Since April 2016 the two main rates of capital gains tax (CGT) have been 10%, if your taxable income plus gains for the year fall within the basic rate band, and 20% if your income and gains are greater. However, where you sell your business, and meet the necessary conditions, a special 10% entrepreneurs’ relief (ER) rate applies regardless of how much your income and gains are. Before CGT starts to apply, every individual adult or child is entitled an exempt amount; for 2017/18 this is £11,300. The annual exemption is easily overlooked despite offering a no-risk tax planning opportunity in the right circumstances.
No Gain, No Loss
Special CGT rules apply to transfers of assets between spouses. These say that if one spouse gives assets to the other, say shares in a company, it’s treated as if they sold them to their spouse at the price equal to their cost, this is called a “no-gain, no-loss” transaction. If later the spouse who received the assets sells them for more than they cost the first spouse, they’ll make a capital gain, but they can use their annual exemption to lower or eliminate any CGT.
TIP: If you’re married or have a civil partner, you can use the no-gain, no-loss rule to save tax even where the rate of CGT you would pay is the lowest possible, i.e. where the ER rate applies.
Example. Sam owns all the shares in Acom Ltd. In November 2017 he accepts an offer for the company of £600,000. Sam paid £100 for his 100 shares in Acom, so his CGT bill is £586,860 ((£600,000 – £100 – £11,300 annual exemption) x 10% ER rate). It would be easy for Sam to reduce his CGT bill by shifting shares to his spouse.
Example. Sam’s gain is £5,999 per share. If he gives two shares to his wife Kate when Acom is sold she’ll make a gain of £11,998. Her annual exemption covers £11,300 of this leaving £698 taxable. If Kate is liable at the main 10% CGT rate, the tax saving between Sam and Kate is £1,130 (£11,300 x 10%). But she is liable at the higher main rate of 20% so the saving is £990. This is only a modest tax saving, but there’s virtually no effort and zero risk in achieving it so there’s no reason not to take advantage.
Increasing the Tax Saving
The no-gain, no-loss rule doesn’t apply to gifts of assets to anyone other than your spouse or civil partner. If Sam from our example gave shares to his children so they received something from the sale of Acom, HMRC would treat the gifts as if Sam sold the shares at their full value. That would land him with the same CGT bill as if he sold the shares to the person buying the company. However, there’s a legitimate way around this.
TIP: Sam can claim CGT holdover relief. The effect of this is similar to giving shares to his wife. The gain is deferred (held over) until the children sell their shares. A holdover claim must be made jointly by Sam and his children, and usually anti-avoidance rules make it ineffective if the children are minors.