Capital Gains Tax

Consideration received

1. Disposals at arm's length W here there is a sale 'at arm's length', the consideration received will be the price paid by the buyer when the asset is sold. 2. Disposals between connected persons If the parties are connected persons, HMRC will deem the seller to have received market value irrespective of the actual sale proceeds. 'Connected Persons' include: The individual's relatives and spouses of their relatives. Relatives are direct ancestors (parents and grandparents), lineal descendants and brothers and sisters but not 'lateral' relatives, eg uncles, aunts, nephews, nieces. Companies, if they are under common control. Partners in business.Remember that this does not include a disposal to an individual's own spouse. 3. Disposals at an undervalue If the transaction is between unconnected persons and at an undervalue, then for CGT purposes, the sale is deemed to be at the market value at the date of disposal. Note, however, HMRC will not substitute market va

Chargeable Gain

A gain needs to have been made and in calculating the chargeable gain, the starting point is always the consideration received (or deemed to have been received). The appropriate rate of CGT (either 20% or 10% unless it is an upper rate gain - see further below) is then applied to the chargeable gain. Disposals to charities are treated as made on a no gain/no loss basis. Gains made by charities are exempt provided that the gain is applied for charitable purposes.

Chargeable Asset

All forms of property are included in the definition of asset unless they are specifically excluded. The main types of asset excluded from CGT are: 1. Principal private residence ('PPR'): an individual can claim the benefit of this exemption from CGT if they have occupied the PPR as their only or main residence during the whole period of ownership, though the individual also has a valuable exemption in respect of the last 18 months of ownership even if they were not in actual occupation. In cases where an individual owns more than one home it is a questionoffactastowhichoftheresidencesisthePPR. Amarriedcouplecanonly have one PPR between them: they cannot each have a different principal place of residence (unless separated); 2. Motor cars for private use, including vintage cars; 3. Certain investments, such as government securities, National Savingscertificates, shares and securities held in Individual Savings Accounts (ISAs) and life assurance policies; and 4. UK sterling and a

1. Companies - Tax payable on the gain

All gains realised by companies will be calculated according to similar principles as those applying to CGT (with certain exceptions eg companies qualify for indexation allowance for inflationary gains up to December 2017 but do not have an annual exemption). Such gains will then be taxed at corporation tax rates (see later). Companies do not pay CGT; they pay corporation tax. Therefore, in relation to gains made by companies, reference should be made to 'corporation tax on chargeable gains' rather than CGT. Note: charities are generally exempt from paying CGT.

Business Asset Disposal Relief - Lifetime Allowance

Business Asset Disposal Relief gives each individual a lifetime allowance, which is now set at £1 million. This means that the first £1 million of qualifying gains that an individual makes in his lifetime can be charged to CGT at a reduced rate of 10%. An individual can make as many qualifying claims as they like during their lifetime until their cumulative gains reach the £1 million lifetime limit. Any gains beyond the £1 million lifetime allowance will be charged to CGT at either 10% or 20% (depending on the rate at which the individual pays CGT; see below). Business Asset Disposal Relief is not available in respect of investment businesses or companies. This means that the disposal of a buy-to-let property investment or other non-trading business will not qualify for Business Asset Disposal Relief.

Business Asset Disposal Relief (formerly known as Entrepreneur's Relief or ER)

Business Asset Disposal Relief reduces the higher rate of CGT from 20% to 10% for gains arising on qualifying disposals. The reduced 10% rate of CGT is applied to the Taxable Chargeable Gain (ie the gain after all allowable deductions, losses and the annual exemption). A qualifying disposal is a disposal of: 1. all or part of a trading business; 2. assets in a business that used to trade; 3. shares in a trading company; or 4. shares in a company that used to trade; where, in each case, certain conditions are satisfied. The conditions are as follows: 1. Where someone disposes of all or part of a business: - the business must be a trading business; and - the business must have been owned for at least two years prior to the date of disposal. 2. Where someone disposes of assets used in a business that used to trade: - thebusinessmusthavebeenownedforatleasttwoyearsbeforeitceasedto trade; - theassetsmusthavebeenusedinthebusinesswhenitceasedtotrade;and -theassetsmusthavebeendisp

Summary

CGT is charged when there is a chargeable disposal of a chargeable asset by a chargeable person, which gives rise to a chargeable gain. There are two main types of disposal: a gift and a sale of an asset. The starting point for the CGT calculation is establishing the consideration or proceeds received by the seller on the disposal of the asset, subject to any substitution of market value if the transaction occurs between 'connected persons'or between unconnected persons and for an undervalue. CGT is charged at 20% (for higher and additional rate taxpayers), 10% for basic rate taxpayers and 10% where the individual benefits from Business Asset Disposal Relief or Investors' Relief. There are several ways to mitigate the CGT liability, eg allowable expenditure, Business Asset Disposal Relief and Investors' Relief (provided the conditions are fulfilled), losses; and each individual is entitled to an annual exemption.

Investors' Relief ('IR')

IR was introduced to give a benefit to investors in unlisted trading companies who hold their shares for at least three years. IR reduces the higher rate of CGT from 20% to 10% for gains arising on disposals of qualifying shares, subject to a lifetime limit of £10 million. Shares will be qualifying shares if the following conditions are met: The shares are fully paid ordinary shares and were issued to the individual for cash consideration on or after 17 March 2016; The company is (and has been since the shares were issued) a trading company or the holding company of a trading group; At the time of issue of the shares, none of the company's shares were listed on a recognised stock exchange; The shares are held by the individual for at least three years from 6 April 2016 (and continuously since issue); and The individual (or any connected person) is not (nor at any time has been from the date of issue of the shares) an officer or employee of the company (or any connected company).

