The following articles have been extracted under a licence from the R&C website:
Introduction
Assets and disposals
Working out the chargeable gain
Reliefs (other than taper relief)
Allowable losses
Taper relief: qualifying holding period
Taper relief: business assets and non-business assets
Working out the tapered chargeable gains
Working out the amount chargeable to CGT
Working out the tax due
Post transaction valuation checks for CGT
Indexation allowance
Taper relief on disposals of business assets on or before 5 April 2000
Introduction
This series of articles tell you the basic rules of Capital Gains Tax (CGT) for individuals.
This article addresses exactly what a gain is, when one can arise, who the owner of a gain is, assets, disposals, disposal dates, gifts and more.
It covers only common situations and does not contain all the guidance you will need to work out your chargeable gain or allowable loss in every case, or how much CGT you will have to pay.
When can a chargeable gain arise?
You may have a chargeable gain when
- you dispose of an asset, or
- you derive a capital sum from your ownership of an asset.
What is an asset?
Any form of property may be an asset for CGT purposes, including
- shares in a company
- units in a unit trust
- land and buildings
- business assets, such as machinery and goodwill. Assets which do not give rise to chargeable gains
There is normally no chargeable gain when you dispose of your home, provided that certain conditions are met (see Article 4 Reliefs).
Certain other assets do not give rise to a chargeable gain when you dispose of them, including
- your private car
- personal effects and goods worth £6,000 or less
- cash held in sterling
- foreign currency held for your own or your familys personal use
- savings Certificates, Premium Bonds and British Savings Bonds
- UK Government stocks (gilts)
- shares in an Enterprise Investment Scheme (EIS) company or a Venture Capital Trust (VCT), provided certain conditions are met
- shares held in an approved Share Incentive Plan provided you keep the shares in the plan until you dispose of them
- assets held in a Personal Equity Plan (PEP) or an Individual Savings Account (ISA).
When am I treated as the owner of an asset?
You may have a chargeable gain if you are the beneficial owner of the asset.
Sometimes, the beneficial owner is not the same as the legal owner, for example when an asset is legally owned by
- a bare trustee, or
- a nominee.
What if I am the joint owner of an asset?
Sometimes you may be the joint beneficial owner of an asset with one or more other people. For example, a husband and wife may be joint beneficial owners of some assets.
When a jointly owned asset is disposed of, each beneficial owner is treated as making a separate disposal based on their share of the proceeds and the costs. Your share of the proceeds will reflect your share of the beneficial ownership.
If you are a joint owner, you should apply the rules for working out CGT to your separate disposal.
Sometimes CGT reliefs will have different results for the different joint owners. For example, you may be entitled to business assets taper relief while another joint owner is entitled to non-business assets taper relief (see Article 7 Taper relief).
What is a disposal?
A disposal occurs when you
- sell an asset
- give away an asset, or
- exchange one asset for another asset.
What if I dispose of part of my interest in an asset?
This is a disposal for CGT purposes. You will only be able to deduct part of the allowable costs of the asset when working out your chargeable gain.
In some cases, we will ignore a part disposal if the amount of the disposal proceeds is small compared to the value of the whole asset. If you think this may apply to you, ask your Tax Office whether you may have this special treatment in your circumstances.
There may also be a transaction treated as a part disposal where the value of an asset that you own is reduced and the value of an asset owned by someone else increases as a result. An example is where you control a company and change the rights attaching to your shares in the company so that value passes out of your shares and into shares owned by someone else.
What is the date of disposal?
If you dispose of an asset under a contract, the date of disposal is usually the date of the contract. However, if the contract is conditional that is, it contains one or more conditions which have to be met before it becomes binding the date of disposal is the date on which the last of the conditions is met.
If you do not make the disposal under a contract other rules apply. For example, if you give away an asset, the date of disposal is the date on which you make the gift.
What if I dispose of an asset to my husband or wife?
Provided that you and your husband or wife are legally married and living together, you will not normally have to pay CGT when you sell or give an asset to him or her.
Instead, you are treated as receiving disposal proceeds equal to the allowable costs plus indexation allowance (where you acquired the asset before April 1998). So, you are treated as making neither a chargeable gain nor an allowable loss.
When your husband or wife comes to sell the asset, he or she will be treated as having your allowable costs plus indexation allowance (see Article 3 Working out the chargeable gain).
The exception is when you dispose of your trading stock to your husband or wife or if you dispose of an asset that he or she uses as trading stock. That counts as a disposal in the normal way.
What if I make a gift to another member of my family, or to a friend?
