Annual exemption
The annual exemption for 2022/23 is £12,300, however, as announced in the November budget it will reduce to £6,000 from April 2023. It is then set to further reduce to £3,000 with effect from April 2024.
This is a ‘use it or lose it’ exemption; it cannot be carried forward to future years. It, therefore, makes sense to crystalise gains each year to the extent of the annual allowance, if possible.
Note that under the 'bed and breakfasting' rule, a gain or loss does not crystalise for tax purposes if you sell shares and repurchase the same shares within 30 days. The 'bed and breakfasting' rule is where an individual sells shares and then buys the same shares back shortly afterwards to crystalise a gain or a loss.
We would recommend making the most of this year’s £12,300 exemption by realising gains prior to 6 April 2023 where possible.
Rates of tax for shares
The rate of capital gains tax (CGT) is 10%, where the total taxable gains and income is less than £37,700.
Any excess gains are taxed at 20%. Where business asset disposal relief applies, the rate of tax on the whole gain is 10%, subject to a £1m lifetime allowance.
It is possible to repurchase the same shares through an ISA. Alternatively, a married couple can arrange for one partner to sell shares after their spouse has transferred some loss-making shares to them to reduce the overall gain.
Investment property
The 10% and 20% rates also apply to gains on commercial property but gains on residential properties are taxed at the higher rates of 18% and 28%.
Taxable gains on the sale of UK residential property must be reported to HMRC within 60 days of completion of the sale. You may have to pay interest and a penalty if you do not report and pay the tax on time.
Crystallise and use capital losses
Capital losses must be offset against capital gains in the same year. Unused losses are carried forward indefinitely and can then be offset against future gains. A formal claim is required.
The claim must be submitted to HMRC within four years of the end of the tax year of the loss, otherwise, it will be time-barred. Hence, claims must be made by 5 April 2023 in respect of 2018/19 losses if claims have not already been filed.
When an asset has become valueless or worth next to nothing, it may be possible to make a “negligible value claim” in order to crystallise a capital loss.
The claim can be related back up to two tax years in certain circumstances, allowing the loss to be offset against gains made in earlier years.
Business asset disposal relief (BADR)
CGT is charged at 10% where BADR applies, subject to a lifetime limit of gains totalling £1m.
BADR applies to the sale of a trading business carried on as a sole trader or partnership, or to the sale of shares in a trading company.
It can also apply to personally held assets that have been used in the trade of a partnership that you are a partner of or a company that you are a shareholder in.
Business owners should consistently review their BADR position as it is easy to fall foul of the detailed rules.
Your main residence
Ownership of two homes in the UK is becoming more commonplace as couples who both own houses marry, houses are inherited, parents buy houses for their children to live in, or people just buy a place in the country, either to let or to escape to at weekends. The gain on your principal private residence is normally free from CGT.
If you have more than one private residence, your ‘main’ residence will normally be, by default, the one in which you spend the greatest time.
However, it is also possible to determine that matter by nominating one property as your main residence. This requires careful planning since the flip side of a gain on one residence being treated as exempt is that a gain on the other residence will become chargeable.
Written nominations must be submitted to HMRC within 24 months of any change in residences becoming available. Lettings relief of up to £40,000 (£80,000 per couple) is available for those landlords who are in shared occupancy with their tenant.
The final 9 months of ownership of a main residence are exempt from CGT, irrespective of how you use the property during that time.
If you own more than one home, consider whether a principal private residence election is needed.
Marital Breakdown
Currently, assets can pass between separated spouses in the tax year of separation without triggering capital gains tax charges, e.g. if you have separated in the current tax year, assets can be transferred on or before 5 April 2023.
However, proposed changes to the rules that are due to come in on 6 April 2023 will allow separated spouses to transfer assets up to three years after the end of the tax year in which they separate, e.g. if you have separated in the current tax year, assets could be transferred on or before 5 April 2026, or without time limit if the assets are transferred as part of a formal divorce agreement.
This change will give greater flexibility to separating couples and, assuming the legislation is ultimately enacted, avoid the need to make quick decisions on assets so as to not trigger a tax charge.
Capital gains tax overhaul
With the cost-of-living crisis, COVID-19 debt, and recent political turmoil, the future direction of capital gains tax remains uncertain.
Previous suggestions have included aligning capital gains tax rates with income tax (currently 20%, 40% and 45%) and abolishing BADR.
No such changes have been announced so far, but this could change in a future Budget or be brought in by a new Government.
Individuals who anticipate realising capital gains in the short to medium term should consider whether it is appropriate to bring these gains forward, where possible.
