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Liability to capital gains tax (CGT)
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 (see Capital Gains Tax: Indexation allowance).
Losses
Losses brought forward from previous tax years
can offset gains. For individual taxpayers, such losses do not reduce
net gains below £8,200, so the annual exemption is not wasted. (See
Corporation Tax: Capital gains
by companies.)
Rate of tax
The first £8,200 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 £2,020, 20% on the next £29,380 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.
| Indexation allowances to April 1998 |
|
| |
|
Jan |
Feb |
Mar |
Apr |
May |
Jun |
Jul |
Aug |
Sept |
Oct |
Nov |
Dec |
| 1982 |
|
- |
- |
1.047 |
1.006 |
0.992 |
0.987 |
0.986 |
0.985 |
0.987 |
0.977 |
0.967 |
0.971 |
| 1983 |
|
0.968 |
0.960 |
0.956 |
0.929 |
0.921 |
0.917 |
0.906 |
0.898 |
0.889 |
0.883 |
0.876 |
0.871 |
| 1984 |
|
0.872 |
0.865 |
0.859 |
0.834 |
0.828 |
0.823 |
0.825 |
0.808 |
0.804 |
0.793 |
0.788 |
0.789 |
| 1985 |
|
0.783 |
0.769 |
0.752 |
0.716 |
0.708 |
0.704 |
0.707 |
0.703 |
0.704 |
0.701 |
0.695 |
0.693 |
| 1986 |
|
0.689 |
0.683 |
0.681 |
0.665 |
0.662 |
0.663 |
0.667 |
0.662 |
0.654 |
0.652 |
0.638 |
0.632 |
| 1987 |
|
0.626 |
0.620 |
0.616 |
0.597 |
0.596 |
0.596 |
0.597 |
0.593 |
0.588 |
0.580 |
0.573 |
0.574 |
| 1988 |
|
0.574 |
0.568 |
0.562 |
0.537 |
0.531 |
0.525 |
0.524 |
0.507 |
0.500 |
0.485 |
0.478 |
0.474 |
| 1989 |
|
0.465 |
0.454 |
0.448 |
0.423 |
0.414 |
0.409 |
0.408 |
0.404 |
0.395 |
0.384 |
0.372 |
0.369 |
| 1990 |
|
0.361 |
0.353 |
0.339 |
0.300 |
0.288 |
0.283 |
0.282 |
0.269 |
0.258 |
0.248 |
0.251 |
0.252 |
| 1991 |
|
0.249 |
0.242 |
0.237 |
0.222 |
0.218 |
0.213 |
0.215 |
0.213 |
0.208 |
0.204 |
0.199 |
0.198 |
| 1992 |
|
0.199 |
0.193 |
0.189 |
0.171 |
0.167 |
0.167 |
0.171 |
0.171 |
0.166 |
0.162 |
0.164 |
0.168 |
| 1993 |
|
0.179 |
0.171 |
0.167 |
0.156 |
0.152 |
0.153 |
0.156 |
0.151 |
0.146 |
0.147 |
0.148 |
0.146 |
| 1994 |
|
0.151 |
0.144 |
0.141 |
0.128 |
0.124 |
0.124 |
0.129 |
0.124 |
0.121 |
0.120 |
0.119 |
0.114 |
| 1995 |
|
0.114 |
0.107 |
0.102 |
0.091 |
0.087 |
0.085 |
0.091 |
0.085 |
0.080 |
0.085 |
0.085 |
0.079 |
| 1996 |
|
0.083 |
0.078 |
0.073 |
0.066 |
0.063 |
0.063 |
0.067 |
0.062 |
0.057 |
0.057 |
0.057 |
0.053 |
| 1997 |
|
0.053 |
0.049 |
0.046 |
0.040 |
0.036 |
0.032 |
0.032 |
0.026 |
0.021 |
0.019 |
0.019 |
0.016 |
| 1998 |
|
0.019 |
0.014 |
0.011 |
- |
- |
- |
- |
- |
- |
- |
- |
- |
|
The indexation allowance is calculated by multiplying the allowable expenditure by the indexation factor for the month in which the expenditure was incurred or for March 1982 if later.
Example Allowable expenditure of £1,000 in June 1984. Indexation allowance: £1,000 x 0.823 = £823.
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).
- 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.
From 6 April 2004, 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.
Number of complete
years after 5 April 1998
for which asset is held* |
Business
assets
% of gain
taxable |
Non-business
assets
% of gain
taxable |
|
| 0 |
100.0 |
100 |
| 1 |
50.0 |
100 |
| 2 |
25.0 |
100 |
| 3 |
25.0 |
95 |
| 4 |
25.0 |
90 |
| 5 |
25.0 |
85 |
| 6 |
25.0 |
80 |
| 7 |
25.0 |
75 |
| 8 |
25.0 |
70 |
| 9 |
25.0 |
65 |
| 10 or more |
25.0 |
60 |
| *Non-business assets acquired before 17 March 1998 qualify for an extra year's worth of taper relief. |
|
Example A non-business
asset acquired for £10,000 in May 1985 is sold for £45,000 net of
expenses in June 2004. The asset qualifies for 7years' taper relief
(6 years to 6 April 2004 plus bonus year).
| |
£ |
£ |
| Sale proceeds |
|
45,000 |
| Less: allowable expenditure |
10,000 |
|
| indexation allowance |
7,080 |
|
| |
|
(17,080) |
| Gain before taper relief |
|
27,920 |
| Percentage of gain taxable |
|
75% |
| Taxable gain =
0.75 x £27,920 |
|
£20,940 |
Main exemptions
Gains on certain assets are exempt (and losses
not allowable).
- An individual's or married couple's 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 (see
Income Tax: Tax privileged
personal investments).
- 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 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 (see
Income Tax: Fringe
benefits for employees).
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 (one year after for venture capital trust reinvestments
made before 6 April 2004).
- 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.
- UK resident individuals who are resident and ordinarily resident outside the UK for less than five tax years starting after 16 March 1998 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, or in respect of periods of non-residence starting before 17 March 1998.
- 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.
The Dyer Partnership, 17
Westminster Court, Hipley Street, Old Woking, Surrey GU22 9LG
Copyright © 2002 - 2004
The Dyer Partnership Limited
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