For 2010/11 and subsequent tax years, there is a specific new provision: where gains made by a taxpayer are subject to Capital Gains Tax (CGT) at different rates, allowable capital losses and the CGT annual exemption may be deducted from those gains in a manner most beneficial for the taxpayer (F(No. 2)A 2010 Sch 1, para 3, inserting TCGA 1992, s 4B).
Allowable Capital Losses
For those not prepared to pay the potentially “massive” (as considered by taxpayers) 28% as opposed to 18% rate there is scope for using ‘allowable capital losses’ via the routes of selling assets to realise losses and/or making ‘negligible value’ claims.
There could be a lot of activity with regard to CGT loss realisation in the months ahead, with taxpayers seeking to mitigate their CGT liabilities by realising tax relievable capital losses.
Take Care!
The complication is that the specific transfer provisions (under F(No. 2)A 2010, Sch 1, para 18), means that for 2010/11 when determining whether there is any unused basic rate band it is essential to ignore gains accruing PRIOR to 23 June 2010. Hence, the link between taxable income and the applicable rate of CGT only applies for gains occurring post 23 June 2010.
This creates tax planning opportunities for advisors to elect to offset capital losses and the annual exemption flexibly – brought forward and current year capital losses do not have to be offset against pre 23 June 2010 gains in priority over post 23 June 2010 gains; the taxpayer is permitted to use losses as effectively as possible. Taxpayers and their advisors should therefore take care not to miss potential planning opportunities.
Financial Heath Check!
The overview result is that all taxpayers who have incurred capital gains or are about to incur potential capital gains in 2010/11 should carry out a “CGT health check” for this tax year – there is still time to take action by 5 April 2011.
For individuals making capital disposals in 2010/11, a planning exercise should be carried out to calculate the predicted CGT for the year and observe how much of the gain might be taxable at 28%. It will be important to check capital losses brought forward, ‘negligible value’ claims not yet made and also to conduct a review of assets that could realise a capital loss and therefore restrict the gains on which the 28% rate is payable to a minimum.
Practical Tip
This task is not something that should be put off until after 5 April 2011 but instead must be carried out well before this date. A total review of assets is appropriate and planning for the timing of disposals for the year to 5 April 2012 is also advisable and can be carried out in tandem. Basic CGT planning tools such as inter-spouse transfers of assets should be incorporated into the CGT review as indeed should other CGT reliefs such as holdover relief on passing business assets to the next generation and rollover relief for business assets where the 28% rate of CGT is in prospect.
By Julie Butler
