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First introduced in the UK in 1962, Capital Gains Tax for individuals was originally a limited tax on short-term gains. However, it was widened considerably in 1965 to cover virtually all gains of a capital nature. There have been a number of changes announced in recent budgets and this piece covers the position for the current fiscal year.
From the outset, there have always been a number of reliefs and exemptions to alleviate the burden in certain circumstances. These rules have changed over the years, and are now quite complex. The purpose of this piece is to summarise the main current rules for calculating gains, and also to describe the principal reliefs and exemptions. It also sets out some of the planning opportunities which are still available, as well as some of the pitfalls to watch out for.
The tax applies to capital gains which accrue to a person in a year of assessment, during any part of which he or she is resident in the UK, or during which he or she is ordinarily resident in the UK. There are special rules for people who are domiciled abroad, or who are temporary visitors to the UK, or who are temporarily non-resident. If any of this applies to you, we shall be happy to advise on your particular circumstances.
Every individual is entitled to an annual exemption which is £12,000 for the current fiscal year. Accordingly, Capital Gains Tax applies only to total gains of the year which exceed this amount.
For gains realised in the current fiscal year which are not within the Entrepreneurs Relief provisions, these gains must be added to the total taxable income of the individual concerned in order to establish what rate of tax applies to them. Total taxable income is calculated after all allowable deductions, including for example loss relief, the Income Tax Personal Allowance, pension contributions and charitable donations under the gift aid scheme.
If the taxable gain when added to taxable income, as calculated above, is less than the threshold for the higher rate of Income Tax, then the gain is taxed at 10% / 18%. The higher rate threshold is £37,500 and it will be seen therefore that if an individual has total taxable income after deductions of £30,000, then he or she can realise taxable gains of £7,500 in the current fiscal year and those gains will be taxed at 10 / 18% depending on what has been sold. The difference in the rates that will apply to the gain is because if you dispose of residential property, that will be taxed at 18 / 28%.
Where gains exceed the higher rate threshold when added to total taxable income, calculated along the lines set out above, then the excess of the gain over the higher rate threshold is taxed at 20 / 28%. Accordingly, if an individual with £30,000 of total taxable income realises taxable gains of £10,000, the first £7.500 of the gains are taxed 10 / 18% and the balance of £2,500 is taxed at the rate of 20 / 28%.
Capital gains and losses are (broadly) calculated as the difference between the proceeds of the relevant asset and its cost. It is usually possible to take account of legal and similar fees, as well as capital expenditure incurred on the asset during the period of ownership.
The tax applies to nearly all capital assets, including shares, properties and antiques. Certain items, such as cars, are not covered, except in special circumstances. If tax is payable, the liability falls due on January 31 following the end of the year of assessment. Thus Capital Gains Tax on gains made during the year ended 5 April 2020 is payable on 31 January 2021.
For gains realised by trustees and personal representatives, the 20 / 28% rate applies in all cases.
A capital loss can be offset against capital gains of the same tax year, but cannot be carried back against gains of earlier years. If you have an unused capital loss, this can be carried forward indefinitely against gains of future years.
The below examples show the interaction between capital loss relief and the annual exemption.
|Less losses of same year||12,000|
|Less annual exemption (restricted)||2,000|
|Losses c/f: Nil|
|Less losses b/f £12,000 (restricted)||2,000|
|Less annual exemption||12,000|
|Losses c/f: £10,000|
In other words, the usage of losses brought forward is restricted, so that the usage of the annual exemption is maximised. It is important to note that capital losses cannot be offset against income, they can go only against capital gains (subject to certain very limited exceptions).
Spouses are treated separately, and each is entitled to an annual exemption. The same applies to civil partners.
For Capital Gains Tax purposes a husband can transfer an asset to his wife without incurring tax, and visa versa. The transferee, in effect, steps into the shoes of the transferor. Where both spouses owned shares in a private company at 31 March 1982, it may be possible to retrospectively increase the base cost of the transferee. Specialised advice should be sought.
The same applies with civil partners.
Special rules operate where there is a divorce or separation, or the dissolution of a civil partnership.
