This is one of a number of explanatory articles, part of a set copied under licence from H M Revenue & Customs 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.
You will find this article useful as an Introduction to the general principles of Capital Gains Tax. For example, if you have disposed of an asset and need to know whether to report a chargeable gain or an allowable loss to your Tax Office. It is also useful if you are contemplating a transaction and are wondering what the CGT implications might be.
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 do I have to pay CGT?
You may have to pay CGT if you:
- dispose of an asset, or
- receive a sum of money in respect of an asset.
You only have to pay CGT on disposing of an asset if you have made a chargeable gain. Typically, you make a gain if the asset is worth more than it was when you acquired it.
You will only have to pay CGT on a sum of money in respect of an asset if it was a capital sum (a capital sum is one that does not form part of your income for income tax purposes).
You may be treated as making a gain even if you do not receive any money for the asset. For example, you may have to pay CGT if you give an asset to your child.
Certain kinds of asset do not give rise to a chargeable gain when you dispose of them. For example, you will not normally have to pay CGT if you sell your home.
Also, certain kinds of disposal do not give rise to a chargeable gain. For example, you will not normally have to pay CGT if you sell or give an asset to your husband or wife.
You may qualify for reliefs that reduce or defer your chargeable gains.
What is the amount chargeable to CGT?
The amount of CGT is based on the gains that you make on disposals of assets and capital sums that you receive from assets in the tax year. The tax year ends on 5 April.
You work out the amount chargeable to CGT as follows: (the rest of these articles explain the terms and show you how to work out the numbers).
· Disposal proceeds or sum received from assets (After allowing for reliefs which reduce the figure to be treated as proceeds. Sometimes market value is used instead of the actual
Proceeds).
· Minus Allowable costs (If this is a negative number, you have made a loss, which may be an allowable loss).
· Minus Indexation allowance (For inflation, up to April 1998, may not create or
increase a loss).
· Minus Other reliefs (Reliefs other than taper relief which reduce or defer a gain).
· Equals Chargeable gain (For each asset individually).
· Sum Total chargeable gains (Total of all the chargeable gains in the tax year).
· Less Allowable losses (Losses in the tax year and unused losses carried forward from earlier years).
· Equals Chargeable gains after losses
· Less Taper relief (A relief that reduces a chargeable gain after losses according to how long you held the asset. Taper relief is applied separately to each chargeable gain).
· Equals Tapered chargeable gains
· Less Annual exempt amount (£7,900 for the tax year 2003-2004)
= Amount chargeable to CGT
If your tapered chargeable gains are less than or equal to the annual exempt amount, you will not have to pay any CGT. If your tapered chargeable gains are greater than the annual exempt amount, you will have to pay CGT on the excess.
How much CGT will I have to pay?
The rate of CGT you will have to pay depends on the level of your income liable to income tax. The amount chargeable to CGT is added on to the top of your income liable to income tax and is charged to CGT at the appropriate rates. For the tax year 2003-2004, the rates are 10%, 20% and 40%.
When do I have to report my gains and losses to my Tax Office?
You must report your gains or losses to your Tax Office if you
- have an amount chargeable to CGT, or
- wish to claim allowable losses that arose in 1996-1997 or a later tax year (the losses will then be deducted from gains of the same tax assessment year or of a later year – and they may not be used in this way unless you have claimed them, or
- have received a Self Assessment tax return and the Tax Return Guide tells you that you must fill in the capital gains pages, for example because you have made disposals (other than your home) worth more than the sum specified in the return (£31,600 in 2003-2004).
You may not use losses that arose in 1996-1997 or later to offset your gains unless you claim the losses (see article 5 on allowable losses). So if the only reason that you would not have an amount chargeable to CGT is because of the deduction of losses that arose in 1996-1997 or later which you have not already declared, then you must contact the Tax Office to claim the losses.
How do I report my gains and losses to my Tax Office?
How you report gains and losses depends on whether you receive a Self Assessment tax return.
If you receive a tax return and have to fill in the capital gains pages, you should report your gains and losses by completing the capital gains pages of the return. You must send back the tax return by the date shown on it, otherwise you may have to pay a penalty.
Even if you do not have to complete the capital gains pages, you may still use them to claim losses.
If you have not received a tax return and wish to report gains or losses, you should contact your Tax Office.
