If you are confused about Capital Gains Tax (CGT), then you’re not alone. The intricacies of Capital Gains Tax can often be confusing, convoluted and there are a number of options available that can help reduce the amount you pay.
According to HMRC, Capital Gains Tax is defined as: “A tax on the profit when you sell something that’s increased in value.
It is the gain you make that’s taxed and not the amount of money you receive”
The treatment of Capital Gains Tax differs throughout Europe. Countries such as The Netherlands and Hong Kong have no CGT while in the UK residents are subjected to a rate of 18%.
The most common capital gains come from property, company stocks and bonds, the sale of a business asset or precious metals, where the items are sold at a higher cost than what they were orginally purchased for.
Individual capital gains tax
Property would be most applicable to the private individual and is subject to legislation within the country in which the individual owns the property. At its extreme, we could use France as an example.
According to an article in The Daily Telegraph France could be about to lose its war on British second home owners after the European Union’s senior legal adviser said that its tax on non-resident property sales is almost certainly “Illegal”.
President Francois Hollande has imposed a 15.5% social “charge” on rental income and capital gains from the sale of second homes in 2012. These social charges are paid on top of the existing Capital Gains income made after the sale of a property, raising CGT on property from 19% to 34.5%.
As an individual you may also be liable for Capital Gains in the US if you hold dual citizenship. Boris Johnson was caught up in this dilemma quite recently after having to pay an undisclosed sum to the US government ahead of his visit to Boston, New York and Washington. Born in the US and having lived there until the age of 5, Boris holds both British and US passports. After the sale of his Islington home in 2009 he was subsequently ordered to file a tax return and pay US taxes.
It’s important that you not only look at where your assets are, but also what nationality you hold as you may need to take independent professional advice on how to structure your assets in a sensible way.
You could also consider using up your entire Gift Allowance, transfer assets between husband and wife or alternatively invest in approved individual country schemes that help start ups.
Capital gains tax for business
Some of the key points to consider for a business when looking at Capital Gains are:
- Make full use of all Capital Gains Tax allowances
- Claim a roll-over relief when you invest the gain in new assets
- Roll the gain into a pension scheme
- Use losses brought forward
When business owners in the UK sell their business they can make significant savings from the government through something called Entrepreneurs Relief. When you sell or dispose of your business assets, the first £10 million is taxed at a rate of only 10%, compared to the standard 18% or 28%. These assets only need to be held for one year to qualify.
According to The Telegraph various UK entrepreneurs are calling for the next government to extend entrepreneur incentives such as this. In an open letter to the main political parties, business leaders including Sherry Coutu and Luke Johnson (the former chairman of Pizza Express) have called on MP’s to protect this relief.
The Wall Street Journal commented recently about how Capital Gains Tax rates in the US are too low when compared to other taxes. However it did state that they do reward investors in critical industries and ultimately have a positive impact on the economy. Raising them would only force people to look at alternative strategies to shelter any gains.
Personal and business capital gains tax planning can often be complicated and will vary from country to country. You may want to consider long term capital gains tax planning as part of your overall business strategy.
This post was written by Russell Lebe, Managing Director of Accountancy In Europe. Set up specifically to assist individuals or companies who are looking for a trusted firm of accountants throughout Europe