Capital gains tax (CGT) is charged on chargeable gains made by a chargeable person on disposal of a chargeable asset. Chargeable persons include individuals, personal representatives, partners and trustees. Companies pay corporation tax instead of CGT – see below.
Gain is calculated by starting with the consideration for the sale, then subtracting initial expenditure (the price paid, the cost of acquisition, and any expenditure wholly and exclusively incurred in providing the asset), subsequent expenditure (wholly and exclusively incurred in establishing, preserving or defending title to the asset).
Disposal: A disposal is construed widely for CGT purposes and includes a sale (whether at full value or undervalue) or a gift. Death will usually give rise to a charge for IHT and not a charge to CCT.
Having calculated the gain from the disposal of an asset, any reliefs will be considered before an annual exemption (currently £12,300) is deducted, giving the taxable sum. If the taxpayer’s capital gains and taxable income added together do not exceed the threshold for basic rate tax, the rate is 10 percent. Any gains over the basic rate threshold are taxed at 20%. Residential property is subject to surcharge of 8 percent if it is not the taxpayer’s main residence. Any assets that qualify for business asset disposal relief are taxed at 10% regardless of income.
The ’disposal value’ usually refers to a sale price, but can refer to a market value where: there has been a gift; a sale at an undervalue or a disposal to a ‘connected person’. A connected person is defined under section 286 of the Tax of Chargeable Gains Act of 1992: CG14580 – Connected persons – HMRC internal manual – GOV.UK (www.gov.uk)
Paul sells a property worth 130,000 to his friend for 100,000. He knows that the true value is 150,000 but sells it at this rate as a generosity. What will the value of the disposal be? The disposal value will be £130,000.
Allowable expenditure includes (1) incidental cost of acquisition (2) subsequent expenditure. This can include capital investments which increase the size of the property but – importantly – exclude any cost of repair, redecoration or replacement of items (3) incidental cost of disposal.
Basic gains in partnerships
Partners are treated as making a disposal of their fractional share in an asset. In order to calculate basic gain for individual partners – (1) identify the fractional share of capital gain to the partner (2) calculate the gain by apportioning the relevant fractional share of the acquisition cost, disposal proceeds and allowable expenses to that partner.
For example, where two partners own a business with profits being split 60% to 40%, then the same division will be applied to the capital gain and then the fractional share of the acquisition costs etc.
Business asset rollover relief allows CGT on gains made when taxpayers sell or dispose of certain assets to be deferred if all or part of the proceeds are used to buy new business assets. The gain is effectively rolled over into the cost of the new asset, which means any CGT is deferred until the new asset is sold.
Where only part of the proceeds from the sale is used in this way, a partial rollover claim can be made. It is also possible to claim for provisional rollover relief if the taxpayer expects to buy new assets in the future. Rollover relief can also be claimed if proceeds of a sale are used to improve existing assets.
In order to qualify, the new assets must be purchased within three years of selling or disposing of the old ones (or up to one year before). HMRC has the discretion to extend these time limits. Taxpayers must claim this relief within four years of the end of the tax year when the new asset was bought or the old one sold.
Hold over relief – postpones the potential payment of CGT until the eventual disposal by the transferee of the business asset concerned. HOR is available to an individual who disposes of a business asset by way of a gift or undervalue provided both parties elect for it to apply. The transferee agrees to take on the CGT liability.
Business asset disposal relief of a flat rate of ten percent is available on gains made by individuals on disposals of certain assets. Sole traders or partnerships qualify where the business itself or part of it is disposed of, or where assets are disposed of following the cessation of the business. The business must have been owned by the claimant for two years up to the disposal or two years up to the cessation of business, as long as the disposal comes within three years of that date.
A disposal of company shares may qualify if the company is a trading company and the taxpayer holds at least five percent of the ordinary share capital in the company and that holding gives them at least five percent of the voting rights. In addition, they must be beneficially entitled to at least five percent of the profits available to equity holders and at least five percent of the assets available in winding up. Alternatively, they must be beneficially entitled to at least five percent of the proceeds of sale of the whole of the ordinary share capital, were it to be disposed of. These requirements have to be satisfied for two years either before disposal or before the company ceased trading. A flat rate of 10 percent is applied as relief, up to a value of one million pounds of qualifying gains.
The Annual exemption of CGT is £12,300. It is not possible to carry forward the whole or any part of the AE. The Annual exemption can only be applied where tax is being paid – not where it is being rolled over or deferred.
Example: Maria gifts Paul a commercial investment property worth 400,000 in 2020. She bought the property for 200,000 in 2018. They both elect for HOR to apply. John then sells the property in 2021 for 500,000. The sale price is 500,000. The acquisition cost is 200,000 (400,000 less 200,000). The basic gain to John is 300,000. Deducting his annual allowance gives him a chargeable gain of £287,700.
You are instructed for David. David sold a holiday home in England two weeks ago. The client is a higher rate taxpayer and the property has never been let. The property was bought for 400,000 five years ago and is now being sold for 700,000. Legal fees of 1,500 were paid on the acquisition, and solicitors and estate agents fees totalled 3.5k in the sale. Three years ago the client began a substantial extension which cost 100,000 The annual exemption is 12,300 and the client has made no previous capital disposals.
Which of the following is the CGT liability:
The answer is E. 700,000 less 400,000, 1,500, 3,500, 100,000 and 12,300 makes a 182,700 chargable gain. This is taxed at 28% as the client is a Higher Rate Taxpayer.