Capital gains tax is payable in the UK at rates of 18% or 28%, depending on the taxpayer’s combined level of income and capital gains. There is an annual exemption of £10,100 which is enough to cover the annual gains of many people, but to those who are making large capital gains the capital gains tax bill can be significant.
A charge to capital gains tax arises when a chargeable asset is disposal of by an individual who is resident or ordinarily resident in the UK, or by a business partner, trustee or personal representative. All assets are chargeable assets unless they are specifically exempt. The various exemptions may be useful to persons who wish to carefully plan their tax affairs so as to ensure that they do not pay any unnecessary capital gains tax.
Where assets are specifically exempt from capital gains tax, no chargeable gain arises on disposal but also no capital loss can be claimed. For this reason, many assets that are likely to steadily lose their value with time are exempt from the capital gains tax. This protects the UK government against many capital loss claims that would take up administrative time and potentially deplete the government’s tax coffers.
The private motor car is exempt from capital gains tax, and this includes vintage and veteran cars. Most of us know from adverse experience that a private car is not normally sold at a gain but at a loss, and the exemption of these assets ensures that individuals cannot claim capital losses on the sale of their car.
There is a capital gains exemption for chattels that are sold for £6,000 or less (gross sale proceeds before deductions). Chattels are defined as tangible, movable property. There is however a special rule that allows a capital loss to be claimed on the disposal of a chattel for less than £6,000, but in this case the loss is calculated as if the disposal proceeds were exactly £6,000, thereby limiting the amount of the capital loss. However it is worthwhile for a taxpayer to bear in mind the possibility of a capital loss claim where a chattel originally cost more than £6,000. This could for example apply to works of art, including paintings, or antique furniture.
There is an exemption for chattels with a predicted useful life of fifty years of less, which are referred to a “wasting chattels”. However this exemption does not apply to plant and machinery used in a business, if this has qualified for capital allowances. Such business plant and machinery is not exempt from capital gains tax unless it is movable plant or machinery and the proceeds of sale are less than £6,000 in which case the general chattels exemption applies.
Where a business sells plant and machinery and a capital loss arises, the amount of the allowable loss for capital gains tax purposes is reduced by the capital allowances that were available on the plant for income tax purposes.
A capital gain on the principal private residence, in other words the main home of the taxpayer, is not chargeable to capital gains tax and a capital loss is not allowable for offset against other capital gains. The exemption applies to the property including the garden up to an area of half a hectare (5,000 square metres). Where a taxpayer has more than one residence it is possible to elect for one of them to be the main residence for this purpose.
Where the taxpayer has not lived in the residence for the whole period of ownership, or has let out part or all of the residence at various times, some of the capital gain may be chargeable to tax. Where the taxpayer is absent from the residence for periods of time, these may be deemed as periods of residence for the purposes of the exemption. This applies to absences for working abroad; periods up to four years working elsewhere in the UK; and an absence of up to three years for any other reason, provided that these periods are preceded and followed by a period of residence in the main home.
Where a part of the principal private residence is let out, or where the whole residence is let during the absence of the taxpayer, some of the capital gain on the property may become taxable but there is a letting relief. The relief takes the form of a deduction of the lower of £40,000, the whole gain relating to the let part of the property or the amount of the gain that is exempt because of the principal private residence exemption.
UK government securities (“gilts”) and qualifying corporate bonds are exempt from capital gains tax. Qualifying corporate bonds are debentures and other fixed interest securities issued by companies and expressed in pounds sterling. This exemption only applies to holdings by individuals, as companies have to pay corporation tax under the loan relationships rules on gains or losses on these securities.
Other capital gains tax exemptions include the following:
National savings certificates and premium bonds; Individual savings accounts (ISAs); Winnings from pools, lotteries and betting; Damages or compensation for personal or professional injury; Life assurance policies (except when purchased from a third party); Foreign currency that was acquired for private use; and Decorations for valour, unless they were acquired by purchase.
A capital gains exemption is also available for an investment up to £200,000 per year in a venture capital trust, a tax efficient vehicle that invests in small unquoted companies. The taxpayer can receive income tax relief at a rate of 30% on the investment (subject to a minimum holding period); dividends received on those shares are exempt from income tax; and the capital gain or loss on disposal of the shares is exempt from capital gains tax.
HM Revenue and Customs www.hmrc.gov.uk
“Taxation” by Alan Melville, fifteenth edition 2010, FT Prentice Hall