Planning For Capital Gains In The Light Of Upcoming Cuts To Annual Exempt Amounts
After four Chancellors in a year and myriad of U-turns in tax policy, you could be forgiven for missing that the Finance Act 2023 (originally labelled Finance (No 2) Bill 2022) received Royal Assent in January.
The Act, to be supplemented by a further Finance Bill following the upcoming Budget Statement on 15 March, confirms the reduction of Capital Gains Tax (CGT) annual exempt amounts (AEA) for individuals, from £12,300 to £6,000 from 6 April 2023, and to £3,000 from 6 April 2024. Gains exceeding these amounts will continue to be taxed at the existing rates of 20% for higher and additional-rate taxpayers, and 10% for some basic-rate taxpayers (28% or 18% on gains from residential property and carried interest).
Avoiding unnecessary Capital Gains liabilities
Advisers and clients should consider what steps can be taken before 6 April to avoid unnecessary CGT liabilities and make the most of this year’s AEA whilst it remains at (a comparatively generous) £12,300, as the AEA cannot be carried over from one tax year to the next.
For individuals with significant unrealised capital gains (for example on shares or properties not qualifying for private residence relief), now may be an opportune moment to take stock and consider whether those gains can be realised. For spouses (married or civil partners) the potential use of inter spouse “no gain-no loss” transfers may be worth considering to ensure effective use of both spouses AEAs and lower tax rates (if applicable).
From April onwards (as always), the use of annual ISA allowances, consideration of investment wrappers and (where possible) utilising losses in order to reduce gains will remain fundamental strategies in mitigating CGT.
Advice for trustees
For trustees, the AEA for CGT is still half an individual one, i.e. £6,150 in 22/23. The reductions due in the individual AEAs will be mirrored by a reduced AEA for trustees, who will only have an exemption of £3,000 from 6 April 2023 and £1,500 from 6 April 2024. Trusts with large historical gains will be hit hardest and the availability of hold-over relief will become more important than ever and it is worth trustees ensuring their “CGT history” is up to date and they are clear about the availability of hold over.
Hold-over relief is available, for example, where assets standing at a gain are appointed by trustees to a beneficiary and there is a corresponding charge to inheritance tax (IHT), even if no IHT is actually payable e.g. within a nil-rate band. This helps a transfer out of a discretionary trust, but not from an immediate post death interest (IPDI) trust. Trustees therefore need to plan ahead where capital with gains is due to a beneficiary e.g. at a specified age. With traps for the unwary, expert advice is recommended.
Utilising AEA’s for estates
For estates, always remember that a full annual exempt amount is available in the year of death and for two further tax years. This means that for many estates, up to £18,300 of tax free gains may be realisable in the next two months (over the current and next tax years) in order to mitigate any CGT liabilities. Where there are significant gains in an estate, alternative strategies such as use of appropriations of assets to beneficiaries may also be available, in order to utilise the AEAs of one or more beneficiaries.
Where deeds of variation are under consideration, it will become more important than ever for beneficiaries to consider the impact of choosing whether to treat the variation as a disposal for CGT, so that the assets redirected under the variation are taken on at their value at the deceased’s death, or the date on which the variation is made, for CGT base cost purposes.
In conjunction with cuts to annual dividend allowances (from £2,000 to £1,000 in 2023/24 and, again, £500 in 2024/25), the reductions in the CGT exemptions form part of an increasing focus by the Government on ‘unearned income’ and the aim to ensure that such income is not taxed (or at least perceived to be taxed) more favourably than ‘earned income’.
This is all part of the new “stealth tax” regime, of squeezing taxpayers for more tax without increasing basic rates. One side effect is likely to be a sharp increase in the number of taxpayers required to submit self-assessment returns in respect of modest income and gains from shares. For such clients, a financial planning review may be timely, to consider switching to a different form of equity investment. Tax planning advice and compliance needs come together, particularly in light these significant changes.
