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Sunday, 20 April 2014

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Think you’re not eligible to pay capital gains tax?

Tax rarely seems to be out of the news recently with income tax making a regular appearance and the more aggressive planning taking up many column inches.

However, there are so many more taxes than just this one and the law assumes we have an understanding of them all.

One of the taxes that seems to be often forgotten is capital gains tax and this is because for many clients it only affects them when they sell an asset and this does not happen that often, which means it can often be missed.

Capital gains tax is charged on the disposal of assets where their value has appreciated during your period of ownership.

It isn’t charged on all capital assets, certain assets benefit from complete exemption, such as the family home, motor cars and individual chattels worth up to £6,000.

There are many other exemptions but there are also many other assets that are chargeable to the tax, especially investments such as shares.

However, the effect of this tax can be reduced by planning in advance of asset sales.

Firstly, every individual has an annual exemption for capital gains tax, currently £10,600.

This means any gains lower than this amount will be covered by your annual exemption, so no tax is due.

However, care is needed here. You benefit from one annual exemption each tax year so always be careful that you do not dispose of too many assets in any one tax year otherwise you could easily exceed this amount.

If you have an investment portfolio you can find yourself changing investments during the year and each of these changes may have either gains or loses which need to be reported on your tax return.

If you have a professional adviser looking after your investments they will probably be making the best use of your annual exemption each year by changing investment to ensure this relief is not lost.

If you look after your own investments consider making disposals that would generate gains to use up your exemption.

If you have an accountant or tax adviser always talk to them about this strategy though as there are some rules on share disposals that make the position slightly more complex.

If you are disposing of an asset you hold in your own name and the gain is greater than your remaining annual exemption then consider passing part of the asset to your spouse or civil partner, so you get access to their annual exemption.

This way you can benefit from £21,200 of exemption.

As there is no tax consequence in a transfer between spouses or civil partners this transfer can be right up to the time the asset is sold, but not, of course, afterwards.

If it is possible to sell some assets, such as quoted shares, you could consider the above planning combined with perhaps making the disposal over two tax years, potentially netting you four annual exemption.

The most important thing to bear in mind with capital gains tax is to plan in advance and seek professional advice, especially if the gain is large or perhaps you are selling a business or second home, because failing to plan can cost you dearly.

If you would like further information or tax planning advice email moneymatters@armstrongwatson.co.uk or call freephone 0800 195 2161.

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