Capital Gains Tax - 5 Tips on How to Reduce It

Convert income into capital

Capital gains tax was introduced in 1965 and subsequent finance acts were consolidated into the Taxation of Capital Gains Act 1992.

I find that when taxpayers sell assets they are drawn immediately to considering capital gains tax. The first option to tax is as trading profits rather than capital gains. The deciding factor is whether or not the intention at the time of purchase is to make a profit from the resale, with or without improving the asset, within a short time scale.
Capital profits can also be taxed as income (S752 ITA 2007).
Ensure that when you consider the taxation of the sale of an asset you make sure you establish the correct method of charge rather than assuming the liability will be to capital gains tax. In your planning also remember inheritance tax.

Residence

Non-residents are chargeable if they are ordinarily resident in the UK or operate a business in the UK.

If you are neither resident, nor ordinarily resident in the UK, no capital gains tax is payable even if the asset disposed of is situated in the UK.

The planning is to delay the disposal of assets pregnant with a gain until you have left the UK and have become both not resident and not ordinarily resident. This planning needs good professional advice.

Do not rely on the extra statutory concession relating to the year of departure from and return to the UK (Fulford Dobson, ex p, R vHMIT 60 TC 168). Make sure you are neither resident nor ordinarily resident for the whole of the tax year and do not need to rely on ESC D2.

Some tax payers are under the mistaken impression that if they own a property abroad, e.g. Spain, no tax is payable. Wrong; if you are resident you will pay tax on the chargeable gain even though the property may not be situated in the UK. Residents are liable to tax on worldwide asset sales

Make sure you use the annual threshold

The annual exemption for 2011/2012 is £10,600 (Section 3 TCGA1992).

The gain is then taxed at the flat rate of 18% but if you pay tax at 40% the charge is at 28%.

Maximise the Principal Private Residence exemption.

Simply explained if you sell your home that you are living in or have lived in then the gain is exempt from tax.

Special provisions apply if you own two residences (Section 222(5) TCGA 1992) and if you have had periods of time when you were not in occupation (Section 223(3) TCGA 1992).

Please be reminded that irrespective of occupation the final 36 months of ownership qualify for relief (Section 223(1) TCGA 1992).

Entrepreneurs' Relief

Entrepreneur's Relief which has no age limit but is not as generous as Taper Relief asit is cut off at the lifetime limit of £10,000,000.

The first £10,000,000 gains charged at 10%. The balance is chargeable at 18% or 28% if you are a higher rate taxpayer.

Exploit Entrepreneurs' Relief

If you want to sell a personally owned building used in your current business but you do not want to either cease to trade or sell the business then the route is to genuinely start another business. Run that business from that building for at least one year.

Then you can cease to trade or sell the business and sell the building with full Entrepreneurs Relief. (EA)