The government is considering doubling the rate of capital gains tax (CGT). A friend has suggested I consider placing certain assets I own into a trust, paying CGT at the current rate and thus avoiding it at the higher rate in the future. Is that possible and what are the downsides?
Debbie Wilson, a director at accountants Hillier Hopkins, says CGT is currently charged at 10 per cent for basic rate taxpayers and 20 per cent for higher and additional rate taxpayers. This changes to 18 per cent and 28 per cent respectively where gains relate to residential property.
If the government accepts recommendations made last year by the Office of Tax Simplification, a statutory body, CGT rates could increase to 20 per cent, rising to 40 per cent and 45 per cent for higher and additional tax ratepayers.
There is no way to avoid paying CGT, but there are options to mitigate any increase in CGT rates, depending on what those assets are.
If the assets you mention were to include a commercial property from which you receive rent and perhaps eventually plan on selling, it may be possible to place that property into what is called a life interest trust. The terms of that trust could allow you to continue to benefit financially from the rent.
As you state, the transfer of an asset into a life interest trust is considered a disposal and would attract a CGT charge. That charge is calculated on the difference between the acquisition cost of an asset and its current market value. There is also the annual CGT exemption, currently £12,300 for an individual and £6,150 for sole trusts.
The trust deed should also set out who will benefit from the capital asset held in trust. When the asset held in trust is eventually sold, CGT would be payable at the prevailing rate only on the difference between the market value of the asset when it entered the trust and its net sale proceeds, and again would benefit from any annual exemption.
Placing assets into a life interest trust now would effectively cap CGT on gains made to the point of transfer at the current rates. This could represent a considerable saving if the value of the asset has increased significantly. Only any future gain would be taxed at the proposed higher rate.
This is not, however, a move to be considered without first taking expert advice to understand your specific detail on the downsides.
CGT on the transfer into the trust of residential property will need to be reported and paid within 30 days of completion. If the asset being transferred holds a mortgage it could trigger a stamp duty land tax charge too.
You also need to consider the consequences for inheritance tax (IHT) both for your estate and the trust, including a potential double charge. If the asset is worth more than the nil rate band of £325,000 per person, there could be an immediate IHT charge payable based on the lifetime rates at 20 per cent.
I am preparing my paperwork ahead of the tax return deadline of January 31 but have been badly impacted by Covid and cannot pay the full tax owed. I am terrified about HM Revenue & Customs taking action against me, but certainly don’t want to take out a high interest loan. What steps should I take to give me the best chance of an amicable outcome?
Dawn Register, head of tax dispute resolution at advisory firm BDO, says you are not alone. Prioritise your cash flow management, look into establishing a payment arrangement and keep HMRC updated about your financial position.
Remember, your 2019-20 tax return reports income from April 6 2019 to April 5 2020, which is largely pre-pandemic. However, HMRC is aware that 10 months on, many individuals and businesses are now facing a dramatically different financial position and so will consider your personal circumstances. The sooner you file your tax return, the easier it should be to agree a payment plan and avoid penalties beyond January 2021. Even if you cannot pay in full, file on time to avoid penalties.
If your income is lower during 2020-21, you can also reduce your payments on account to help cash flow. This can be done online through the gov.uk personal tax account or by post using form SA303.
Once you have submitted your 2019-20 personal tax return, you can see how much additional tax you owe by the January 31 deadline. If it is under £30,000, 48 hours after your tax return is filed you can apply online for a “Time to Pay” arrangement — spreading payments.
If your tax debt is more than £30,000, you will need to speak to HMRC or get professional help to set up a bespoke Time to Pay arrangement. For people severely impacted by Covid-19, HMRC should be sympathetic and willing to reach a workable solution.
This will generally involve an instalment plan of an agreed monthly amount paid by direct debit. If instalment payments are missed you run the risk of HMRC taking enforcement action. HMRC charges forward interest on the debt, currently at 2.6 per cent (although linked to the Bank of England interest rate).
If your debt is over £30,000 and it will take you more than 12 months to pay, HMRC will expect you to raise funds elsewhere to clear it or provide specific evidence demonstrating that you are not able to do so. This could mean selling assets, extending your mortgage or borrowing from a commercial lender — this may also be needed if you miss agreed payment instalments.
If you owe HMRC significantly more than £30,000, or have multiple tax debts, seek an adviser who has experience dealing with HMRC’s debt management unit.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
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