Nature of Capital Gains tax
Capital Gains Tax is a tax on the rise in value of an asset. CGT arises when an asset is “disposed of”, which will usually be by a sale but will also occur on a gift or on the receipt of any capital sum where an asset is destroyed e.g. compensation or insurance proceeds.
Assets passing on death are not subject to CGT. Inheritance Tax may apply instead. Assets passing on death pass to the successors at the value as at date of death so that any latent capital gain is removed. On a subsequent disposal of the asset by a successor, he is deemed to have acquired it at the date of death value so that any “pre-death” rise in value is not taxed.
Certain types of assets are exempt from CGT with the result that neither the gains are taxable nor losses are allowable when they are “disposed of”. Exempt assets include motor vehicles, principal private residence, gilt edge securities, qualifying corporate bonds, National Saving Certificates, foreign currency acquired for personal use, prizes, assets held in individual Savings Accounts .
Chattels (movable goods) sold for less than £6,000 are exempt. Those sold for more than this sum are taxable.
Scope
Individuals who are resident in the UK are subject to CGT on all of their gains worldwide.
Formerly persons or companies who are neither resident nor ordinarily resident in the UK were not subject to UK Capital Gains Tax. This was in contrast with the position in many countries, including Ireland, where certain classes of assets such as land, mineral rights etc. are always subject to Irish CGT irrespective of the residence of the person disposing of them.
The definition of residence and the relevant connecting factors is the same as for income tax. See our separate note on “Residence” under UK tax law in the income tax overview.
If an individual has been resident in the United Kingdom for at least four of the previous seven years prior to departure and within five years returns to take up residence (as defined) he remains subject to capital gains tax. Gains realised in the year of departure are taxed for that year. Gains realised in the following years are taxed when residence recommences.
With effect from 6 April 2015, the charge to UK Capital Gains Tax has been extended to include non UK residents disposing of UK residential property where that property is not their main residence.The charge also applies to the disposal of UK property which is suitable for use as a dwelling.
UK Capital Gains Tax applies to
- Non-resident individuals
- Non-resident trustees
- Personal representatives of non UK residents who have died
- Non-resident partners of partnerships
- Closely held non-resident companies.
The charge applies to gains relating to periods after 6 April 2015. There are three options available to calculate the gains arising.
- rebase the cost of the property to the market value at 6 April 2015
- time apportion the gain on a straight line basis over the period of ownership
- compute the gain/loss over the entire period of ownership.
If a loss arises, it is ring fenced against gains arising on the sale of UK residential property thereafter.
Calculation
A capital gain is calculated as follows. The sale proceeds or value is ascertained. Selling costs are deducted. Expenditure, including the original cost, the costs of acquisition and the cost of permanent improvements is deducted.
Assets acquired prior to 31 March 1982 are deemed to be acquired at their market value on that date for the purpose of calculation of the acquisition cost in this context.
In deducting acquisition costs and expenditure, only capital or improvement expenditure qualifies. Maintenance or repairs do not qualify. Acquisition costs such as stamp duty, legal fees and auctioneers’ fees are allowed. If the asset is given away, the person disposing of it will be subject to CGT based on the market value of the asset.
The capital gain is the difference between the sale monies received or disposal value less the above deductions.
In some cases, the market value is substituted for the actual proceeds. This applies to gifts or sales at under value. It is presumed that transfers between connected persons are at undervalue. Connected persons include family members and companies under the person’s control or controlled by his family.
Married Couples / Civil Partners
Married couples and civil partners may transfer assets between themselves without a gain or loss. The recipient is deemed to have acquired the asset at the time and the cost of acquisition by the spouse / civil partners.
Spouses and civil partners are entitled separately to the annual exemption. Each is individually taxed on his / her chargeable gain realised in the tax year in excess of the exemption limit. The exemption ceases to applies if the couple permanently separate.
Rate
In April 2008 a single 18% rate was introduced. By way of simplification many of the reliefs such as taper relief were abolished. Thereafter the rates have become more complex.
There is a general annual allowance exemption for CGT of £11,300 (2017/8) for capital gains available to an individual in each year. If gains do not exceed this amount no capital gains tax is payable. If the annual exemption is not used in any particular year it is wasted. It cannot be carried forward.
Chargeable gains over the annual tax-free allowance are charged at different rates depending on the nature of the assets and the owner’s income. The gain is added to the taxpayer’s income. Where it exceeds the basic (income tax) rate limit (£33,500) tax is paid at 10/18% on the gains within the basic rate band and 20/28% on the amount above.
The rates for residential property are 18% to £33,500 (see above) and 28% on the excess where the gain plus income exceed £33,500. For other assets the rates is 10% to £33,500 (see above) and 20% on the excess where the gain plus income exceed £33,500.
A capital loss is computed in the same way as a capital gains. Capital losses on sales and disposals of assets in the current year are set off against capital gains in the same year. Capital losses can be carried forward against gains in future years.
CGT is due on 31st January following the relevant tax year. Payments on account are not required. See the section on income tax in relation to the tax return which is part of the general tax return of income and gains.
