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Capital Gains Tax generally arises when you sell
assets. This could include property, shares and expensive antiques. In
the information below you will find out:
- What might be liable to capital gains
- How to calculate the amount of the gain
- How to apply taper relief to reduce the gain
which is taxable
- Whether there are special rules to show the gain
is not taxable
- Whether there are any tax reliefs which you can
claim
- How you calculate the tax due on the gain
If you sell land or shares at a profit then you are potentially liable to capital gains tax. You can also be liable to tax if you give away valuable assets to a person who is connected to you. Some compensation for loss of assets can also be taxable.
Certain assets are exempt from capital gains tax, that is to say any gains on the disposal of these assets will not be subject to CGT. The following assets are exempt:
- Private motor vehicles
- Moveable plant & machinery
- Winnings from betting, gaming etc
- Compensation or damages for injury
- Currency
- Goods worth £6,000 or less at the date of disposal
This list is not exhaustive, a full list of exempt disposals can be found on the HMRC website.
You may believe that this question has an obvious answer: it is the proceeds less what I paid for the asset. This is fundamentally correct, but the complication has only just begun.
You need to bring into the calculation any costs incurred in purchasing and selling the asset. These may be professional fees of valuers, auctioneers, solicitors or other agents plus conveyancing costs and stamp duty. If the asset has been added to during the period of ownership, for example if the building has been extended, those costs must also be included.
If you acquired the asset before 31 March 1982, the calculation will need to incorporate the value of the asset at that date. Such a valuation can be complex if the asset disposed of was land, buildings or shares in an unquoted company, and you will almost certainly need professional help. A similar valuation may also be required if the asset was held on 6 April 1965.
If the gain arises on the disposal of shares that have been acquired over a period of time there are some very complex rules to determine the cost of the shares to be used in the calculation. Shareholdings in quoted companies are often added to by the issue of bonus shares or scrip dividends that confuse the original cost of the shares. You will definitely need help with such a calculation.
In order to allow for the effect of inflation on the increase in value of the asset, the associated additions and acquisition costs, an indexation allowance is deducted for the period the asset has been held between 31 March 1982 and 5 April 1998. The indexation allowance is an approximation of the percentage increase in inflation between the later of the date of purchase and 31 March 1982, and the earlier of the date of sale, and 5 April 1998.
The indexation allowance can not turn a capital gain into a loss or increase a capital loss. For disposals after 5 April 1998 taper relief may also reduce the gain, see below.
If the calculation before deduction of taper relief or indexation allowance produces a loss, that loss can usually be used to reduce another capital gain made in the same year. If there are no other gains in that year the loss is carried forward to set against a gain arising in a later tax year. Where the loss arises on the disposal of an asset to a person who is connected to you, there are restrictions on its use.
Taper relief exempts a percentage of the gain, after deduction of indexation allowance and losses, from capital gains tax. The amount of taper relief given depends on the type of asset and the number of full years the asset was held since 6 April 1998.
The definition of a business asset was relaxed significantly from 6 April 2000 and now includes all holdings of shares in unquoted companies and holdings of quoted shares where the shareholder works for the quoted company. Assets that are used by an unquoted company or used for the purposes of the owner's employment can also be business assets. Companies that are listed on the AIM count as unquoted for the purposes of taper relief.
When calculating the amount of taper relief applicable to the gain one must examine the full period of ownership since 6 April 1998 to determine the periods during which the asset qualifies as a business asset or a non-business asset. The change in definition of business asset from 6 April 2000 could change an asset from one category to the other. In such a case the total gain must be apportioned over the period of ownership and the differing rates of taper relief applied to the two portions of gain. This can lead to the owner being disadvantaged by holding the asset for a longer period of time, in which case sophisticated planning techniques can be used to maximise the amount of taper relief due. Where an asset has been transferred between spouses, prior to its eventual disposal to a third-party, you would also need to consider the combined ownership period of the couple to calculate the taper relief available.
Each individual has a capital gains annual exemption – an amount of gain that is taxed at 0%. Currently the annual exemption is £8,500 (2005/06). This is deducted from the total chargeable gains after all reliefs to arrive at the taxable gain.
The taxable gain, after all reliefs and exemptions, is taxed according to the individual's income tax bandings, but at the CGT rates (10%, 20% and 40%). The income is allocated to the bands first and the gain is then allocated according to the bands remaining and taxed at the appropriate CGT rate for that band.
- Assets can be transferred between husband and wife (and now Civil Partners) at “nil gain/nil loss” – so that there is no taxable gain.
Assets can also be transferred to registered charities and similar organisations at “nil gain/nil loss”
Generally, gains on the sale of your home (or Personal Private Residence (PPR)) are tax-free, if you have lived in the home throughout your ownership. If during the ownership period you have had periods of absence or have used part of the property for business or not as your residence part of the gain may be taxable. There are also restrictions on other aspects of the relief and specialist advice is often required to maximise the tax relief.
Where an asset is given away without proceeds of sale, or at a price less than its market value, it may be possible to defer or “holdover” all or part of the gain so that it only falls to be taxed when the recipient of the asset disposes of it.
Where the proceeds of the sale of a business asset, say the business premises, are reinvested in a new business asset the tax on the gain may be deferred.
Where an unincorporated business is transferred into a company, subject to certain conditions being met, the gain on the disposal of the sole trade or partnership share may be “heldover” in the shares of the company so that it only falls to be taxed on the eventual disposal of the shares.
There are other CGT reliefs available, which we would be happy to discuss with you. In particular, many of our clients have benefited from our advice in connection with the Enterprise Investment Scheme (EIS). As with most tax planning, the earlier advice is sought in connection with a potential transaction the more options there are available to reduce the tax.
Any CGT due is paid on 31 January each year with the final income tax payment.
The tax team at Andrew Webster Ltd have a wealth of experience in advising on the above matters in connection with CGT. To gain specialist , please call us at +44 (0)1223 507080 or email at info@tax.uk.com
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