please note, however, that there are strict conditions attached to this and you may wish to consult your tax adviser accordingly.
3. Use ISAs and SIPPs
Gains on investments held in an ISA or SIPP are not subject to CGT, so it makes sense to try to use these standard, legitimate vehicles to hold your investments if possible.
ISAs can be more readily accessed but you can only invest up to £15,000 per year. SSIPs are appropriate for longer term financial planning, as they are accessed like a pension but they can hold much greater investment values, as well as things like commercial property.
4. Use losses
You can offset losses from the sale of assets and investments against gains made on the sale of others and losses made on the sale of investments in a given tax year can be carried forward to future tax years to offset against gains. The loss needs to be notified to HMRC within four years of the year in which it occurred, but can then be rolled forwarded indefinitely.
In addition, where certain conditions are met, income losses from trading can also be set off against capital gains in the same tax year.
5. More advanced schemes
There are a number of other ways to invest in a tax-efficient manner, such as Venture Capital Trusts and Enterprise Investment Schemes. These give you tax relief in return for investing in qualifying unquoted trading companies.
Both can be useful for sophisticated investors, but you should bear in mind that they come with increased risks. The generous tax breaks are needed to encourage people to invest in companies where the risks are generally higher.
If you own and run your own limited company business, which you then sell, and certain fairly simple conditions are met, you will probably be eligible for Entrepreneurs’ Relief, meaning you only pay 10% on the gain. There is a £10 million lifetime limit on gains that are allowable for Entrepreneurs’ Relief.
In some cases, if you reinvest the proceeds of a sale in another qualifying investment, you can defer the tax on the gain into the future.
Please note: capital gains tax planning can be complex, the most efficient approach will depend on your specific circumstances and may change over time both in response to changes in those circumstances and the tax rules. We recommend speaking to an professional adviser when planning your investments.