Please contact us if you have any questions

Introduction »

Disposals and capital gains tax (CGT)

Introduction

Making the most of your investments requires some understanding of CGT. CGT arises on the sale of most assets and, subject to various reliefs and exemptions, is payable on the difference between the sale proceeds and the original cost. The CGT annual exemption results in the first £10,100 of gains, for 2010/11, being tax free. A flat rate of CGT then applies to any chargeable gains (after losses, reliefs etc) of 18% where the gains were made before 23 June 2010.

Where the gain is made on or after 23 June 2010 the rate will remain at 18% where total taxable gains and income, after taking into account all allowable deductions including losses, personal allowances and the CGT annual exemption are less than the upper limit of the income tax basic rate band (£37,400). A new 28% rate of CGT will apply to gains or any parts of gains above this limit. These rates do not apply to gains eligible for Entrepreneurs’ Relief (see below). Such gains remain chargeable at 10%.

Certain other CGT reliefs allow chargeable gains to be deferred for a period of time such as gains deferred under the Enterprise Investment Scheme. Gains on these disposals before 23 June 2010 which have been deferred until 23 June 2010 or later will be liable to CGT at the time the deferral period ends. This means that either 18% or 28% could apply depending on the taxpayer’s overall position.

In working out the CGT due, taxpayers will be able to deduct losses and the annual exemption in the way which minimises the tax due.

Some assets are exempt from CGT such as motor cars (including classic cars), personal goods such as jewellery or antiques sold for less than £6,000, UK government bonds and, crucially, your only or main home.

Where a gain is chargeable, there are a number of reliefs which could be considered mainly in relation to business assets. Such reliefs are mainly used to defer tax until a later date rather than reduce the gain permanently. Entrepreneurs’ Relief is the exception.

Entrepreneurs’ Relief

For qualifying gains arising before 23 June 2010 the effect of the relief was to reduce the gains liable to CGT at 18% by 4/9ths resulting in an effective rate of 10% (18% x 5/9ths). Qualifying gains arising on or after 23 June 2010 will simply be taxed at a 10% rate of tax. The previous 4/9 reduction will cease to apply from this date.

In addition the amount of gains that can qualify for relief has been increased as follows:

Qualifying business disposals include:

• qualifying shareholdings
• the whole or part of an unincorporated business
• disposal of assets on cessation of a business

There also needs to be a qualifying period of ownership of one year up to the disposal.

Where an individual makes a qualifying business disposal, relief may also be available on an ‘associated disposal’.

An ‘associated disposal’ is a disposal of an asset:

• used in a qualifying company or group of companies of the individual or
• used in a partnership, where the individual is a partner.

The ‘associated disposal’ must be part of the withdrawal of the individual from participation in the business and the available relief may be diluted due to various restrictions.

Trustees may benefit from the relief but only in very limited circumstances.

Main residence

An individual’s or married couple’s only or main residence is exempt from CGT. The exemption extends to grounds of up to half a hectare. Larger grounds may also be exempt.

The sale of a part of the garden or grounds for development may also be covered by the exemption.

Subject to exceptions, periods of absence are chargeable but, if the main residence was let during absences, as a result of which a charge arises, a ‘letting relief’ may apply to reduce the chargeable gain.

Where an individual (or married couple) have two or more residences, only one residence at any one time can be treated as the main home for exemption. This is done by an election. Provided a particular residence has been the main home at some time, then the last three years of ownership will always be exempt. This applies even if another residence has now become the main home during this time.

The main residence exemption can be complex and often causes a good deal of misunderstanding. Please contact us for further advice before making transactions in property.

Introduction »