In today’s blog, here at Tulip Thistle Accountancy, we are covering UK Capital Gains Tax (CGT), who it applies to, the different rates involved, as well as some of the available reliefs.
Capital Gains Tax (CGT) is a tax on the profit when you sell (or ‘dispose of’) an ‘asset’ that has increased in value. The most common way for a person to dispose of an asset is to sell it to another person. However, a gift is also seen as a disposal in this context. CGT applies to individuals as well as companies (N.B. if a company makes a taxable gain it pays corporation tax on its gain).
Most property other than cash in sterling is an asset for CGT purposes. However there are some specific exemptions*:
- Cars are always exempt from capital gains tax (but not vans and lorries)
- Wasting chattels. A chattel is “tangible, movable property”, i.e. an asset that can been seen, touched and moved. A wasting chattel is one with a useful life of no more than 50 years (e.g. greyhounds and racehorses)
- Gilts. Gilts are Treasury Stock issued by the UK Government on which annual interest is payable
- Shares in an Individual Savings Account (ISA) are exempt
- Shares held in approved share incentive plans through employment
- Shares in Venture Capital Trusts are exempt, provided they were acquired within the investment limit for the year of acquisition
- Gains on shares in Enterprise Investment Schemes (EIS) and Seed Enterprise Investment Schemes (SEIS) are also exempt subject to certain conditions
- Foreign currency held for personal expenditure outside of UK & Foreign currency bank accounts
- Certain other assets specifically listed as Exempted Assets for CGT
In summary an Asset is subject to Capital Gains tax if it is not specifically exempt under the CGT legislation. So the sale of a buy-to-let property, selling shares held outside of an ISA but also gains on valuables (e.g. jewellery, paintings, antiques, coins and stamps etc.), are all subject to CGT. However if personal possessions you dispose of are worth no more than £6,000, any gain is exempt (NB: if you sell a set (of chairs, for example), the £6,000 limit applies to the set, not each item).
Every individual has an Annual Exemption for capital gains tax (£11,700 in the 2018/2019 Tax Year).
Any transfers between spouses and civil partners are treated as taking place at no gain and no loss. So effectively the receiving partner is deemed to have acquired the asset at the same time and for the same price as the original partner. Gifts to charities also take place on this basis.
For example: Jane acquired some shares in a company on 1 January 2017 for £20,000. In March 2018 Jane gifts these shares to her husband John. At the time of the gift to John, Jayne is assumed to have disposed of these shares at the same value as she bought them for originally (i.e. £20,000) so no Capital Gain results at the time of the gift. When John sell the shares on 31 December 2018 for £40,000 he has made a capital gain of £20,000; the sales proceeds of £40,000 less the cost of acquisition of £20,000 (the original amount his wife Jayne purchased the shares for).
The rate at which any Capital Gain is taxable depends on:
- the level of an individual’s taxable income and
- the nature of the asset being disposed of
If an individual pays tax at the higher or additional rates on his income, then the rate of capital gains tax is 20%. Otherwise gains are generally taxed at a rate of 10% to the extent that they do not exceed the individual’s unused basic rate band (amount of basic tax rate band remaining after an individual’s income has been taxed) and 20% to the extent that they exceed the amount of unused basic rate tax band.
However where a gain arises on disposal of residential property, the 10% and 20% rates are increased to 18% and 28% respectively*. Where an individual has both non-residential property gains and residential property gains, the annual exemption can be allocated in the most beneficial way in order to minimise the tax payable.
Capital Gains are assessed through Self-Assessment and as such Capital Gains Tax is due and payable in full on 31 January following the tax year in which the gain was made.
There are several reliefs available; in today’s Blog we will discuss three of the main ones:
- Principal Private Residence Relief (an individual is entitled to this relief when they make a capital gain on the sale of their only or main residence). If the taxpayer has lived in the property as their home throughout the whole period of ownership, 100% of the gain is exempt and no gain is chargeable. A gain will only arise if the taxpayer has been absent from the property at some point during their period of ownership (e.g. let out their property or lived elsewhere). A taxpayer’s principal private residence also includes gardens and grounds, provided the entire area including the site of the house does not exceed half a hectare (slightly over 1 acre).
- Entrepreneurs’ Relief (applies to disposals of business assets). The relief is available to tax payers who sell or give away their business. The aim of entrepreneurs’ relief is to reduce the rate of capital gains tax paid by taxpayers on qualifying disposals. Gains are eligible for entrepreneurs’ relief up to a maximum lifetime limit which is currently £10 million. Relief is given by taxing gains qualifying for entrepreneurs’ relief at a flat rate of 10%, regardless of whether the taxpayer is a basic, higher or additional rate taxpayer. There are several qualifying criteria (e.g. you’re a sole trader or business partner and you have owned the business for at least one year (2 years from 6 April 2019) before the date you sell or close it). In these scenarios I would always recommend obtaining professional advice from an accountant as the rules are complicated. In the case of the disposal of shares or securities in a company, the main conditions are that the company is the taxpayer’s “personal trading company” (the company must be “trading” and the taxpayer must have at least 5% of the ordinary shares & voting rights of the company (in addition some additional requirements will apply from 6 April 2019); and the taxpayer must work for the company (or for another company in the same group). There is no minimum hours worked stipulation, so full or part-time employees or directors will be eligible.
- Holdover relief (where a trader disposes of a business asset and reinvests his proceeds in buying another business asset, they can make a claim to defer the gain that was made). Rollover relief is a deferral relief, as it pushes the capital gains back to a later period in time. The way rollover relief works, is that the amount of the gain deferred is “rolled over” and reduces the base cost of the new asset purchased. Rollover relief must be claimed by the trader within four years from the end of the tax year in which the gain arises or the new asset is acquired (whichever is the later).
And finally you should always record and report Capital Losses as well. CGT is charged on your total gains each tax year. So if you make a profit when selling one item, but a loss when selling another, you can deduct the loss from the gain before working out how much tax you owe. While you can’t carry forward any unused allowances (£11,700 in the 2018/2019 Tax Year), you are allowed to carry forward any losses that haven’t been used to offset gains. So even if you don’t owe any CGT, it’s important to submit details of losses in your Self-Assessment Tax Return to make it easier to offset them against a potential gains in future years.
As so very often with Tax, the rules surrounding Capital Gains Tax are complex and in this blog we have only provided an introduction. If you want to learn more or discuss your specific circumstances in detail, please get in touch.
Until the next time!
Charles Donkers (ACMA), Tulip Thistle Accountancy
* please note this is not an exhaustive list
** A residential property is a property which at any time during the individual’s period
of ownership was used as a dwelling or was suitable for use as a dwelling.
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