Capital Gains Tax is calculated on the profit that is received when selling or disposing of an asset that over time has seen a value increase. Capital Gains Tax is a legal tax requirement for individuals, companies and self-employed people and must be calculated and paid on an annual basis, a process normally undertaken by qualified accountants. Whether the asset is sold, given away, traded in return for compensation or swapped for another item, it is still liable for Capital Gains Tax.
Many businesses and individuals seek to avoid Capital Gains Tax in order to pay less money to the H M Revenue & Customs (HMRC) and in many situations, it can be done legally and without repercussions. However, when Capital Gains Tax is avoided in the attempt to not pay taxes that should be due or to represent earnings dishonesty to the HMRC, serious problems can occur and there are many pitfalls that individuals and companies fall victim to due to improper handling. In any instance when seeking to avoid Capital Gains Tax, enlisting the advice from specialist accountants or tax accountants can be extremely beneficial.
Do I always need to pay Capital Gains Tax?
It is not always a requirement to pay Capital Gains Tax and understanding where and when it needs to be paid can help you to avoid many of the common pitfalls. Capital Gains Tax has to be paid on ‘Chargeable assets’, these include personal assets that have a value of more than £6,000, any property that isn’t your primary residence, assets used for business, the majority of shares and any home that has been used as a rental property either residential or business or that is exceptionally large.
For shares that are located in PEP or an ISA, no Capital Gains Tax has to be paid out when they are sold or otherwise disposed of. Earnings that originate from gambling wins such as those from the lottery or from pools are free of Capital Gains Tax along with any profit from premium bonds or UK based government gilts.
Are there any Capital Gains Tax allowances or reliefs?
Tax accountants are often used to look at a company’s finances or an individual’s earnings to locate where they may be able to find reliefs, but there are also a number of standard allowances and reliefs that apply to the majority of people. The main allowance is the annual standard tax-free allowance, this is the amount that you are able to ‘gain’ without paying Capital Gains Tax. In the UK, the standard allowance is £11,300 a year with an additional gains allowance of £5,650 on trust funds.
Any individual that fits the criteria can gain a relief on their Capital Gains Tax by gifting or selling assets to their spouse, this is then exempt from the tax but could be liable again if the asset is sold on. Equally, Capital Gains Tax does not have to be paid on any assets that are given or sold to charity unless they are sold for less than that of the market value or more than the sum that was originally paid.
A further relief is known as the Entrepreneurs relief which helps new businesses to become established. However, staying wary is important as many people seek to capitalize on the reliefs and enter into illegal avoidance schemes, one of the most well-known being the entrepreneur’s avoidance scheme. If the HMRC believes that you are practicing outside of the law, you can be liable for large penalties.
What does the avoidance of Capital Gains Tax entail?
Capital Gains Tax avoidance is the act of trying to reduce the amount of Capital Gains Tax that needs to be paid or the attempt of trying to avoid any payments. While those who are unsure of where they stand in relation to the tax that may do often opt to use tax accountants, some individuals actively try to avoid paying the HMRC at all costs which are considered to be highly illegal.
There are many pitfalls that individuals often encounter when unsure of exactly where they stand legally. Problems can arise when assets were fraudulently removed by a person before being reinstated at a higher value than when they were removed. This is a problem often seen in regard to shares, where during the period an individual didn’t own the shares they went up in value, before being gifted back to them with a ‘gain’ in worth.
One of the biggest pitfalls that individuals encounter is in regard to property sales where gains are generally much higher than the annual allowance and attempt to reduce the Capital Gains Tax can err more towards the illegal misrepresenting of tax owed as opposed to the legal avoidance methods. In all instances where a person or company wishes Capital Gains Tax to be reduced, specialist accountants should be involved to ensure the process is legal.
How can I save on Capital Gains Tax legally?
While in many instances Capital Gains Tax can’t be avoided completely, it can be reduced legally through careful management and looking for ways that can reduce the rates. To ensure that all of your practices comply with the HMRC, tax accountants should be used to report and record your finances.
- Monitor your tax-free allowance- If you are an individual trying to reduce your Capital Gains Tax, making use of your tax allowance but not exceeding it is important. Holding onto an asset until the next tax year can stop you paying unneeded Capital Gains Tax.
- Invest in tax-free shares- As ISA’s are exempt from Capital Gains Tax, they can make the ideal investments. Qualified accountants can help you to set up ISA’s to reduce your tax law and advise you on how to re-buy assets through ISA’s whilst still remaining HMRC compliant.
- Make use of capital losses- Because Capital Gains Tax is calculated on loss and profit, ensuring your account for every loss and allowing capital losses to carry onto the next tax year, your overall gains will be reduced.
- Transfer certain assets- Making use of your spouse’s tax allowance by gifting assets can mean that the annual allowance you can use together is doubled.
To avoid the countless pitfalls with illegal Capital Gains Tax avoidance, it is crucial that you safeguard your company’s future and protect yourself by knowing the law and following the HMRC regulations. If you have questions and are worried about the tax liability which may arise please contact The Accountancy Solutions on 01216297768 for a free and no obligation advice.