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An Introduction to Capital Gains Tax

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Capital Gains Tax (CGT) applies when chargeable assets are disposed of and is applicable to individuals and trustees but not to limited companies, although Limited Companies do pay Corporation Tax on the gains that they make.

Chargeable assets includes all forms of property unless it is specifically exempt. The main assets it tends to apply to are land and buildings, shares and business assets including goodwill. CGT can be very complex and the rules are far more detailed that can be explained in this brief summary.

How a Capital Gain occurs

A capital gain occurs when the value of an asset at the date it is disposed of is higher than when it was acquired. An asset can be disposed of either by sale or by gift. If you give away an asset away in an uncommercial transaction, the market value will replace any actual consideration paid.

For assets acquired before 31 March 1982 the cost usually taken to be the value on that day, although actual cost can be used in some circumstances.

The following also reduce the amount of the chargeable gain...

  • Incidental costs of acquisition;
  • Expenditure to enhance the value of the asset;
  • Incidental costs of disposal; and
  • Tax relief's and allowances (see below)

Tax Relief's

There are several different tax relief's which can reduce the chargeable gain, including...

  • Rollover/holdover relief on replacement of business assets - allowing you to defer the CGT on a gain of a business asset where this is matched with a replacement of a new business asset in the period commencing one year before and ending three years after the disposal.
  • Business incorporation relief - available when you transfer your business into a Limited Company in exchange for shares.
  • Holdover gift relief - on some gifts of business assets, or gifts made into trusts mean the tax does not become payable until the person, or trustee who receives the gift disposes of it.
  • Entrepreneurs' relief - for disposals after 5th April 2008. This allows disposal of a material part or all of your business (subject to a lifetime allowance of 1 million of gains) to have the CGT rate reduced to 10%.

Prior to 6th April 2008, two other reliefs were also available:

  • Taper relief available on assets held since 6 April 1998. Business assets qualify for up to 75% taper after two years, non-business assets qualify for up to 40% taper after 10 years. This is however abolished with effect from 6th April 2008.
  • Indexation allowance an increase in the cost of the asset by an amount that represents the growth in value due solely to the increase in retail prices while it was held from 31 March 1982, or the date of acquisition if later, to 5 April 1998, or the date of disposal if earlier. This is also abolished with effect from 6th April 2008.

Capital Losses

Any capital losses made on a chargeable transaction are netted off against any capital gains made in of the same tax year. They are applied before the annual exemption. Unused capital losses are carried forward against future capital gains, they can not normally be carried back. To make use of a capital losses it must be reported to HMRC within five years and ten months of the end of the tax year in which it arose.

Entrepreneurs' Relief (available from 6th April 2008)

The new entrepreneurs' relief can apply when you sell part or all of your business, or shares in your own company after 5th April 2008. The capital gain will be cut by 4/9ths leaving 5/9ths taxable at 18%. This makes the effective CGT rate on the gain before allowances just 10% instead of 18%. Currently where full business asset taper relief applies a higher rate taxpayer pays CGT at 10% and a lower rate taxpayer pays CGT at 5% on the same gains.

From sale of a business in 2008/09

Gain from selling your business:                 450,000

Less Entrepreneurs' relief (4/9 x 450,000) (200,000)

Taxable gain before allowances:                 250,000

Less annual exemption for 2008/09:           (9,600)

Net gain:                                                   240,400

CGT due at 18% 43,272

There are some other tight restrictions to the new entrepreneur relief. The relief only applies to the first 1 million of qualifying lifetime gains made after 5 April 2008. Gains in excess of 1 million, or which do not qualify for other reasons will be taxed at 18%

Annual Exemption

An annual exemption of 9,600 for 2008/09 is available to individuals so total gains made in the tax year up to this amount are exempt. Any unused annual exemption is lost and cannot be carried forward or transferred to another person.

CGT Exemptions

These are the main exemptions from CGT...

  • Normally the sale of your only or main residence is exempt, although it can become partly chargeable in some circumstances such as if it is let out or used for business purposes;
  • Transfers of assets between husband and wife or civil partners. Such transfers are treated as being made at no gain/no loss;
  • Most chattels whose value decreases over time (called wasting assets);
  • Non wasting and business chattels where the disposal proceeds do not exceed 6000;
  • Private motor cars;
  • Gifts to charity and certain amateur sports clubs;
  • SAYE contracts, savings certificates and premium bonds;
  • Betting winnings and prizes including the lottery;
  • Compensation for damages for personal or professional injury;
  • Some compensation payouts for mis-sold pensions;
  • Life assurance policies in the hands of the original owner or beneficiaries;
  • Company reorganisations and takeovers where there is a share for share exchange.

Payment of CGT

CGT is paid through the self-assessment system and gains and losses must be declared on your self-assessment return. The gains after all reliefs and exemptions are added to your taxable income and then taxed at your top marginal rate. The tax is payable by 31 January following the tax year in which the gain arose.

With effect for disposals on or after 6th April 2008, at the same time as taper relief and indexation allowance were abolished, Capital Gains Tax was simplified with just one capital gains tax rate of 18%.


About the Author

Jonathan Amponsah BSc FCCA is a UK Tax Expert and the founding partner of A M P Associates A specialist firm of chartered certified accountants and tax advisers based in London and Surrey. Jonathan advises on a wide range of business and tax issues and he is recognized for his proactive and innovative approach to taxation.

Jonathan can be contacted on 0845 009 8845 or email:jonathan@ampassociates.co.uk


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Article Published/Sorted/Amended on Scopulus 2008-06-02 23:41:03 in Tax Articles

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