Changes in Rate and Reforms
UK Capital Gains Tax (CGT) was reformed significantly in 2008. A range of exemptions and reliefs which used to apply, were removed. Many of these exemptions had reduced the effective rate of tax to as low as 10%.
Formerly taper relief was available to reduce the capital gain by up to 75% where assets had been owned for a number of years. This relief was particularly generous for business assets. With the introduction of the 18% rate taper relief has been removed.
Formerly, relief was allowed against inflation on the original purchase price and any capital improvements. However, the relief has been removed for disposals by individuals or trustees after 5th April 2008.
The reduction in the UK CGT rate caused controversy because in certain cases, particularly those related to business and enterprise, the abolition of the old taper relief caused the rate to increase from 1o% to 18%. For this reason, a special 10% rate was introduced to cover same narrow categories of cases.
Formerly the CGT rate was a flat of 40% on the entire chargeable gain. The most significant 2008 reform was the reduction of the general CGT rate from 40% to 18%. It occurred as the financial crisis led to significant falls in the value of many capital assets.
Subsequent reform has since created a higher rate for higher rate tax payers, with the gain being added to the annual income for this period. In this case 28% and 20% is now charged on the excess gain over the basic rate limit, in cases where the 18% general rate and the 10% incentive respectively apply.
Residence and “Non-Doms”
An individual who is resident and domiciled (i.e. permanent home) in the UK is subject to CGT on his worldwide income. The concept of residence has been amended in recent years and depends on a the periods of physical presence and a number of connection tests.
See the Income tax General Issues article. The same principles apply to the determination of residence in relation to capital gains tax.
Domicile is a common law concept distinct from nationality or residence. Domicile refers to a person’s long-term settled or permanent home. A person acquires the domicile of his father on birth. He may change domicile when he is over 16 by abandoning his existing domicile. This usually involves moving permanently, creating permanent ties and and settling in another country.
An resident or ordinarily resident but non domiciled UK individual was formerly subject to CGT only in respect of non-UK gains to the extent they were remitted into the UK. This provision was reformed in 2008. An non domiciled UK resident individual can elect for this special treatment, but he must pay an annual charge to do so, unless unremitted foreign income and gains are less than £2,000. In this case he has no personal allowances or CGT annual exemption.
The charge is £30,000 for a non-domiciled person who has been resident for at least 7 of the previous 9 years.The charge is £60,000 where he has been resident for at least 12 of the previous 14 years,. The charge is in addition to ordinary tax liability. Sums remitted to pay it are not taxed as remitted income or gains.
Alternatively, non-domiciled person can be taxed on their worldwide income without the remittance basis and with an obligation to the pay the levy.
CGT / Income Tax borderline
Speculative short term disposals, particularly of land and investment properties, may be deemed subject to income tax. Where an asset is acquired with a view to being resold in s short term HMRC may deem the transaction to be a trade which is accordingly subject to income tax.
There may be deemed to be a trade where one or more of the following apply:-
- the asset is acquired with a view to being resold in the short term
- a large part of the purchase price is financed by short term borrowings
- the seller has a background of similar transactions or special expertise that assists in achieving a profit
Income tax liability for the sale (in the case of a trade) applies to both UK residents and non residents. Therefore where transactions are deemed “income” transactions, a non UK resident may be subject to income tax. This is a particular risk for builders, developers or individuals who enter land transactions, particularly a number of transactions.
Gifts, options and conditional sales
CGT will apply to an outright sale but also to other transactions such as a conditional sale or the grant of an option. It will also be applied to a gift and to a situation where sums are received by way of compensation or under the proceeds of an insurance company.
CGT also applies to assets which have been destroyed or have become of negligible value. The compulsory acquisition of an asset will be a disposal for CGT purposes.
A gift is a disposal for CGT purposes at market value. UK Inheritance tax may also rise. There are reliefs which postpone CGT liability where a gift involves business property or where there is a transfer subject to inheritance Tax purposes such as a gift to a trust.
Miscellaneous Matters
When a person inherits an asset, he is generally deemed to take it at the market value of the date of death of the person from whom he has inherited. This means that when a person dies, any latent capital gains in assets they own is removed from the CGT charge. In effect Inheritance Tax is the only relevant tax on death.
Relief for a CGT loss is not allowed on the disposal of an asset which has already attracted capital allowances.
There is special relief for takeovers and mergers where a company issues shares or other securities or takes at least a certain percentage stake in a company. The shareholders who accept the shares will not be treated as disposing of their shares subject to certain conditions. In effect their new shares will be in addition to their older shares. If they receive a mixture of cash and shares then there will be a part disposal in relation to the cash element.
Where a UK resident disposes of non UK property the proceeds and acquisition costs must be recalculated in sterling. The exchange rate at the time of disposal is taken in respect of the sale price and acquisition cost.
Where CGT is payable (by an UK resident) and foreign tax is also payable, Double Taxation relief is generally also available.
