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Most people use their Income Tax allowance every year without even thinking about it. Most of the money coming into households every year is, after all, subject to Income Tax.
The same most certainly cannot be said for the annual Capital Gains Tax allowance, however. Very few people use it in full every year and many people have never used any of it in any year at all. The current allowance is £10,900 and so there is a large amount of tax relief going wasted each year.
This rather begs the question. What is a Capital Gain – perhaps with the supplementary thought of how you might make one.
In a technical sense a Capital Gain is the profit on the disposal of a chargeable asset. This could be stocks and shares or a second home or even valuable antiques (if worth more than £6,000). The disposal doesn’t have to be a sale, however, it could be a gift. Just because there are no sale proceeds out of which to pay any CGT, doesn’t usually mean you can avoid coughing up to the taxman.
The profit on a normal sale is the difference between the proceeds and what you paid for it. Any costs of making either the acquisition or the disposal can be claimed against tax. Where you inherit property it will be the value used for probate and where there is a gift then the market value is used to substitute for cost or sale proceeds. If you spend money improving the asset – for instance house improvements – then these too can normally be claimed.
Gifts between married couples or civil partners are exempt from CGT.
At the moment we are at the beginning of the tax year and it may seem that there is no need to rush into things. Up to a point that is true. Nevertheless, the very fact that the CGT exemption is so little used is in my view testimony to the lack of planning that has gone into it.
If you own a second home standing at a gain maybe should you be thinking about using a trust to realise part of the gain each year so that there is little or no tax due when you do sell. That sort of planning is very difficult to put into effect quickly at the end of the tax year.
The stock market has risen in recent times and many people may in fact be sitting on decent Capital Gains in their investment portfolios.
If you are thinking about an ISA, should you be considering one now at the start of the year. If you fund it from existing investments then any dividends paid later in the year will also be tax free. You can put up to £11520 into a stocks and shares ISA this year. Please do take Independent Financial Advice if contemplating such a move though.
Make a new (tax) year’s resolution. Use your CGT allowance this year.
Graham Arnott, Tax Director
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