The recession may have turned capital gains tax (CGT) into a problem many people wish they had, but you could be sitting on unrealised gains that are exposed to tax at 18% or 28%. If the economy recovers – as we hope it will – investments bought now may be showing big gains in a few years.
A lower CGT rate of 10% applies where the disposal qualifies for entrepreneurs’
relief (ER). ER generally applies on the sale of your own business or on disposal of shares in your own company. The conditions for ER are complicated and it’s worth checking that you are entitled to it if you are hoping to benefit. Don’t sell up in the expectation of tax at 10% and be disappointed to find the tax is nearly two or three times as much. There is also a limit of £10 million of gains which can qualify for ER over your lifetime.
The rates of CGT of 10%, 18% and 28% are generally lower than the main rates of income tax (20%, 40% and 50%) so many people try to arrange to receive their investment returns in the form of gains rather than as income. HMRC are aware of this and there are anti-avoidance rules in place that let them charge tax at income tax rates on what the taxpayers think are gains. If you are hoping to pay at the lower CGT rate, it’s worth being sure that none of these traps can be applied to you.