Capital Gain Tax (CGT) in brief
Who is liable to CGT?
CGT is payable by UK resident individuals and trustees (incl. personal representatives). It is also payable by non-residents on disposal of UK residential property.
Partnership gains are apportioned to the partners. Limited companies pay corporation tax, albeit computed on CGT rules (including Indexation allowance, which is not available to individuals).
CGT or income tax?
People often think that, for example if you dispose of real estate, this means the gain is liable to CGT. Consider the badges of trade – often in advisory cases, the “gain” is in fact more likely to be income from property development (even if one off) rather than the gain resultant from holding property longer term to rent out.
How is a gain computed?
Proceeds: Normally this is quite straightforward as it is selling price. However, for gift to related party other than spouse, market value used. Note: transfer to spouse is no gain/no loss. Option to hold over relief under s 165 TCGA for business assets and s 260 TCGA 1992 for any asset transferred into a trust by joint election. Can also be value of asset (part) exchanged
Less Incidental costs of disposal: E.g. solicitors/estate agent costs, advisory fees on sale etc.
Less Base cost: This can be original cost, March 1982 value, probate value on inheritance, or part of the above for a part disposal calculated on the “A/(A+B)” principal. EG, original cost of property £100k. Selling off land for £50k (“A”). Remainder of property valued at £200k(“B”). Cost used is £100k x A/A+B (50/250) = £20k.
Less Incidental costs of acquisition: E.g. SDLT, legal fees, surveyors fees, advisory fees
Less Improvement costs: Capital improvements made.
Equals gain or loss.
Each individual also has an annual exempt amount (£11,300 for 2017/18). Husband and Wife have one each so often there is mileage in transferring sole name assets to joint name before sale (deemed to be exchange of contract not completion). No need for formal conveyance – can use a deed of trust. Think also around timing of disposals – each year’s allowance is lost if not used, try and stagger disposals across tax years.
How are losses utilised?
In the year of the loss, losses are offset against gains in the year other than losses from transferring assets to a connected person, which can only be offset against gains from transfers to the same person.
You may choose which gains you offset with losses (i.e. against highest rate gains – see below)
Current year losses must be offset against current year gains even if the gains would be covered by the annual exemption.
Losses which exceed current year gains are carried forwards. The use of these can be restricted in later years to preserve the annual exempt amount.
as an example:
In 2015/16 Derek has a gain of £50k and a loss of £45k. He must offset the full £45k loss even though with net gains of only £5k he has over £6k annual exemption left.
In 2016/17, Derek makes a loss of £30k and no gains.
In 2017/18, Derek makes a gain of £20k and no losses. He uses £8,700 of his 2016/17 loss to bring his net gains to £11,300 (the annual exempt amount). He has losses to carry forward of £21,300.
With the right advice and planning, if Derek had realised his £45k loss in 2014/15 and then made the same £50k gain in 2015/16, he would only have had to use approx. £39k of the loss brought forward to bring his 2015/16 gain down to his £11k annual exemption, meaning he had £6k of loss to carry forward against a future gain.
Losses in the year of death may be carried back up to three years, and losses on earn outs can be carried back against the original gain. Losses on unquoted trading company shares may be claimed as an income loss. This includes a negligible value claim. Claim vs current year or previous year income. See https://www.gov.uk/hmrc-internal-manuals/venture-capital-schemes-manual/vcm70100
These are the only circumstances where capital losses may be carried back.
What rate of tax is payable?
For gains qualifying for entrepreneurs relief (shares in personal company [5% and officer/employee or under EMI] sole trade/partnership or related sale of land), 10% up to lifetime limit of £10M per person.
Also long term investors relief – unquoted trading co shares issued post 17.03.16, held 3 yrs post 06.04.16. 10% and separate £10m lifetime limit.
Other gains add to income. Where gain falls in Basic Rate Tax band, 10% (18% for residential property) or 20% for gains above this (28% for residential property). Note there is no additional rate akin to 45% for gains falling in the additional rate band, still 20%/28%.
- Rollover relief: Old and new assets must qualify and reinvest all proceeds (or proportionate relief only) e.g. building used in same trade (ST/partnership or personal company), fixed (not moveable) P&M, ships, goodwill, various quotas. Never seen it used in practice
- Holdover/Gift relief: gifts of business assets (s 165 TCGA) or into/out of trust (s. 260) – joint election.
- Incorporation relief: where all assets transferred on incorporation (normally use s. 165 instead)
- Main residence relief (PPR): where, at some point during ownership, occupied as main residence (note danger in late intra-spouse transfer after moved out). Gain time apportioned on straight line basis. Periods of occupation as main residence exempt, plus:
- Last 18 months (was 36 months)
- Employment wholly abroad (when preceded and followed by actual occupation)
- Temporary absence for any reason up to three years (when preceded and followed by actual occupation)
- Up to four years due to being in work related accommodation
- Letting relief up to £40k per individual (limited to lower of relief otherwise due and gain in let period)
- Use of spouse – joint sale or “bed and spouse” to uplift base cost
- Invest in SEIS shares – permanently eliminate half of CGT where proceeds reinvested (note risks)
- Invest in SEIS or EIS shares to defer gains (but not if ER??)
- Think about IHT issues – has BPR qualifying asset been exchanged for non-exempt asset?
If you would wish to discuss your own personal circumstances, then please call us on 01865 379272.
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