|A brief history
CGT was first introduced in 1965. Until then capital gains were not subject to tax. This had led many people to avoid Income Tax by converting (taxable) income into (tax free) capital gains. A capital gain is the profit you make when you sell an asset for more than you paid for it and the law sometimes taxes you on capital gains that you are deemed to have made when you give certain assets away or otherwise dispose of them without selling them.At various times in the past the Capital Gains Tax system has provided major reliefs which have also complicated the system. Taper relief, indexation or inflation linked reliefs are no longer available, although gains attributable to periods of ownership prior to 31 March 1982 are exempt from CGT.
What is CGT?
A charge to CGT usually arises after you sell an asset but can also occur when you:
At its simplest, a capital gain is calculated by deducting from the sale proceeds of an asset:
CGT is normally charged at a simple flat rate of 28% and this applies to most chargeable gains made by individuals. If you only pay basic rate tax and make a small capital gain you may only be subject to 18% thereon. Once the total of your taxable income and gains exceed the higher rate threshold, the excess will be subject to 28% CGT.
A lower rate of 10% applies to capital gains that qualify for entrepreneurs’ relief. Limited companies do not pay CGT. Instead they pay Corporation Tax on their chargeable gains which qualify for fewer reliefs and exemptions than those available to individual taxpayers.
Payment of tax
Notifying HMRC of liability to CGT
If you do not automatically receive a tax return each year you must still notify HMRC that you have a CGT liability. Tax geared penalties and interest are charged when CGT is paid late.
You are only required to report capital gains as and when you have a liability to pay CGT. In most cases therefore no return is required where total gains in a tax year are less than the annual tax-free allowance. Of course someone needs to prepare the calculations to establish whether there is a liability to CGT.
If you own shares or other assets that become worthless you can make a ‘negligible value claim’. This procedure allows you to establish a capital loss even though you are still the legal owner of the ‘asset’. Such losses can be deducted from other capital gains as noted above.
Main home exemption from CGT
In many of these situations it will be necessary to apportion the capital gain to identify how much qualifies for the main residence exemption. And further exemptions may be available to relieve any part of the gain that is not automatically exempt.
For example, in most cases the final eighteen months of ownership will be treated as if occupied by the home owner even if they have moved to live elsewhere. There are also special rules where the owner was not living in the house due to a requirement to live elsewhere for work related reasons.
Contrary to a popular myth, if you work from home you will not automatically affect your entitlement to the main residence exemption. The important issue is to ensure that you do not identify any specific room or area in the house as being used exclusively for business reasons. Occasionally this is unavoidable where your business requires the conversion of a room into something like a surgery, clinic or studio that is used exclusively for business purposes. In such cases, when the house is sold, it will be necessary to compute how much of any capital gain relates to the room or area used exclusively for business purposes.
When an individual, married couple or those in a civil partnership own more than one home, they can make a formal election as to which one should (in due course) benefit from the main residence exemption. You need to make this election within two years of having more than one home. You are also allowed to change your mind, or vary the election, within two years of acquiring another home.
Main home lettings relief from CGT
Non-UK residents and capital gains tax
The amount can be calculated by either:
Anyone that is not resident in the UK and sells a UK residential property will be required to notify HMRC and pay any CGT due within 30 days after the property sale is completed (i.e. the date when title is conveyed). The reporting and payment can be completed electronically. A non-UK resident taxpayer that is already within the UK’s Self Assessment system for Income Tax and CGT will also have the option of paying any CGT due as part of their normal year-end tax payment.
Other exemptions from CGT
None of the above exemptions apply when the gains arise through trading or business activities as distinct from occasional sales and disposals.
When the relief was first introduced there was a lifetime limit of £1m for gains. This was increased to £2m with effect from 6 April 2010, to £5m from 23 June 2010 and to £10m from 6 April 2011.
The relief is available to individuals who:
There are a number of qualifying conditions that you must meet in order to qualify for the relief. The lifetime limit means that you can qualify for the relief more than once, subject only to the fact that 28% tax will be charged once your total qualifying capital gains exceed £10m.
Other reliefs from CGT re business assets
Business Asset Roll-Over Relief
One of these involves arranging the incorporation of the business so that it satisfies the conditions necessary to secure ‘Incorporation Relief’. One such condition is that the entire business must be transferred as a going concern in exchange for shares in the new company.
Gift Hold-Over relief
31 March 1982
If you make a capital gain on an asset you owned on 31 March 1982, special rules apply. You will be deemed to have acquired the asset on that date at its then market value. You should then use that value instead of the actual costs prior to that date when computing your taxable gain.
In such cases it is important to disclose on your tax return the name and qualifications of the valuer. Although not a legal requirement, this disclosure should protect you from a late discovery by HMRC. This in turn should remove the prospect that can later demand you pay more CGT plus interest and penalties long after the normal payment date.
How we can help
We would also be pleased to determine if there might be ways to limit your potential liability to pay CGT. This is something best done long before you realise your capital gains so it is easier if we are familiar with your tax affairs. We could then discuss with you the steps that you could take to reduce your liability. We would aim to help ensure that you become liable to no more than the minimum CGT than is legally necessary.