|
Capital Gains Tax (CGT) applies when chargeable assets are disposed of and is applicable to individuals and trustees but not limited companies, although Limited Companies do pay Corporation Tax on the gains that they make.
Chargeable assets includes all forms of property unless specifically exempt and the main assets it tends to be applicable to is property, shares and business assets including goodwill. It can be very complex and go way beyond the summary provided here.
How a Capital Gain occurs
A capital gain occurs when the value of an asset when disposed of is higher than when purchased. An asset can be disposed of either by sale or by gift. If you gift an asset away in an uncommercial transaction, the market value will replace any actual consideration paid.
For assets acquired before 31 March 1982 the cost usually taken to be the value on that day, although actual cost can be used in some circumstances.
The following also reduce the amount of the chargeable gain...
- Incidental costs of acquisition;
- Expenditure to enhance the value of the asset;
- Incidental costs of disposal.
Capital Losses
Any capital losses made on a chargeable transaction are netted off against any gains of the same year or any unused losses carried forward against future capital gains. They are applied before taper relief or the annual exemption. To be used they must however have been reported to HMRC within five years and ten months of the end of the tax year in which they were incurred.
Taper Relief
There is a reduction in the capital gain chargeable based on how long the asset has been held. This is known as taper relief and is far more generous for business assets than for non-business assets. For example, business assets held for two years have their chargeable gain reduced by 75%. Non business assets only get down to 60% chargeable and that is after 10 years.
Taper relief was introduced with effect from 5th April 1998 and applies to the period of holding from then on. For any period the asset was owned prior to that, indexation is added to the cost of the asset to reduce the gain.
Annual Exemption
An annual exemption of £9,200 for 2007/08 is available to individuals so total gains up to this amount are exempt. The annual exemption reduces capital gains after taking account of taper relief and any unused annual exemption is lost and cannot be carried forward.
Reliefs and allowances
A lot of the capital gains tax legislation is about the reliefs and allowances available, which include...
- Rollover/holdover relief on replacement of business assets - allowing you to defer the CGT on a gain of a business asset where this is matched with a replacement of a new business asset, commencing one year before and ending three years after the disposal.
- Business incorporation relief - available when you transfer your business into a Limited Company in exchange for shares.
- Holdover gift relief on some gifts such as business assets mean the tax does not become payable until the receive if the gift disposes of it.
CGT Exemptions
These are the main exemptions from (CGT)...
- Normally the sale of your only or main residence is exempt, although it can become partly chargeable in some circumstances such as if it is let out or used for business purposes;
- Transfers of assets between husband and wife or civil partners. Such transfers are treated as being made at no gain/no loss;
- Most chattels which are wasting assets;
- Non wasting and business chattels where the disposal proceeds do not exceed £6000;
- Private motor cars;
- Gifts to charity and certain amateur sports clubs;
- SAYE contracts, savings certificates and premium bonds;
- Betting winnings and prizes including the lottery;
- Compensation for damages for personal or professional injury;
- Some compensation payouts for mis-sold pensions;
- Life assurance policies in the hands of the original owner or beneficiaries;
- Company reorganisations and takeovers where there is a share for share exchange.
Payment of CGT
CGT is paid through the self-assessment system and gains and losses declared on your self-assessment return. The gains after all reliefs and exemptions are added to your taxable income and then taxed at the appropriate rate.
How We Can Help You
Capital Gains Tax is a specialist area and you should contact us for advice in minimising CGT liabilities.
Got a Question?
If you have any queries on any of the above, please ask a question
| |
