Changes to Capital Gains Tax in 2020
HMRC are constantly looking at ways of streamlining the tax system and making the process of collecting our tax liabilities more cost-effective. One of their upcoming changes is to alter how we are required to declare and pay capital gains tax from April 2020.
Michael Chadwick, founding Director at Chadwick & Company gives an outline of capital gains tax and explains how it may be avoided or deferred. He also gives an overview of your capital gains tax free allowance, offers effective family business tax planning advice to prevent capital gains tax being a concern, and describes how capital gains tax may change over the upcoming months.
What is Capital Gains Tax?
Capital gains tax is a tax on the profit made when we sell something that’s increased in value. In most cases, it occurs when we dispose of a high-value asset, either personally or when a company sells an asset for a profit. Often the assets in question are personal possessions with a value of over £6,000. These could range from paintings to second homes, fixtures and fittings, land and buildings and many business assets or often shares.
The Government gives all individuals a £12,000 annual capital gains tax allowance, meaning that the first £12,000 of any gain is completely tax free. After this, the rate of tax payable on capital gains for individuals and sole traders would either be 10% or 20% depending on whether the owner is a standard rate tax payer or a higher / additional rate tax payer. The rate may increase to 18% and 28% if the asset disposed of is a residential property.
If a company sells an asset for a gain then they will include this in their Corporation Tax return and the gain will be taxed at the standard rate of Corporation tax, presently 19%. Companies do not get a personal allowance in the way that individuals do. However, if they owed the asset before December 2017 then they may be able to claim the indexation allowance for capital gains tax, which will reduce the taxable gain.
What is Entrepreneur Tax Relief?
This is sometimes referred to as ‘capital gains tax allowance on shares’. This essentially means that individuals will pay 10% tax on the disposal of their business or a significant part of their business, regardless of their income tax level. Thus, this is a significant tax saving opportunity.
However, there are certain conditions that need to be satisfied:
- The individual making the disposal must be an employee of the company
- The individual must own at least 5 % of the shares and the voting rights
- The company must be trading, not an investment company
- The individual must have owned the business for at least two years before the date of disposal.
Entrepreneurs relief is a significant tool when considering retirement and the succession of your business to a third party or a family member.
Capital Gains Tax changes for 2020
The most significant change to the capital gains system is the way in which payments are made. Previously an individual or company would make a chargeable gain and pay the liability anywhere between 10 and 22 months after the date of sale, reporting the gain on the companies corporation tax return or on the individual’s self-assessment tax return at the end of the following January.
From April 2020, if a UK resident disposes of a residential property then they will have to pay the tax liability just 30 days after disposal of the property. This makes the process a one-off standalone report and payment, although directors and self-employed people will also have to report the gain on their tax return.
Please note this is for secondary residential property only. If you sell your main home then it is unlikely there will be any tax to pay due to the private residency relief, which confirms that there is no capital gains tax payable on the disposal of your main home.
Find out more about Capital Gains Tax
We offer a free, no-obligation, initial meeting where we provide information on:
- The process of selling your business and claiming entrepreneurs relief
- The upcoming changes to the administration of HMRC
- Our history and experience that we can bring to your organisation
- A detailed breakdown of fees.
We are an experienced firm of Chartered Accountants and cover a range of industries including charities, professional practices, group companies and more. All new clients are assigned a qualified accounts manager who provides one-to-one contact throughout the year. We meet regularly to discuss your accounts, any relevant changes to your industry sector and future plans for your business. We take great pride in delivering a high-quality service to give you a better understanding of your financial position and provide meaningful recommendations to help drive your business forward.
To find out more or about capital gains tax and tax relief, email or call us on 0161 370 9600.