If you give an asset to a friend or to a member of your family other than your husband or wife you are normally treated as making a disposal. So you may be liable to pay CGT. That is also the case if you sell him or her an asset for less than its value.
Example
You buy a home for the use of your son or daughter when he or she is a student or starting work. After some years, you decide to give the home to your child. At that point you have made a disposal.
You may have to pay CGT on the gain in value since you first bought the house.
What if I give an asset to charity?
When you give an asset to a charity you do not normally have to pay CGT.
You also do not normally have to pay CGT if you give an asset to certain other institutions, such as national or local authority museums or art galleries.
Instead, you are treated as receiving disposal proceeds equal to the allowable costs plus indexation allowance (where you acquired the asset before April 1998). So, you are treated as making neither a chargeable gain nor an allowable loss.
You may also be able to save CGT if you sell your asset to a charity or other similar institution for less than its full value.
What if I exchange shares for other shares when a company is taken over or reorganises its share capital?
You may not have to pay CGT on such a disposal. Instead any CGT may be deferred until you dispose of the replacement shares or loan notes.
You may have to pay some CGT if you receive cash as well as the new shares.
What if I already own shares and now wish to hold them in an Individual Savings Account (ISA)?
You have to subscribe cash to an ISA. The ISA manager may then use the cash to buy shares.
So, if you already own shares, units in a unit trust, or securities and you wish in future to hold them in an ISA, you will have to sell them and transfer the sale proceeds to an ISA manager. The manager will use the proceeds to buy the shares that you wish to hold in your ISA. Sometimes the ISA manager can do all this for you.
Whether you sell the shares yourself or pass them to the ISA manager to sell on your behalf, that sale is a CGT disposal in the normal way. You may have to pay tax on any gains.
There is an exception for shares that you have acquired in an Approved Profit Share Scheme, Save as You Earn Scheme, or Share Incentive Plan. You may be able to transfer these directly to an ISA. If so, the transfer would not count as a disposal for CGT.
What about when someone dies?
When a person dies and their assets pass to their personal representatives, this is not treated as a disposal for CGT purposes.
Personal representatives do not have to pay CGT when they distribute the assets to legatees.
Personal representatives are liable to pay CGT on any gain they make when they dispose of an asset other than to legatees. The acquisition cost they use to work out the gain is the market value of the asset at the date of death.
If they have worked out the market value at the date of death and had it ascertained for purposes of Inheritance Tax, which is the value they should use.
Personal representatives have the same annual exempt amount (see Article 10 Working out the tax due) as individuals for the year of death and the next two years, but nothing after that. The rate of tax is the rate applicable to trusts (34% in the tax year 2003-2004). They are entitled to taper relief and other reliefs, but there are some provisions that apply only to them.
If as legatee you receive an asset from personal representatives, you are treated as having acquired the asset at its value at the date of death, or at the acquisition cost of the personal representatives if they acquired it later.
What capital sums can give rise to a chargeable gain?
Examples of capital sums on which you may have to pay CGT include
- compensation for damage to an asset
- cash payments from mutual bodies, such as building societies and insurance companies, when they convert into a public limited company or are taken over by such a company (but not free shares any gain will arise when you dispose of the shares)
- the proceeds of maturity of a life insurance policy where you were not the original beneficiary of the policy and had bought the right to the proceeds from a third party.
Certain capital sums do not give rise to a chargeable gain, including
- personal injury compensation
- proceeds of a life insurance policy when you were the original beneficiary
- betting, lottery or pools winnings
- bonuses from Tax Exempt Special Savings Accounts (TESSAs)
- save As You Earn (SAYE) terminal bonuses, and
- certain compensation payments for mis-sold pensions.
What date should I use when I receive a capital sum?
You should treat as the date of disposal the date on which you received the capital sum.
What about assets situated abroad?
You may own assets outside the UK. Those could include tangible assets such as land and buildings or shares in a company that is registered outside the UK.
In most cases, CGT applies to assets that you own directly and that are situated abroad just as it does to assets in the UK.
In some cases you may have to pay tax overseas.
Different rules apply if you are not domiciled in the UK
What about gains made by trusts and companies in which I have an interest?
If someone holds an asset on your behalf as a nominee or a bare trustee, any gain arising on the asset is treated as your gain for CGT purposes.
You may also have to pay CGT on amounts attributed to you in respect of chargeable gains made by certain other trusts or companies, including
- trusts resident in the UK of which you are a settlor (a person who puts property into the trust) and from which you or your husband or wife can benefit
- trusts not resident in the UK of which you are a settlor and from which you, or certain persons close to you, can benefit
- trusts not resident in the UK from which you have received capital payments
- certain kinds of company not resident in the UK in which you hold an interest.
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