There are some important exemptions from the Capital Gains Tax charge. The principal ones are briefly described below:
Principal private residence. The gain on sale of a person’s main residence is normally exempt. The relief also covers the last 9 months of ownership (18 months up to 5 April 2020) even if the owner was living elsewhere during that period. There is only one private residence exemption for a husband and wife living together or for both members of a civil partnership.
There may be problems if you own two or more homes. We shall be happy to advise you in this regard. In certain circumstances it may be possible to obtain an element of tax exemption on your second home by the judicious use of elections as to which property is your main residence.
It should be noted that, if you use part of your main residence for business or letting purposes, that element may not qualify for the main residence exemption (but see below about the possible use of rollover relief in this situation).
Let property. If your home was let for part of the period of ownership, then the gain on disposal could be apportioned. The element which is attributable to the letting can qualify for an exemption from Capital Gains Tax on the lesser of:
the amount of the exempt gain by virtue of the main residence relief.
It should also be borne in mind that an individual can buy quoted shares via an ISA (“individual savings account”) within a current annual investment limit of £20,000 (2020/21). Any sales of these shares by the ISA are exempt from Capital Gains Tax.
If there is a capital gains liability having taken account of everything set out above, then it may be possible to eliminate or defer the tax liability by taking advantage of certain reliefs which are available. We describe these briefly below, and would be happy to explain them in more detail.
Please contact us for more information.
Enterprise Investment Scheme (“EIS”)
By investing in the shares of a qualifying unquoted trading company you can “shelter” your gains. You must invest the gain arising on the original disposal within one year before the original disposal or three years afterwards. There is no monetary limit on this relief, but the tax liability is deferred, not eliminated. It will crystallize on disposal of the EIS investment.
This applies where you sell a business asset and a capital gain arises. In very broad terms, you can claim rollover relief if you invest the proceeds in a further business asset and you buy it within one year before or three years after the disposal. Subject to certain conditions, you can “rollover” the gain depending on the extent of the reinvestment so that the tax is not payable until you sell the new asset.
This can be particularly helpful if you have been using an office building for your business and you sell the building and acquire alternative premises. The relief also covers the situation where you move house and both your old and new houses are (or were) used partly for business purposes.
Special rules apply if one or both of the properties is leasehold and the lease runs for less then 60 years.
This relief was introduced from 6 April 2008 and the lifetime limit was decreased to £1million on disposals made on or after 11 March 2020.
The relief is available when an individual makes a ‘qualifying business disposal’, which typically falls into one of the following categories:
A gain made on the disposal of all or part of a business
A gain made upon the disposal of assets following the cessation of a business
A gain made by certain individual shareholders (broadly a former employee with at least 5% of the issued share capital), and at least 5% of the voting rights
In order to qualify for the relief an individual must meet all the qualifying conditions for a full year prior to the gain arising.
The relief is available on disposals by trustees of interest in possession trusts, however the individual who is a qualifying beneficiary has to meet the qualifying conditions throughout a period of one year ending not earlier than three years before the gain is made.
Gains which qualify for entrepreneurs’ relief are charged at a rate of 10%.
The total amount of entrepreneurs’ relief is limited to a ‘lifetime’ limit of £1million of gains. Therefore the actual amount of relief available will depend initially on the extent to which gains relate to disposals of qualifying assets and then the total amount of relief previously received on qualifying gains.
It is important to highlight that any qualifying disposals made prior to the introduction of entrepreneurs’ relief, i.e. the sale of a business, do not count towards the £1million lifetime limit.
There are many ways in which it may be possible to mitigate potential Capital Gains Tax liabilities.
Care is needed in this connection, as there are a number of anti-avoidance provisions which must be taken into account and we shall be happy to advise in your particular circumstances.
We give below some examples of possible tax-saving strategies:
Finally, it should be mentioned that there is no Capital Gains Tax liability on death. Nevertheless, a taxpayer’s assets are regarded as being acquired by the personal representatives at market value at the time of death.
It is clear from the above that Capital Gains Tax has many ramifications for individual taxpayers and steps can frequently be taken in advance to reduce potential liabilities. Please contact us, as we shall be happy to advise further.
Please note: This piece is for general information only. It is not intended to give specific technical advice and it should not be construed as doing so. It is designed to alert clients to some of the issues. It is not intended to give exhaustive coverage of the topic. Professional advice should always be sought before action is either taken or refrained from as a result of information contained herein.
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