Where available, taxpayers are entitled to a tax-free annual exemption of £12,300 for 2020/21 on capital gains. Rates are then charged at 10% for any remaining basic-rate band entitlement, with 20% charged on any remaining gains. These rates rise to 18% and 28% respectively for residential property and carried interest.
There are also several important capital gains tax reliefs to consider, such as Business Asset Disposal Relief (BADR). This was previously known as entrepreneurs’ relief and applies a CGT rate of 10% against sales of trading business and shares in a trading company, subject to certain conditions. This is now subject to a £1million lifetime limit, reduced from £10million prior to 11 March 2020.
Private residence relief is also available on any gain on the sale of your private residence, which exempts the gain for the period that it is your main residence as well as open other potential periods to exemption. In many cases, it is straightforward to determine which property is your main residence, although it is possible to nominate a property if you live in more than one property.
The capital gains tax rates are historically low and are subject to frequent speculation that they could increase in the near future. While we cannot predict future Budget announcements, the fact that the Chancellor did not mention it at the recent Spring Budget does not necessarily mean there will not be changes in the future.
What should you do?
Consider whether enough gains can be crystallised each year to utilise the annual allowance, if possible. Again, this is particularly important with allowances being frozen for five years. Also consider whether capital losses can be generated if large gains have already been realised. This may include negligible value claims against worthless assets, where these have not already been realised. It could also involve transfers between spouses before sale, to ensure that any losses are set against other gains. However, this may not always be appropriate, such as if you are envisaging large gains in future years where you think the capital gains tax rate may be higher.
Likewise, if you are planning on making disposals that will crystallise large gains and the circumstances make this possible or advisable, it may be worth making them in this tax year rather than waiting for future tax years where the capital gains tax rates may be higher although also bear in mind that we now know there will be at least one further tax year (2021/22) with the CGT rates remaining as they currently are.
You may also wish to review your Business Asset Disposal Relief position, particularly in the light of the reduction of the lifetime limit last year. These rules have consistently changed in recent years and further changes cannot be ruled out.
Finally, if you have more than one home, consider your private residence relief position and whether an election is needed.