Tax Advice and Tax Planning: Capital Gains Tax in the United Kingdom
. Capital Gains Tax (CGT) is charged on net gains, i.e. total chargeable gains realised during a tax year after deducting total allowable losses realised in the year. Companies are subject to corporation tax on chargeable gains calculated according to modified CGT rules. CGT can only arise on the disposal of an asset. Normally this means sale, but it could also mean gift or compensation for loss or damage to an asset. The value on which the gain (or loss) is based is normally the consideration received. However, on gifts and certain sales, the open market value is used instead. No CGT is payable on death. The beneficiaries of a deceased person's estate are treated as if they had acquired the assets of the deceased at their market value on death.
The first £8,800 of an individual's net gains realised during the tax year is free of CGT. The excess is taxed as if it were the top slice of income, at the rates that apply to savings income, namely 10% on the first £2,150, 20% on the next £31,150 and 40% on the balance. Husbands and wives are subject to CGT separately, each with their own annual exemption and tax rates. Transfers between spouses living together are not liable to CGT.
Individuals who are resident or ordinarily resident in the UK are liable to CGT on gains from disposing of assets wherever situated. Individuals who are neither resident nor ordinarily resident are not normally liable to CGT unless they are temporary non-residents, or trade in the UK and dispose of UK assets used for the trade. Individuals who are resident and ordinarily resident outside the UK for less than five tax years are normally liable to CGT on their return to the UK on disposals abroad of assets acquired before their departure (re-entry charge). There is no re-entry charge for individuals who were not resident and not ordinarily resident in the UK for four of the seven tax years before the year of departure. Non-UK domiciled individuals who are resident or ordinarily resident in the UK or are temporary non-residents are taxable on non-UK gains only to the extent they are remitted to the UK. Our tax services department can help you through this maze, ensuring that you handle all of your UK Capital Gains tax responsibilities accurately and efficiently. We pride ourselves on providing tax advice that is commercially aware, practical and relevant. Areas of specialisation include business tax planning, shareholder and shareowner issues, personal tax planning, and employment solutions. If you would like quality tax advice on UK income tax, PAYE, NI contributions or any other aspect of tax and financial affairs for your business or yourself, please contact Coddan CPM.
Further information
CGT is a tax on capital gains in the United Kingdom. A gain is an increase in value. You normally only have to pay CGT when you no longer own an asset, that is when you have disposed of it. If you give an asset away, you normally look at what it is worth, not what you get for it. The same is true when you sell it for less than its full worth in order to give away part of the value. You may also have to pay CGT if you dispose of part of an asset or exchange one asset for another. In addition, CGT may be payable if you receive a capital sum of money from an asset without disposing of it, for example if you receive compensation when an asset is damaged. If you sell or give an asset to your husband or wife while you are legally married and living together, that does not give rise to a CGT charge.
If your husband or wife later sells the asset, he or she will work out the CGT at that time by looking at what you paid for the asset. You may have bought or acquired in other ways shares or units in a particular company or unit trust on a number of different occasions and now dispose of some of them. If so, there are special rules for identifying which of the shares or units you have sold, and for working out the gain.
Shares in the company where you work. You may have to pay CGT when you sell shares in the company where you work, but there are some special reliefs that may help you keep your tax bill down. How do I work out the CGT that has to be paid? Start by listing all the assets that you have disposed of in the tax year (6 April to 5 April in the following year).
You can ignore exempt assets and disposals that do not give rise to a CGT charge. You may be able to ignore the disposal of your own home. Work out the gain on each asset. How much CGT you pay depends on your overall income. Your total taxable gains are added to your taxable income for the year and treated as the top part of that total. The gains are then charged to CGT at the following rates (2005-2006 tax year): 10 per cent where they fall below the starting rate limit for Income Tax (Ј2,090). 20 per cent where they fall between the starting rate and basic rate limits for Income Tax (Ј2,091 to Ј32,400). 40 per cent where they fall above the basic rate limit for Income Tax (Ј32,401 and above). If you’ve received a Self Assessment tax return, follow the guidance to decide if you need to fill in the capital gains pages as part of that return.
The return tells you how to obtain these pages if you need them. If you don’t usually complete a tax return, but wish to report gains or losses, contact your local Tax Office and ask them to send you a return and the relevant pages. If you have CGT to pay you must tell your tax office in writing by 5 October following the tax year. There is a time limit for claiming losses.
How married couples can maximize their income tax and capital gains tax savings by transferring assets from one spouse to the other... and then back again! How to extract every drop of tax saving from your annual capital gains tax exemption, and those of your spouse and children. When selling investments to exploit your CGT exemption is a BAD idea.
