CAPITAL GAINS TAX. Disposal of assets. Deductions. Rate of tax. Losses

Transcription

1 Capital gains tax

2 CAPITAL GAINS TAX Relatively few people pay CGT each year about 146,000 in 2011/12 according to HMRC estimates but it can have a very considerable impact when it is payable. CGT is charged on your net gains, i.e. the total chargeable gains that you realise on disposals during a tax year after deducting total allowable losses that you have realised in the same year or brought forward from previous years. There were major changes to CGT from 6 April 2008 and a further important reform in June Broadly speaking, in 2014/15 CGT is charged at a flat rate of 18% for basic rate taxpayers and 28% on all gains for higher and additional rate taxpayers. Taper relief and indexation relief disappeared from April 2008 but not the other reliefs (e.g. for main residences). There is also an entrepreneurs relief for certain business assets. Companies are subject to corporation tax on chargeable gains that are calculated according to modified CGT rules. Disposal of assets CGT can only arise on your disposal of an asset. Normally this means its sale, but it could also mean a gift or insurance claim or compensation for loss or damage to an asset that you own. The value on which the gain (or loss) is based is normally the consideration you receive. However, on gifts and certain sales (e.g. with a family member), the open market value is used instead. CGT is not normally payable when a person dies. The beneficiaries of a deceased person s estate are then treated as if they had acquired the assets of the deceased at their market value on death. This is one of the main reasons why most people avoid paying CGT. Deductions Certain costs are allowable in computing chargeable gains: The acquisition cost or market value on 31 March 1982 (if you acquired the asset before that date). The costs of acquiring and disposing of the asset. Expenditure on enhancing the asset s value. Rate of tax The first 11,000 of your net gains realised during the tax year is free of CGT. The excess is treated as the top slice of income. To the extent that this falls in the basic rate band (or below), it is taxed at 18%. A 28% rate applies to the extent that the gain falls into the higher or additional rate bands. Husbands and wives (and civil partners) are subject to CGT separately, each with their own annual exemption and tax rates. Transfers between spouses/civil partners living together are not liable to CGT. Losses You can use the losses you have brought forward from previous tax years to offset your gains. As an individual taxpayer, such losses will not reduce your net gains below 11,000, so your annual exemption will not be wasted. All Rights Reserved Page 1 of 4

3 Identification of securities If you have bought shares at different times and then you sell some of your holding, it can be important to be able to identify which investments you have sold to be able to compute the taxable gain. Shares and securities you have disposed of are identified with acquisitions you have made in the following order: Acquisitions made on the same day as the sale. Acquisitions within the following 30 days (thereby rendering bed and breakfasting, i.e. selling and buying back immediately, ineffective). All earlier other acquisitions (as a single pool). This means that you take the average acquisition value and apply it to the number of shares being sold. Example of pooling of shares You bought shares in Tectonic PLC on two occasions you bought 2,000 shares when the price was 4 a share and later you bought another 1,000 shares when the price was 7 a share. So your total pool of 3,000 shares was bought for 15,000 or an average price of 5 a share. So when you come to sell 2,000 shares at 12 a share, your gain will be 14,000 ( 24,000 sale value less 10,000 average cost). Worked example An investment acquired for 10,000 in May 1985 was sold for 45,000 net of expenses in May Sale proceeds 45,000 Less: allowable expenditure 10,000 (10,000) Taxable gain 35,000 Main exemptions Gains on certain assets are exempt (and losses are not allowable): An individual s or married couple s/registered civil partnership s only or main residence. Certain works of art, historic buildings and their maintenance funds, decorations for valour, private motor cars. Enterprise investment scheme (EIS) shares (losses on these are allowable after adjustment for any income tax relief) and venture capital trust (VCT) shares. Shares with a value of up to 50,000 acquired as an employee shareholder. This is a new type of employment status introduced from 1 September 2013 employee shareholders receive shares in their employer company in exchange for giving up certain employment rights. Government securities, loan stocks, qualifying corporate bonds, and National Savings and Investments certificates. All Rights Reserved Page 2 of 4