· If you have an amount chargeable to CGT you should ask your Tax Office to send you the appropriate form. You must tell your Tax Office in writing within six months after the end of the tax year in which the disposal took place, otherwise you may have to pay a penalty. You should use the form to claim any losses arising in the same year.
· If you only wish to claim losses, you should write to your Tax Office, setting out the details including identifying the source and giving the amount of the loss. There is a time limit for claiming losses – see Section 5.
If you are late in paying tax due, you may have to pay interest and surcharges.
What sort of records should I keep?
You should keep any information and documents that you have received that may be needed to help you fill in your tax return or claim. You may have to keep some papers for a long time.
The records you will need to keep will depend on your circumstances, but here are some common examples of what it would be useful to keep.
· Contracts for the purchase or sale, lease or exchange of your assets.
· Documentation describing assets you acquired but did not buy yourself, for example, assets you received as a gift or from an inheritance.
· Details of any assets you have given away or put into a trust.
· Copies of any valuations taken into account in your calculation of gains or losses.
· Bills, invoices or other evidence of payment records such as bank statements and cheque stubs for costs you claim for the purchase, improvement or sale of assets.
· Details of bonus issues, scrip dividends and company re-organisations affecting shares that you own.
· Information about companies in which you own shares, if you might have to check whether they were ‘trading companies’ for the purposes of taper relief.
· Material that would be useful in working out the value of an asset in March 1982, if you owned it before then.
It would also be sensible to keep correspondence with purchasers or vendors leading up to the sale or acquisition of your assets.
Perhaps you use an asset, such as your home, for both business and private purposes, or you may let all or part of it at some time. If so, you will need to keep sufficient records to work out what proportion of any gain on disposal is taxable.
You may have already discarded any records relating to events before April 1996, as there was previously no obligation to keep them. It does not matter if you have not kept such items, but you should hold on to any that you still have if they might be relevant in future.
There is further guidance outlining some records it might be sensible to keep in SA/BK4 - Self Assessment. A general guide to keeping records. You should also read How can I avoid having to retain records of the cost of assets I acquired before 31 March 1982?
What if I have lived abroad?
If you are not resident, not ordinarily resident or not domiciled in the United Kingdom, there are special rules for determining what gains are chargeable to CGT.
There are also special rules if you are temporarily non-resident.
Husband and wife
Husband and wife are each taxed separately. They each have their own annual exempt amount. The rates at which they each pay CGT reflect their own personal circumstances.
There are some special rules when you transfer an asset to your husband or wife while you are living together. You will not normally have to pay CGT if you sell or give an asset to your husband or wife (see article 2 – Assets and Disposals).
Other rules are set out in later articles. Articles 6 and Article 7 deal with taper relief and a married couple may normally have private residence relief on only one home – see Article 4.
CGT and children
Often, assets for the benefit of children are held by trustees on their behalf. Except in the case of ‘bare trustees’, it is normally the trustees who are assessed to CGT. In some cases other people may have to pay CGT on trust gains, see ‘What about gains made by trusts and companies in which I have an interest?’ in Article 2.
Where a child owns assets directly, or where a bare trustee acts on behalf of the child, it is the child who is assessed to CGT in the same way as an adult is.
Each child has her or his own annual exempt amount. The rate at which he or she pays CGT reflects her or his own income and personal allowances.
There is no special relief for disposals to your children. However, special rules apply to determine the value of assets that you dispose of to them, see When am I treated as receiving disposal proceeds equal to the market value of an asset? and What are acquisition costs?
CGT and trusts
A trust (other than a bare trust) is treated as a separate taxpayer for CGT. If you are a trustee you are responsible for working out the amount of the trust gains and for notifying the Tax Office where appropriate.
You will normally also be responsible for paying any CGT due. Sometimes the settlor may be liable to pay CGT on trust gains, but, if so, he or she has the right to recover the tax from you (see What about gains made by trusts and companies in which I have an interest?).
The way in which you work out CGT for trusts is very similar to that for individuals, but there are some special rules, for example, to determine when an asset is a business asset for taper relief (see Article 7). The annual exempt amount may be different and there is a different rate of tax. A transfer of property into a trust and the occasion when a person becomes entitled to trust property are both disposals for CGT purposes.
What is a bare trust?
A trust is a ‘bare trust’ where the beneficiary of the trust is absolutely entitled to the assets in the trust, or would be absolutely entitled if he or she was not a minor. Where there is a bare trust, the gains of the trust are treated as the gains of the beneficiary. | 
