With income tax rates of up to 50% but a top rate of capital gains tax (CGT) of just 28%, it is worth knowing about CGT.
CGT is charged on gains made on the disposal of some capital assets. Gains (or losses) are broadly calculated as the sale proceeds minus the original cost of the asset and any incidental costs of both purchase and sale. Where shares are sold out of a larger holding of the same shares, strict rules determine which shares have been sold so that their original cost can be determined.
Where a disposal is a gift by one person to another or a sale between connected persons (other than between spouses), the market value of the asset is substituted for the actual proceeds – this can create a CGT liability where the donor has received nothing, so advice should be taken before making a gift other than of cash (which is exempt from CGT).
Where transfers are made between spouses, these are deemed to take place at nil gain/nil loss. If a couple separate, this treatment applies until 5 April after the separation – after that, until they formally divorce, the couple are treated as connected persons as above.
Gains and losses arising in the same tax year are aggregated and where a net gain arises of less than the annual exemption (currently £10,600 for 2012/13), no CGT is due. Where an overall loss arises in a tax year, that loss is carried forward and set against future years’ gains.
Where total net gains in the tax year exceed the annual exemption, the excess is taxable – at 18% for basic-rate taxpayers and at 28% for higher-rate and top-rate tax payers. However, a rate of 10% CGT is payable on some business disposals.
As well as cash, certain other assets are also entirely exempt from CGT – cars, personal possessions worth up to £6,000 (e.g. jewellery, paintings or antiques), shares held in an ISA, certain UK government securities (e.g. gilts, premium bonds, national savings certificates), winnings (from betting, gambling or lottery), personal injury compensation and foreign currency held for personal use. Assets with an expected useful life of less than 50 years when acquired are also exempt, unless they have been used in your business. Shares qualifying under the Enterprise Investment Scheme (EIS) and the new Seed Enterprise Investment Scheme (SEIS) introduced in the 2012 Budget are also exempt, if various conditions are met.
A gain on the sale of your home is not automatically exempt, but under the “principal private residence exemption” will not be subject to CGT if the whole of the property has been used as your residence for the whole time that the property was owned.
Where a property was not your residence for the entire period of ownership, then a proportion, on a time-apportioned basis, of the gain arising on its sale may be liable to CGT, but various periods of non-occupation can be treated as periods of “deemed occupation” for the purposes of time-apportioning the gain – most importantly, where a property has been your residence at some time, then the final 3 years of ownership will always be treated as a period of occupation. Similarly, CGT issues can arise if part of the property was used exclusively for business purposes, in which case again a proportion of the gain on sale may be taxable.
If you have more than one property where you live at some time, then you can nominate which one will be treated as your “main” residence for the purposes of the above exemption. You can change the nomination as your circumstances change and with careful planning it can be possible to minimise or even completely avoid a CGT liability on two properties.
Sale of a business – Entrepreneurs Relief
When you sell a business asset – i.e. your business, your share in a trading partnership or shares in a trading company (or the holding company of a trading group) – then, provided certain conditions are met, the gain (up to a lifetime limit of currently £10m) is taxed at 10%. Relief also applies to certain “associated disposals” of assets used in the business.
The conditions are broadly that the asset being sold has been held for at least 12 months before sale and, in the case of shares in a company, that the holding was at least 5% of the company.
Trading profit or capital disposal?
Finally a word of caution – while a one-off or occasional disposal of assets should be liable to CGT, regular or frequent sales may attract the attention of H M Revenue & Customs and could be seen as a trading activity, the profits of which are liable to income tax and not CGT.
Umesh Modi BA ACA, is a Chartered Accountant and Tax Advisor, and a partner at Silver Levene (Incorporating Modiplus+). He can be contacted on 020 7383 3200 or email@example.com