This is the first in a short series of articles dealing with Capital Gains Tax (CGT) and covers the basic principles. Further CGT articles to be published on the Marsh Vision website shortly will deal with business asset reliefs and some useful tax planning opportunities.
Scope of CGT
CGT applies when certain assets, such as most shares, investment and let property and business asset are disposed of at a profit. It can apply not only to outright sales but also lifetime gifts and sales at undervalue.
In arriving at a capital gain the following items of expenditure can be deducted from the sale proceeds (or market value in the case of gifts):
- Original purchase cost
- Costs incurred in acquiring or selling the asset such as legal expenses
- Cost of any capital improvements during ownership (but not repairs or maintenance costs)
Where an asset is disposed of at a loss then it must be set-off against any capital gains of the same tax year, even where the gains are below the level of the annual exemption.
Where losses exceed gains for a tax year, the excess can be carried forward and set-off against taxable gains above the level of the annual exemption.
Note that the following transactions are not subject to CGT:
- Gifts between husband and wife and civil partners
- Assets left on death under the terms of a will or intestacy. Inherited assets are deemed to be acquired at their probate value (i.e. market value) at the date of death.
Rates of CGT
For 2013/14 the first £10,900 of gains of an individual are exempt, with husband and wife each entitled to their own annual exemption. Unfortunately where the annual exemption is unused for a tax year it is not available to carry forward to a subsequent year nor is it transferable between spouses.
Where gains exceed £10,900 for 2013/14 the balance of the gain is taxed at 18% and/or 28% depending upon the amount of the individual’s taxable income for that tax year.
That part of the gain which when added to taxable income (after deduction of the personal allowance) falls within the basic rate band of £32,010 is taxed at 18%. The balance of the gain is then taxed at 28% or wholly at 28% where a person’s taxable income exceeds the basic rate band for 2013/14.
Assume that a UK taxpayer has capital gains for 2013/14 of £20,000 and that his taxable income for 2013/14, after deducting the personal allowance, is £50,000.
As his taxable income is more than the higher rate threshold of £32,010, all of his £9,100 taxable gains (i.e. total gains of £20,000 less his annual exemption of £10,900) are taxable at 28%.
His CGT liability for 2013/14 is therefore £2,548 and is all payable on 31 January 2015.
Gains qualifying for Entrepreneurs’ Relief
Where the disposal of a business asset qualifies for Entrepreneurs’ Relief then the gain is taxable at a specially reduced rate of 10%. This will be covered in more detail in the next CGT article.
Note that companies are NOT entitled to the CGT annual exemption with any capital gains being taxed as part of their profits subject to corporation tax. This will be at the rate of 20% on total taxable profits up to £300,000.
The following assets are exempt from CGT:
- A taxpayer’s only or main residence (but note only one exemption allowed per married couple)
- Tangible moveable assets, such as antiques and jewellery, which are sold for less than £6,000 per item
- Private motor cars
- Shares acquired under the Enterprise Investment Scheme (providing held for 3 years)
- Shares held in a Venture Capital Trust (but note losses are not allowable)
- Gilt-edged securities and National Savings Certificates
- Share ISAs
Reporting capital gains to HM Revenue & Customs
Capital gains need to be reported to HMRC via a tax return where:
- There is a potential capital gains liability; OR
- The sale proceeds of capital disposals exceeds four times the annual exemption (i.e. £43,600 for 2013/14)
For 2013/14 a paper tax return needs to be submitted by 31 October 2014 and by 31 January 2015 if submitted online.
If you require any further information regarding the impact of capital gains tax then please call us on 01633 215544 or email us at firstname.lastname@example.org