An Introduction to Capital Gains Tax
Capital Gains Tax (CGT) applies when chargeable assets are discard of and is applicable to individuals and trustees but not to private companies, although private companies do pay Corporation Tax on the gains that they make.
Chargeable assets include all forms of property unless it is specifically exempt. The main assets it tends to apply to are land and buildings, shares, and business assets including goodwill. CGT can be very complex and the rules are far more detailed that can be explained in this brief summary.
How a Capital Gain occurs
A capital gain occurs when the value of an asset at the date it is to be dispose of is higher than when it was obtain. An asset can be dispose of either by sale or by gift. If you give away an asset in an uncommercial transaction, the market value will replace any actual consideration paid.
For assets that are acquire before 31 March 1982, the cost is usually consider to be the value on that day, although actual cost can come in handy in some circumstances.
The following also reduce the amount of the chargeable gain…
- Incidental costs of acquisition;
- Expenditure to enhance the value of the asset;
- Incidental costs of disposal; and
- Tax reliefs and allowances (see below).
Rate of Tax
CGT is charge at the rate of 20% where the total taxable gains and income are above the income tax basic rate band. Below that limit, the rate is 10%. For residential property (that does not qualify for private residence relief) and carried interest CGT is charged at 28% gains above the basic rate band and 18% below this limit. For trustees and personal representatives of deceased persons, the rate is 20% (28% for the disposal of the residential property).
There are several different tax reliefs which can reduce the chargeable gain, including…
- Rollover/holdover relief on replacement of business assets – allowing you to defer the CGT on a gain of a business asset where it is matching with a replacement of a new business asset in the period commencing one year before and ending three years after the disposal.
- Business incorporation relief – available when you transfer your business into a limited company in exchange for shares.
- Holdover gift relief – on some gifts of business assets or gifts made into trusts mean the tax does not become payable until the person, or trustee who receives the gift disposes of it.
- Entrepreneurs’ relief – for disposals after 5th April 2008. This allows the disposal of a material part or all of your business to have the CGT rate reduced to 10%. There is a lifetime limit which from 6 April 2011 is £10million.
Any capital losses on a chargeable transaction are net off against any capital gains that take place in of the same tax year. They apply before the annual exemption. Capital losses that are unutilise go forward against future capital gains, they can not normally carry back. To make use of capital losses HMRC must be aware within five years and ten months of the end of the tax year in which it arose.
The new entrepreneurs’ relief can apply when you sell part or all of your business or shares in your own company after 5th April 2008. Entrepreneurs’ relief allows the capital gain to be taxed at an effective CGT rate of just 10%.
There are some other tight restrictions to entrepreneur relief. It applies to gains made after 6 April 2008. From 6 April 2011, the relief applies to the first £10million of qualifying lifetime gains. Gains in excess of this limit or which do not qualify for other reasons will be taxed at 10% or 20% (18% or 28% for residential property and carried interest).
An annual exemption of £11,700 for 2018/19 is available to individuals so total gains in the tax year up to this amount are exempt. Any unused annual exemption is lost and cannot be carried forward or transferred to another person.
These are the main exemptions from (CGT)…
- Normally the sale of your only or main residence is exempt, however, it can become partly chargeable in some circumstances such as if it is finish or business purposes are using it;
- Transfers of assets between husband and wife or civil partners. Such transfers are consider as making no gain/no loss;
- Most chattels whose value decreases over time (called wasting assets);
- Non-wasting and business chattels where the disposal proceeds do not exceed £6,000;
- Private motor cars;
- Gifts to charity and certain amateur sports clubs;
- SAYE contracts, savings certificates, and premium bonds;
- Betting winnings and prizes including the lottery;
- Compensation for damages for personal or professional injury;
- Some compensation payouts for mis-sold pensions;
- Life assurance policies in the hands of the original owner or beneficiaries;
- Company reorganisations and takeovers where there is a share for share exchange.
Tax Schemes Available
There are certain types of investment which have been designed with preferential tax treatments for Capital Gains Tax and Income Tax, mainly to encourage investment in new companies and also to encourage employees to own shares in the companies they work for.
Schemes include the Enterprise Investments Scheme (EIS) which gives income tax and capital gains tax relief on investments made in companies with assets worth less than £15million. A similar scheme Seed Enterprise Investments Scheme (SEIS) with similar reliefs for smaller companies. The Enterprise Management Incentive Scheme is a share option scheme which can be used to provide tax-efficient targeted incentives to key employees or employee groups.
See our helpsheets that deal with EIS, SEIS, and EMI in more detail.
Payment of CGT
CGT is paid through the self-assessment system and gains and losses must be declared on your self-assessment return. The gains after all reliefs and exemptions are added to your taxable income and then taxed at your top marginal rate. The tax is payable by 31 January following the tax year in which the gain arose.
How We Can Help You
Capital Gains Tax is a specialist area and you should contact us for advice in minimising CGT liabilities.