Using capital losses

Since CGT is only charged on overall gains made by an individual in a tax year, any capital losses that an individual has made in the same tax year can be carried across and deducted from any gains made in that tax year. Such losses must be set off against other capital gains made in the same tax year first. If there are insufficient gains against which to offset the losses in the same tax year that they are incurred, any unrelieved losses are set against gains in future tax years ie carried forward (in so far as the gains in those years are not covered by the annual exemption; see below) until used up. There is no time limit on taking a loss forward but it must be used against the first available gains. Note that there are limits as to how much an individual may claim in loss relief in certain circumstances

Introduction

The idea behind Capital Gains Tax ('CGT') is to tax the profit that a person might make from disposing of a capital asset which has appreciated (increased) in value during their period of ownership. CGT is charged where there is: - a Chargeable Disposal - of a Chargeable Asset - by a Chargeable Person - which gives rise to a Chargeable Gain CGT is charged on all gains made in the relevant tax year (ie 6 April to 5 April). The tax is payable on or before 31 January following the tax year in which the disposal occurs. This is the same date as for the final payment (or refund) of income tax for the year.

Chargeable Disposal

The two main instances of disposal are as follows: 1. the sale of an asset; and 2. the gift of an asset during the taxpayer's lifetime. There is no chargeable disposal on death. The personal representatives of thedeceased'sestatearedeemedtoacquiretheestateatitsthenmarketvalue. Thisis commonly known as 'a free uplift on death'.

Allowable expenditure

There are three types of expenditure which can be deducted from the consideration (or deemed consideration) received. These deductions enable the taxpayer to minimise the gain made and therefore the tax payable. The categories of expenditure are as follows: Initial Expenditure The cost price of the asset (the 'base cost'); and The incidental costs of acquisition (eg surveyors' fees/lawyers' fees). Subsequent expenditure Subsequent expenditure on the asset which enhances its value; and Expenditure incurred in establishing, preserving or defending title to the asset. Disposal expenditure Incidental costs of disposal (eg agents' commission).

Business Reliefs

There are two main business reliefs, which defer liability to CGT. These are: Replacement of business assets relief ('Rollover Relief') Gift of business assets relief ('Hold-over relief')

2. Individuals - Tax payable on the gain

There are two rates of CGT: 10% and 20% (unless the gains are upper rate gains (see below)). Broadly, basic rate taxpayers pay 10% CGT and higher and additional rate taxpayers pay 20% CGT. It is important to have calculated a person's income tax prior to their capital gains tax in order to establish this. The details of the calculation are as follows: Where an individual's Taxable Income plus total taxable chargeable gains after all allowable deductions (including losses and the AE) is less than the basic rate tax threshold of £37,700, the rate of CGT will be 10%. Where an individual's Taxable Income exceeds the basic rate tax threshold of £37,700, the CGT rate will be 20%. Where an individual's Taxable Income is less than the basic rate tax band threshold of £37,700 but after the gains are added, the combined total exceeds the threshold that part of the gains within the unused part of the basic rate tax band will be charged to CGT at 10% and any part that exceeds the thr

1. Replacement of business assets relief ('Rollover Relief')

To avoid having to pay CGT each time certain business assets are sold and replaced, a taxpayer can elect to postpone the CGT liability it realises on the sale of such an asset by 'rolling over' the gain into the replacement asset. This applies to land and buildings, fixed plant and machinery and goodwill. The new asset need not necessarily be of the same type as the old one. It merely needs to be within the list of qualifying assets. The effect of the relief is that any gain arising from a disposal of a qualifying asset is carried forward and 'rolled' into the cost of a qualifying replacement asset. The acquisition cost of the replacement asset is reduced by the amount of the gain being rolled over. Therefore, tax is postponed until the replacement asset is sold and no new qualifying replacement asset is purchased. It is possible to roll over gains indefinitely provided sufficient qualifying assets are bought within the time limits. The annual exemption cannot be used to reduce

Disposals between spouses

W hen one spouse disposes of an asset to the other, legislation deems that neither a gain nor a loss has occurred, so no CGT is payable. In effect, the spouse receiving the asset takes over the base cost (ie the original cost of the asset to the transferring spouse) of the spouse who disposed of it. This is the case for spouses or civil partners notwithstanding disposals between connected persons (see later). Example A husband bought shares in a company for £4,000 in May 2018 and three years later gave the shares to his wife. For CGT purposes, there is no capital gain (or loss) on this 'disposal' by the husband: the wife in effect acquires the shares at a value of £4,000 with an acquisition date of May 2021.

2. Gift of business assets relief ('Hold-over relief')

W here an individual gives away a business asset, the donor (the person making the gift) and donee (the person receiving the gift) can claim hold-over relief. As a transfer at an undervalue or gift, the market value rule will apply. The donor will have no liability to CGT but the donee's acquisition cost for CGT purposes is reduced by the amount of the donor's deemed gain. In effect the CGT liability is postponed until the donee ultimately disposes of the asset (although further hold-over relief can be claimed if the donee then gives away the asset). As in the case of roll-over relief, the whole chargeable gain must be held over if a claim for hold-over relief is made. The donor cannot use his annual exemption to reduce the gain held over. Hold-over relief may also be claimed where an asset is sold at undervalue but the hold- over relief will only be available on the gift element, ie the difference between the price paid and the market value. Business assets on which hold-over reli

Tax payable on the gain

When the Total Chargeable Gain (ie after deductions and the annual exemption) has been calculated, losses can then be taken into account and all gains are added together to find the Total Taxable Chargeable Gains. It is then necessary to calculate the tax payable on the total taxable chargeable gains. In order to calculate the tax payable, the following rules apply:

Annual Exemption ('AE')

all individuals are entitled to make up to £12,300 of gains tax free in this tax year. Companies do not have the benefit of any AE.