It’s a favourite party trick of mine. Which is illegal? Avoidance or evasion. Answer at the foot of this article.
Private Residence Relief
This is the ruling that allows people who own their own home to avoid paying CGT on the sale profits and saving a princely sum along the way. You have to use it entirely for your personal use and not run a business from the premises. You can “flip” the relief if you own more than one property. The MPs were doing that in 2010 – many owned flats in London and homes in the counties. They could nominate which one to claim the relief on; quite legally.
Roll Over Relief
If a business owns an asset and sells it, CGT can be postponed by using the proceeds to buy a new asset for the business. Ultimately CGT would be payable when that asset is sold unless it’s also rolled over. Buy to let mortgages are often arranged using SPV limited companies. They can avoid CGT by rolling over the sale proceeds to a new property.
Hold Over Relief
This is where you hold the CGT bill until the recipient of the asset sells it. It's only allowed for certain assets though – agricultural assets, assets for a sole trader’s business use, unlisted company shares are examples.
Any capital losses made in a tax year can be used to offset CGT on another asset sale. Typically a client might sell some unit trusts at a loss and use this amount to reduce the CGT on their second home sale.
Think Dragons Den and those inspirational types that can’t stop creating companies and making money. This is for them. A lower rate of 10% is allowed up to £10 million of gains made in their businesses. 5% is the critical figure – at least 5% of the shares must be owned by them with 5% voting rights and entitled to 5% of the dividends.
The rest is evasion. Evasion is illegal, avoidance is ok but frowned upon, look at what happened to our MPs reputation in 2010.