4 Individual savings account (ISA), junior individual savings account (JISA) and child trust fund (CTF) investments. Life assurance policies disposed of by their original owner. Foreign currency for personal expenditure. Betting and lottery wins, and compensation or damages for personal wrong or injury. Assets transferred to charities or to trustees for the benefit of employees. Shares held by the trustees of share incentive plans up to the point they are transferred to the employee. Other main reliefs Chattels The disposal of tangible moveable property (i.e. chattels) with a predictable life of less than 50 years is exempt from CGT, provided the asset did not qualify for capital allowances. The disposal of other chattels (such as antiques) is exempt from CGT, provided that the consideration is not more than 6,000. Otherwise, the chargeable gain is the lesser of the actual gain or 5/3 of the difference between 6,000 and the consideration. Reinvestment relief is available on all chargeable gains made by individuals who reinvest the gain in shares eligible for the enterprise investment scheme (even if income tax relief is not given). All or part of your gain (depending on the amount reinvested) is deferred until you have sold the shares, subject to certain qualifying conditions being met. The reinvestment must be made within a period starting one year before and ending three years after the disposal. Reinvestment relief is available on chargeable gains of up to 100,000 realised in 2014/15 made by individuals who reinvest the gain in shares eligible for the seed enterprise investment scheme (SEIS), subject to certain qualifying conditions being met. The relief is 50% for reinvestment made in either 2014/15 or 2015/16. However, it is possible to treat an investment as being made in the previous tax year. Rollover relief may be available when disposing of a qualifying business asset and acquiring another qualifying business asset. All or part of the chargeable gain is postponed until the replacement asset is disposed of without replacement. Heldover gains You may decide to hold over the CGT on gifts of certain assets, As a result, the taxable gain is postponed until the recipient disposes of the asset. The assets that can be held over in this way include: Assets that you transfer that are used in your unincorporated business or for a trade carried on by a company in which you hold at least 5% of the voting rights. Shares in an unlisted trading company (except when the gift is to another company). Certain agricultural property; and transfers that are not potentially exempt for IHT purposes (e.g. to most but not all - kinds of trusts). You cannot claim holdover relief on assets you transfer to a trust in which you, the settlor have, or will acquire, an interest. Rollover relief on incorporation postpones any gains (e.g. on property or business goodwill) when you transfer an unincorporated business to a company in exchange for the issue of shares. All Rights Reserved Page 3 of 4

5 Entrepreneurs relief Entrepreneurs relief was introduced from 6 April 2008 as part of the reforms to CGT. The main features of this relief are: It applies to gains you make on the disposal of all or part of a business, or on certain disposals of related assets (e.g. business property) following the cessation of a business. The relief applies if you are a business owner or employee of a trading company who holds at least 5% of the voting rights. The relief reduces the tax rate applicable to the gain to 10%. You can make claims for the relief on more than one occasion, subject to a lifetime gains limit of 10 million. There is no minimum age requirement. As a general rule, the asset on which you claim relief must have been owned for at least one year. While the relief goes some way to helping small business owners, it does nothing for non-employees who invest in unquoted businesses, such as business angels, and AIM shareholders. Residence and domicile status Individuals who are resident in the UK are liable to CGT on their gains from disposing of assets wherever these may be situated. However, if you are not resident in UK, you are not liable to CGT unless you are just a temporary nonresident, or you carry on a trade in the UK and dispose of UK assets used for the trade. Individuals who are resident outside the UK for less than five tax years may be subject to a CGT reentry charge when they come back to UK. Such people are normally liable to CGT on their return to the UK on disposals made while they have been abroad of assets that they acquired before their departure (i.e. there is a re-entry charge). There is no re-entry charge for individuals who were not resident in the UK for four of the seven tax years before the year of departure. The position of non-uk domiciled individuals changed from 6 April 2008, when new rules were introduced. Whereas they used to be generally exempt from tax on gains realised and kept overseas, in some cases they will now be taxable on all gains, not just those remitted to the UK. How we can help Capital gains tax can be unnecessarily expensive if you do not make full use of the exemptions and reliefs that are available to you. We can advise on the best tax strategies as part of your overall investment planning. This could involve basic strategies, such as sharing assets between spouses/partners; it could also mean using tax-privileged investments such as funds, ISAs, pensions or even EIS and VCTs. Levels and bases of, and reliefs from, taxation can change and the value of tax reliefs depends on your individual circumstances. This publication is for general information only and is not intended to be advice to any specific person. You are recommended to seek competent professional advice before taking or refraining from taking any action on the basis of the contents of this publication. The Financial Conduct Authority (FCA) does not regulate tax advice, so it is outside the investment protection rules of the Financial Services and Markets Act and the Financial Services Compensation Scheme. This publication represents our understanding of law and HM Revenue & Customs practice as at April All Rights Reserved Page 4 of 4

6 Thank you for your interest in this Essential Guide. For further information or if you would like to discuss any aspect of the guide, please contact us. EA Financial Solutions Ltd 869 High Road Finchley London N12 8QA +44(0) The Financial Conduct Authority (FCA) does not regulate tax advice. Tax rules are subject to change. All Rights Reserved