Capital Gains Tax (CGT)

The sections below contain tax saving advice for those eligible to pay CGT.

Indexation relief

Indexation relief may be used to reduce the amount of any capital gain for assets held between 31st March 1982 and 5th April 1998 (eg disposal of shares). The relief increases the cost of the asset in line with inflation but cannot increase or create a capital loss.

Indexation relief was replaced by taper relief after 6th April 1998.

Taper relief

Taper relief replaced Indexation Relief from 5 April 1998. It is applied to net gains after deducting any indexation allowance and losses. Different rates of taper relief apply to business assets and non-business assets.

Exemptions

If, for 2007/2008, your capital proceeds are below £31,600 and your capital gains are below £9,200 you do not need to inform HM Revenue & Customs. If either of the limits is exceeded you must inform HM Revenue & Customs as soon as possible to avoid paying unnecessary penalties.

If you are likely to exceed either of the above exemptions, consider disposing of part of the asset before 5 April and the other part after 5 April. This will mean you can utilise the exemptions for two tax years.

Transfer of assets

If you pay tax at the higher rate of 40% and your spouse pays tax at a lower rate or doesn't pay tax, you could save tax by transferring assets between you. This would move part of the income taxed at the higher rate to be taxed at a lower rate or possibly not taxed at all (e.g. if there are unused personal allowances to set against the income). For 2007/2008 both spouses can earn £5,225 before paying income tax.

There must be an actual transfer of the asset(s) involved from one spouse to the other in order to qualify. If you do not want to transfer the full amount of the asset to your spouse you could always transfer part of the asset or put it into joint names.

The transfer of assets between spouses is exempt from capital gains tax and inheritance tax. (For 2007/2008 both spouses can realise capital gains of £9,200 before paying capital gains tax.)

Letting your home

If you let all or part of your main home you may have to pay capital gains tax when you later dispose of the house. The amount will depend on the proportion of the house that was let together with the length of the letting.

Generally, there is no tax to pay if the gain from the part that is let is below £40,000 and is less than the gain on the part you have lived in. On disposal of the main residence, the last 36 months are always ignored when computing any capital gain.

Capital losses

Capital losses in a tax year are set against capital profits in the same year. Unused losses for the tax year will be carried forward to set against any capital gains in future tax years.