Tax Advice

Capital Gains Tax

CGT is charged on net gains, i.e. total chargeable gains realised during a tax year after deducting total allowable losses realised in the year.

Companies are subject to corporation tax on chargeable gains calculated according to modified CGT rules.

Disposal of assets

CGT can only arise on the disposal of an asset. Normally this means sale, but it could also mean gift or compensation for loss or damage to an asset.

The value on which the gain (or loss) is based is normally the consideration received. However, on gifts and certain sales, the open market value is used instead.

No CGT is payable on death. The beneficiaries of a deceased person's estate are treated as if they had acquired the assets of the deceased at their market value on death.

Deductions

Certain costs are allowable in computing chargeable gains:

The acquisition cost or market value on 31 March 1982 (if the asset was acquired before that date).

Costs of acquiring and disposing of the asset.

Expenditure on enhancing the asset's value.

Indexation allowance

Losses

Losses brought forward from previous tax years can offset gains. For individual taxpayers, such losses do not reduce net gains below £8,800, so the annual exemption is not wasted.

Rate of tax

The first £8,800 of an individual's net gains realised during the tax year is free of CGT. The excess is taxed as if it were the top slice of income, at the rates that apply to savings income, namely 10% on the first £2,150, 20% on the next £31,150 and 40% on the balance.

Husbands and wives are subject to CGT separately, each with their own annual exemption and tax rates. Transfers between spouses living together are not liable to CGT.

Indexation allowance

The indexation allowance can reduce the chargeable gain for assets acquired before 1 April 1998, but it cannot increase a loss or turn a gain into a loss. The acquisition cost and enhancement expenditure (before April 1998) are revalued in line with indexation factors derived from increases in the RPI (retail prices index) between the date of expenditure and April 1998.

Identification of securities

Shares and securities disposed of are identified with acquisitions in the following order: Same day acquisitions.

Acquisitions within the following 30 days (thereby rendering 'bed and breakfasting' ineffective) but not any acquisitions after a person has become non-resident.

Previous acquisitions after 5 April 1998, taking the most recent acquisition first.

Any share in the 'pool' at 5 April 1998.

Any shares held on 5 April 1982.

Any shares acquired before 6 April 1965.Taper relief

Taper relief reduces a chargeable gain by reference to how long the asset has been held. It is applied to net gains after any indexation allowance. Losses are deducted so as to minimise the total chargeable gain. Different rates of taper relief apply to business assets and non-business assets. Business assets include:

Assets used in an unincorporated business. The owner of the asset need not be involved in the business.

All shareholdings in unlisted trading companies, including AIM companies.

Any shareholding of 5% or more in a quoted trading company and any shareholding in such a company held by any employee or director.

Employee holdings of up to 10% in non-trading companies.

Assets used in the company's trade where the shares are business assets in relation to the individual.

Main exemptions

Gains on certain assets are exempt (and losses not allowable).

An individual's, married couple's or civil partners’ only or main residence.

Certain works of art, historic buildings and their maintenance funds, decorations for valour, private motor cars.

Enterprise investment scheme shares (losses on these are allowable) and venture capital trust shares

Shares issued after 18 March 1986 under the Business Expansion Scheme.

Government securities, loan stocks, qualifying corporate bonds and National Savings and Investments certificates.

Individual savings account, child trust fund and personal equity plan investments.

Life assurance policies disposed of by their original owner.

Foreign currency for personal expenditure

Betting and lottery wins and compensation or damages for personal wrong or injury.

Assets transferred to charities or to trustees for the benefit of employees.

Shares held by the trustees of share incentive plans up to the point they are transferred to the employee

Other main reliefs

The disposal of tangible moveable property (chattels) with a predictable life of less than 50 years is exempt from CGT provided the asset did not qualify for capital allowances. The disposal of other chattels is exempt from CGT provided that the consideration is not more than £6,000. Otherwise, the chargeable gain is the lesser of the actual gain or 5/3 of the difference between £6,000 and the consideration.

Reinvestment relief is available on all chargeable gains made by individuals who reinvest the gain in shares eligible for the enterprise investment scheme (even if income tax relief is not given) or in shares in a venture capital trust. All or part of the gain (depending on the amount reinvested) is deferred until the shares are sold, subject to certain qualifying conditions being met. The reinvestment must be within a period starting one year before and ending three years after the disposal. Rollover relief may be available when disposing of a qualifying business asset and using the proceeds to acquire another qualifying business asset. All or part of the chargeable gain is postponed until the replacement asset is disposed of without replacement.

CGT on gifts of certain assets may be held over, ie the gain is postponed until the recipient disposes of the asset. They include: assets used in the transferor's unincorporated business or for a trade carried on by a company in which the transferor holds at least 5% of the voting rights; shares in an unlisted trading company (except when the gift is to another company); certain agricultural property; and transfers that are not potentially exempt for IHT purposes (eg to discretionary trusts). Holdover relief cannot be claimed on any assets transferred to a trust in which a settlor has an interest, or will acquire one
Rollover relief on incorporation postpones any gains (e.g. on property or business goodwill) when an unincorporated business is transferred to a company in exchange for the issue of shares.

Residence and domicile status

Individuals who are resident or ordinarily resident in the UK are liable to CGT on gains from disposing of assets wherever situated. Individuals who are neither resident nor ordinarily resident are not normally liable to CGT unless they are temporary non-residents, or trade in the UK and dispose of UK assets used for the trade.

Individuals who are resident and ordinarily resident outside the UK for less than five tax years are normally liable to CGT on their return to the UK on disposals abroad of assets acquired before their departure (re-entry charge).

There is no re-entry charge for individuals who were not resident and not ordinarily resident in the UK for four of the seven tax years before the year of departure.

Non-UK domiciled individuals who are resident or ordinarily resident in the UK or are temporary non-residents are taxable on non-UK gains only to the extent they are remitted to the UK.

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