Tax and Wealth Preservation
Capital Gains Tax - FAQs
What is capital gains tax?
Capital gains tax was introduced in 1965. Since then, a number of key changes have been made, including the introduction of indexation allowance in 1982 and taper relief in 1998. The most recent change came about in 2008, when a new set of capital gains tax rules were introduced and 2010 when different rates apply depending on your level of income.
Capital gains tax is chargeable on the disposal of a chargeable asset. In its simplest form a disposal can be a sale or a gift of an asset. The tax is payable on a gain made on a disposal. Various reliefs and exemptions are available.
What rate is it payable at?
For individuals the rate of tax is 18% if total taxable gains and income are less than the upper limit of the income tax basic rate band. The rate of 28% applies to taxable gains (or any part of the taxable gains) exceeding this limit.
The rate of tax applicable to trustees and personal representatives is 28%.
Companies pay corporation tax on their chargeable gains.
When does it arise?
A charge to capital gains tax can arise when you sell or gift an asset. It can also arise on other events, such as the grant of a lease, the receipt of a capital sum following the surrender of rights to an asset, on the loss or destruction of an asset, or the appropriation of an asset to trading stock.
What type of assets is it payable on?
Most types of asset are chargeable assets, including land and buildings, shares and securities, and chattels. There are a number of exempt assets, the most common ones being motor vehicles for private use, ISA holdings, cash, national savings certificates and premium bonds.
Who has to pay it?
Individuals, trustees and personal representatives are responsible for paying capital gains tax on the disposals they make. Charities are exempt, as are, generally, persons who are neither resident nor ordinarily resident in the UK (however if the latter applies to you make sure you are aware of the occasions when a tax charge could arise). Companies pay corporation tax on their chargeable gains.
When does it have to be paid?
Capital gains tax is reportable to HMRC by self-assessment. It is payable by the 31st January following the tax year in which the disposal takes place.
Are there any exemptions or reliefs?
An annual exemption each tax year is available for individuals, trustees and personal representatives. For the tax year to 5 April 2011 it is £10,100 for individuals and personal representatives. The annual exemption for trustees is half that of an individual’s. The trustee annual exemption is divided amongst the existing trusts that share the same settlor.
Various deductions are available to reduce the chargeable gain, including allowances for the cost of acquisition and disposal of the asset, and capital expenditure incurred which enhances the value of the asset.
There are a number of reliefs and exemptions which, if they apply, can significantly reduce your tax bill. Here are some of the more common ones:
- entrepreneurs’ relief – on the disposal of certain business assets;
- incorporation relief – on the incorporation of a business;
- gift relief – on the disposal of a business asset, or any asset into or out of certain types of trust;
- reinvestment relief – on the sale of a business asset followed by reinvestment of sale proceeds into another business asset;
- principal private residence relief – on the disposal of a property which has qualified – either by fact or by way of election – as your only or main residence. In order to make the most of this relief when you have two or more properties that you use as a residence, careful planning is needed.
If a loss is made it can be deducted from gains made in the same tax year, or carried forward to deduct from gains in future tax years.
When should I be looking to get advice on capital gains tax planning?
If you own assets which would be chargeable to capital gains tax on an intended disposal you should get advice early on (and before the disposal!) to ascertain the likely tax charge and ways to minimise it.
If you have two or more residences (perhaps you have a holiday home either in the UK or abroad) you could save a significant amount of capital gains tax by making best use of tax mitigation opportunities.
A re-structure of your estate could give rise to a capital gains tax liability so get tax advice beforehand.
If personal representatives are contemplating the sale of an asset in the estate they should weigh up the pros and cons of either selling in their capacity of personal representative or appropriating the asset to the beneficiaries who then sell in their individual capacity. For example if the beneficiaries sell, there might be more annual exemption to deduct, or if the sale is at a loss they could carry it forward to deduct from a future gain. We can advise on the best choice.
For advice on Capital Gains Tax please contact a member of our Tax and Wealth Preservation team.
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