I have received a lot of questions concerning capital gains tax and the assets that are within the scope of this tax. Therefore, I have decided to write a series of blogs on the subject, which will hopefully give you a better idea of what is chargeable and how the amount is calculated.
This blog will cover an overall summary of chargeable gains.
Who is a chargeable person?
A chargeable person can be either an individual or a company. However, please note that companies do not pay capital gains tax but instead pay corporation tax on any gain.
What assets are chargeable?
The answer to this is that most property other than cash in sterling is an asset for capital gains tax purposes. There is, however, a list of specifically exempt assets which I list below:
- Wasting chattels – these are “tangible movable assets” with a life not exceeding 50 years – an example would be a racehorse
- Gilts – Gilts are treasury stock issued by the UK Government on which annual interest is payable
- Shares in an ISA or Venture Capital Trust
- Shares in EIS and SEIS companies subject to certain conditions
The above is not an exhaustive list so if you are unsure, please get in touch.
When does a chargeable event arise?
The most common occurrence that would cause a chargeable event to arise would be for you to sell a chargeable asset. However, a chargeable event may also arise if you gift an asset, or if the asset is lost or destroyed.
Please note that death is not an occasion of charge for capital gains tax purposes – no capital loss or gain will arise for the deceased.
How do you calculate a chargeable gain?
The method of calculating a chargeable gain on assets is very straightforward. We simply take the proceeds of sale and deduct all costs of acquisition to leave us with the capital gain.
In essence, we are simply working out the cash profit on the transaction.
From the proceeds of the sale, we may deduct incidental costs of disposal. These will include:
- Legal fees
- Valuation fees
- Costs of advertising
Similarly, the costs of acquiring a chargeable asset, such as the following, will be allowable:
- The actual cost of acquiring the asset
- Legal fees
- Stamp duty land tax
One point to note is that an asset that has been inherited is treated as being acquired at probate value for capital gains tax purposes.
Another cost that can be included in the calculation of the capital gain is enhancement expenditure. This would be classed as any cost incurred which enhances the value of the asset. One caveat to this is that the enhancement expenditure must be “reflected in the state or nature” of the asset at the date of disposal.
A good example of the above would be that you fitted a new conservatory to a rental property at a cost of £10,000 back in 2012. You then decided to knock the conservatory down in 2018 as it was getting old and you didn’t feel it was a good investment to replace it. You then go on to sell the property in 2019. The question is: can you claim the £10,000 against the chargeable gain?
The answer is no because the expenditure is no longer reflected in the state of the house sold as the conservatory has been knocked down.
Every individual gets an annual exemption – for the 2020/21 tax year, this is £12,300. This gets deducted from the gain to give you the gain chargeable to tax.
What rate of tax do I pay on a capital gain?
The rate of tax payable by an individual (see above for company) will depend on two things:
- The individual’s taxable income in the tax year of disposal
- The nature of the asset
For most assets, an individual will pay capital gains tax at a rate of 10% up to their basic rate band and then 20% thereafter.
However, for a residential property, the rates differ and the rates payable are 18% for basic rate payers and 28% thereafter.
There are reliefs that can affect the rate of tax payable on a gain and I will lay these out in a future blog.
As a note on the above, an individual’s basic rate band covers taxable income from £12,500 a year up to £50,000. The first £12,500 of taxable income is covered by the personal allowance.
What if I transfer an asset to my partner/civil partner?
Any transfer between married individuals or between civil partners will be treated, for tax purposes, as taking place at a nil gain/loss. This means that spouses can transfer assets freely between them, without incurring a capital gains tax charge.
I do hope the above was helpful and if you would like to get in touch please contact me by telephone or email:
Tel: 01392 360008
Daniel Routcliffe ACA