In this article
Understanding tax and the way taxes work is always a daunting task. Therefore, our solicitors have made capital gains tax simple. This article includes only the essential information you need to ensure you understand what Capital Gains Tax is and how it is applied.
If you have any questions surrounding Capital Gains Tax after reading this article, please don’t hesitate to visit our contact us page or contact one of our solicitors directly on 020 3007 5500.
What is capital gains tax?
In short, capital gains tax is a tax charged on the profit gained from the disposal of an asset you previously bought.
In the UK, there are two main forms of tax that deal with profits and increases of value. Profits derived from income are subject to income tax, whereas profits that come from an increase in capital value of an asset (of any nature) are chargeable as capital gains tax.
Example:
Say if you were to buy an antique for £20,000 and later sell the antique for £80,000, you would have to pay capital gains tax. In this case, you would have made a gain of £60,000 (£80,000 minus the £20,000). So you will be taxed on the £60,000 gain.
Talk to us now. Save costs further down the line.
Save yourself potentially thousands of pounds by seeking advice now. Speak to us today for more information.
Lines open 24/7
020 3007 5500
What are ‘assets’ and ‘disposals?’
The change in value is taxable to capital gains tax or subject to relief as a capital loss only if:
- The transferor is within the charge to tax on chargeable gains.
- There is a listed “asset”.
- There is a listed “disposal”.
What constitutes as an ‘asset?’
The definition of an asset is broad and comes in various forms. Assets can be physical assets such as antiques or commercial estates as well as intangible property such as debts and crypto-assets. Additionally, assets are not restricted to legally transferable items. For example, an asset could include the goodwill of a company or trader, which undeniably has value.
Furthermore, it’s vital to consider that special considerations and rules apply to certain types of assets. An example of an asset that is regulated is residential property (which is highly regulated).
What constitutes as a ‘disposal?’
A disposal can be broken into an ‘actual disposal’ or a ‘deemed disposal’.
Actual disposals are usually in the form of exchanges or gifts. Exchange is the most straightforward example of disposal. Exchange is the process of trading one asset for another asset. A typical example of an exchange is the transfer of a physical asset in return for cash.
A gift is the other example of actual disposal. A gift of an asset to somebody else can also be subject to capital gains tax. The capital gains tax charge on a gift will be measured on the market value of the gifted asset.
On the flip side, deemed disposals can appear in many different forms. Some examples of deemed disposal include: receiving a capital sum derived from the asset (even if the person making the payment acquires nothing), and the destruction or dissipation of assets (usually results in an allowable loss rather than a capital gain).
It’s also possible to have ‘part disposals’. A part disposal occurs if a taxpayer disposes of part of an asset, creates new rights or interests in, or over, an existing asset, or disposes of an asset that is subject to an interest or right and holds and retains that interest or right. An example of an asset that’s subject to part disposal is a receipt of compensation for an asset that is damaged but not destroyed or disposal of shares that form part of a larger pool.
Close examination is needed on when precisely a disposal takes place to help avoid more sizeable capital gain taxes. There’s no legislative provision dictating this, but there are specific rules which apply in certain situations. For example, a small detail like the timing of the disposal could alter how much tax is payable.
How much is capital gains tax?
How much capital gains tax you pay depends on several factors, in particular the type of asset disposed of and the individual’s income tax bracket.
For individuals who pay basic rate income tax (20%), 10% capital gains tax is currently payable, and for individuals who pay the higher (40%) or additional rate (45%) of income tax then 20% capital gains tax is payable. For trustees and personal representatives during probate, the rate of tax is fixed at 20% regardless of the individual’s income tax bracket.
Upper rate gains relate to gains on residential property accumulated by non-resident individuals (a landlord for example) and carried interest gains are charged at the upper rate of 28%.
What assets require you to pay capital gains tax?
You must pay capital gains tax on the gain when you sell or dispose of:
- Most personal possessions (including jewellery, paintings, antiques etc.) worth £6,000 or more, apart from your car.
- Property that’s not your main home (land, business premises etc.)
Your main home if you’ve let it out, used it for business or it’s substantial (over 5,000 square metres) - Shares that aren’t an ISA or PEP
- Business assets (land, buildings, machinery etc.)
All of the assets listed above are known as ‘chargeable assets’.
Where you jointly own an asset with someone else, you must pay capital gains tax on your share of the gain.
Furthermore, depending on the assets, you may be able to claim a relief to reduce capital gains tax. It’s beneficial to contact a solicitor to clarify whether you qualify to gain any reductions on the capital gains tax of your asset.
Have a capital gains tax enquiry?
Don’t worry, we’re here to give the advice you need when you need it. Just contact us to arrange an appointment.
Lines open 24/7 020 3007 5500
What are the exemptions and reliefs?
There are several potentially applicable exemptions and reliefs to capital gains tax.
Currently, the exemptions include:
- Individuals and personal representatives have an annual exempt amount of £12,300 per year.
- Trustees also have a reduced annual exempt amount of £6,150 per year.
- Certain assets enjoy exemptions from capital gains tax. Examples include personal possessions valued under £6,000 and gilt-edged securities (specific high-grade bonds traded on the capital markets).
There are several reliefs which may potentially be available for capital gains tax including:
- Principal private residence relief (the relief that means individuals do not pay capital gains tax when they sell their primary home).
- Holdover relief (available to gifts to defer the gain on disposal to apply to the next disposal of the asset).
- Entrepreneurs’ relief/business asset disposal relief (a reduced rate of capital gains tax at 10% for individuals who realise gains on the disposal of business assets).
