07 Oct Capital gains tax on chattels
Capital gains tax and chattels
For capital gains tax purposes, not all chattels are equal. In some cases, it is possible to realise a profit on the disposal of a chattel and enjoy that profit tax free, whereas in other cases, capital gains tax must be paid. It all depends on whether the chattel is a wasting chattel or a non-wasting chattel, and where it falls in the latter camp, the amount of the disposal proceeds.
What is a chattel?
The word ‘chattel’ is a legal term that means an item of tangible movable property. This covers personal possessions, including items of household furniture, paintings and antiques, cars, motorcycles. Items of plant and machinery which are not fixed to a building are also chattels.
Exemption for cars
Private cars and other passenger vehicles are exempt from capital gains tax.
A wasting asset is an asset with a predictable life of 50 years or less. Certain chattels are always treated as wasting assets, such as plant or machinery.
A gain or loss on a disposal of a wasting chattel is exempt from capital gains tax unless capital allowances have or could have been claimed on the asset. Capital gains tax also applies if a chattel with a predictable life of more than 50 years is loaned to a business which uses it as plant.
Chattels with a predictable life of more than 50 years are non-wasting chattels. This would include paintings and jewellery.
The capital gains tax position depends on the sale proceeds.
Chattels exemption – proceeds £6,000 or less
An exemption – the chattels exemptions – applies if a gain arises on the disposal of a chattel and the disposal proceeds do not exceed £6,000.
Max purchases a painting from an unknown artist for £300. The artist becomes popular and Max sells the painting for £5,000, realising a gain of £4,700.
As the disposal proceeds are less than £6,000, the chattels exemption applies, and the gain is exempt from capital gains tax.
Chattels exemption – proceeds more than £6,000
Where the proceeds are more than £6,000, the gain is reduced by five-thirds of the difference between the amount of the consideration and £6,000.
Where the disposal proceeds are more than £15,000, the maximum gain will exceed the actual gain, so the relief is not in point.
Ruby acquires an antique brooch for £3,000. It becomes a collectible item and she sells it for £10,000.
The maximum chargeable gain is 5/3 (£10,000 – £6,000) = £6,667
The actual gain is £7,000. As this exceeds the maximum permitted gain, the chargeable gain is £6,667.
In the same way that the exemption operates to reduce the chargeable gain, it also caps the allowable loss. If a loss arises and the consideration on disposal is less than £6,000, it is deemed to be £6,000 for the purposes of computing the loss.
Lola buys a painting for £7,000 which turns out to be a fake. She is able to sell it for £100, realising an actual loss of £6,900.
However, in computing the allowable loss for capital gains tax purposes, the consideration is deemed to be £6,000. The allowable loss is therefore £1,000 (£6,000 – £7,000) rather than £6,900.
Sets of chattels
Special rules apply to sets of chattels. This is to prevent people from artificially splitting a set worth more than £6,000 and selling each item separately to the same person for less than £6,000 each to benefit from the chattels exemption. The anti-avoidance provisions work to treat the set as a single asset in respect of which only one £6,000 limit is allowed.
Additional note: TCGA 1992, s. 262.