- Investors’ relief (a reduced rate of capital gains tax which is applied to investors in unlisted trading companies who have held the investment for more than three years before disposal).
- The Cultural Gifts Scheme (which gives a tax reduction for gifts of art to the nation).
- The Enterprise Investment Scheme.
- The Seed Enterprise Investment Scheme.
- Venture capital trusts.
- Social investment tax relief.
- Charitable reliefs.
How do you calculate capital gains tax?
Capital gains tax is chargeable on an annual basis which is the same as a standard tax year (6 April one year to 5 April the next year). Additionally, the individual must be resident in the UK for that tax year to receive tax.
Capital gains tax incurs on:
- Sales or exchange of an asset.
- When the taxpayer sells an asset (i.e. exchanges it for financial gain), capital gains tax on the increase in the value of the asset between acquisition and sale may result in a chargeable gain. This will depend on several factors, including whether any exemptions or reliefs apply (see above).
- A gift. When the taxpayer has done everything in their power to transfer an asset, a gift will have been made (for example, signing a stock transfer form for a gift of shares or physically handing over assets into the possession of another person).
How do you calculate capital gains tax?
You must calculate the gain which is potentially chargeable to capital gains tax once disposal or deemed disposal of an asset has been identified. The starting point is to calculate the sum the person disposing of the asset acquired in exchange for the asset. Sometimes this will be very straightforward, say if it is a cash sum.
Then, from the value received by the individual disposing of the asset, specific amounts may be deducted, including:
- The amount initially paid for the asset.
- Incidental costs of the acquisition of the asset (such as estate agent fees or commission) or, if the asset was not acquired, any expenditure incurred in providing the asset.
- The expense incurred by the person disposing of the asset. This cost is only deducted if the person spent money exclusively on maintaining or increasing the value of the asset.
- Incidental costs incurred by the person disposing of the asset which is wholly and exclusively to make the disposal.
The amount left after these deductions will be the chargeable gain or the allowable loss. Where there’s a chargeable gain, a percentage of this amount will be payable to capital gains tax(unless there are any applicable exemptions or reliefs).
What updates to capital gains tax has the Office of Tax Simplification reported?
Before discussing the most recent updates, it’s beneficial to have a background understanding of who the Office of Tax Simplification (OTS) are.
The OTS is an independent office of HM Treasury, part of the Government of the United Kingdom. The office identifies areas where there are complexities in the tax system that they can reduce. The OFS then publishes their findings for the Chancellor to consider ahead of his budget.
What is the most recent update from the OTS?
In July 2020 the Chancellor, Rishi Sunak, wrote to the Office of Tax Simplification (OTS) requesting a review of the rules on capital gains tax for individuals, investors, for estates in administration and unincorporated businesses. On 11 November 2020, the OTS published its first report and proposals on the reform of capital gains tax. The focus of the report is the policy design and the principles underpinning capital gains tax. A second report is due in “early” 2021, which will “explore key technical and administrative issues”.
What measures did the recent OTS report highlight?
The report recommends the following measures:
- Aligning capital gains tax and income tax rates, reducing the number of Capital Gains Tax rates or addressing boundary issues.
- Reducing the annual exempt amount from £12,300 to between £2,000 and £4,000 (whilst increasing reliefs and simplifying the administrative side of reporting).
- Replacing the business asset disposal relief with relief more focused on retirement. This change will mean the incentive to invest applies at the time of the investment rather than disposal.
- Abolishing investors’ relief. They propose this change because this relief is rarely used.
- Expanding gift holdover relief to non-business assets.
- Introducing relief for inflation-connected gains (indexation allowance).
Does the Government acknowledge the OTS report?
It’s uncertain to what extent the Government will adopt any recommendations in this report. The Government will likely be considering its options very closely as it attempts to alleviate the impact of COVID-19 on the economy. The current recommendations from the OTS all appear in the first report. The first report usually focuses on broad policy options open to the Government. The follow-up report is usually a more finalised version, which suggests more granular suggestions.
Although, according to the OTS, aligning capital gains tax and income tax rates could, theoretically, raise an additional £14 billion a year. Whilst this may seem irresistible to the Government in raising funds to assist the economic recovery, the impact on taxpayers could be significant. According to Hamptons International, the effect on landlords alone would be substantial. If capital gains tax rates increased and the annual exempt amount decreased, it may result in a tax increase of £10,000 for a landlord in a higher income tax rate bracket.
Other proposals may suppress the entrepreneurial environment, which this Conservative Government has been championing. For example, one proposal aims to abolish investors’ relief and business asset disposal relief. Even if the benefits of the reform outweigh the considerations, the Government will still need to consider the proposal’s introduction. Introducing these proposals may not be sensible during a time of such economic hardship in the UK.
Currently, it’s impossible to predict what the Government will do with capital gains tax, but they will be revealing more in the future. Advisors will hope that the Government continues its consultative and integrated approach to the potential capital gains tax reform, rather than introducing piecemeal measures.
Landlords, investors, and unincorporated business owners will need time between the Budget and the implementation to get their affairs in order.
How can Britton and Time Solicitors help?
Have an enquiry regarding a capital gains tax matter? With an initial consultation, we can offer you:
- Unlimited time to go through the details of your case and ask any questions you may have
- An overview of your legal standpoint and your available options
- A precise time and fee estimate for your case
To arrange your initial consultation with one of our solicitors, simply send us an email via [email protected] or call us directly on 020 3007 5500.
0 Comments