Everything you need to know about the various capital gains tax reliefs such as taper relief and indexation relief, and how they can be used to cut your tax bill to almost zero. How unit trust investors can earn 20-66% more than other share investors. How ISAs, used correctly, can produce an incredible 60% more income than other investments. How ISAs, used incorrectly, produce not one penny in tax savings. Why share dividends are more attractive than other forms of income. Shares vs Property - which offers the most attractive tax breaks? The benefits of gilts and corporate bonds and HOW you should invest in them to derive the highest possible after-tax return. Detailed comparisons of the various tax shelters available, such as VCTs and Enterprise Investment Schemes.
How to gain extra tax savings from your losses. Plain English guide to calculating capital gains tax when you sell shares, unit trusts and other assets, including the complex 'share matching' rules. How to complete the capital gains tax pages of your tax return. Offshore tax planning strategies for stock market investors. Inheritance tax planning. The tax benefits of obtaining 'share trader' tax status. How to cut your tax bill by 30% by setting up your very own share trading company.
Individuals, personal representatives and trustees are potentially liable to CGT. Companies do not pay CGT, but instead pay Corporation Tax on chargeable gains. A person liable to CGT must notify the Inland Revenue by 5 October following the end of the relevant tax year, if a self-assessment return has not already been received.
CGT is charged on the total of all chargeable gains in the tax year, less allowable losses, taper relief and the annual CGT exemption. CGT is chargeable at rates of 10%, 20% or 40%. Whilst CGT is calculated separately from income tax, it is calculated by treating taxable gains as the 'top slice' of income. Trustees and personal representatives were liable to CGT at 34% for 2003/04, but from 6 April 2004 their CGT rate increased to 40%. CGT is normally payable by 31 January following the end of the relevant tax year (or 3 months after the issue of the self-assessment return, if later). If the disposal proceeds for an asset are payable by instalments following the disposal for a period exceeding 18 months, the taxpayer can apply to pay the tax by instalments over a period not exceeding 8 years.
CGT on gifts of some assets may be paid by 10 equal annual instalments, if certain conditions are satisfied. An individual who is 'resident' and 'ordinarily resident' in the UK is liable to CGT on worldwide assets and gains. An individual who is not resident or ordinarily resident in the UK is generally not liable to CGT, but there are some important exceptions (e.g. gains in disposal of UK assets used to carry on a trade, profession or vocation in the UK). An individual who is resident and ordinarily resident but not domiciled in the UK is liable to CGT on overseas assets only to the extent that the gain is remitted to the UK. Individuals who leave the UK and subsequently return are liable to CGT on gains arising during their absence on assets owned prior to their departure if they were UK resident for at least 4 out of the last 7 tax years, and their period of non-residence is less than 5 tax years.
Actual disposal proceeds are replaced by the market value of an asset for CGT purposes in certain circumstances, most notably for disposals between connected persons. An individual is 'connected' with a spouse, close relatives (e.g. brothers, sisters and lineal descendents) and those relatives' spouses. CGT is charged on all chargeable gains, less allowable losses of the same tax year, less unused allowable losses brought forward. A current year loss is set off in priority to losses brought forward. Capital losses cannot be carried back, with the exception of unused allowable losses of a deceased individual in the tax year of death. Those losses can be carried against chargeable gains of the preceding 3 tax years, starting with gains of the later year.
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CGT can only arise on the disposal of an asset. Normally this means sale, but it could also mean gift or compensation for loss or damage to an asset. Disposal of assets: The value on which the gain (or loss) is based is normally the consideration received. However, on a gift or on certain sales, the open market value is used instead. No CGT is payable on death. The beneficiaries of a deceased person's estate are treated as if they had acquired the assets of the deceased at their market value on death.
DEDUCTIONS
Certain costs are allowable in computing chargeable gains: The acquisition cost or market value on 31 March 1982 (if the asset was acquired before that date. Costs of acquiring and disposing of the asset. Expenditure on enhancing the asset's value.
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LOSSES
Losses brought forward from previous tax years can offset gains. For individual taxpayers, such losses do not reduce net gains below £7,500, so the annual exemption is not wasted.
RATE OF TAX
The first £7,500 of an individual’s net gains realised during the tax year are free of CGT. The excess is taxed as if it were the top slice of income, at the rates that apply to savings income, namely 10% on the first £1,880, 20% on the next £27,520 and 40% on the balance. Husbands and wives are subject to CGT separately, each with their own annual exemption and tax rates; transfers between spouses are not liable to CGT.
INDEXATION ALLOWANCE
The indexation allowance can reduce the chargeable gain for assets acquired before 1 April 1998, but cannot increase a loss or turn a gain into a loss. The acquisition cost and enhancement expenditure (before April 1998) are revalued in line with indexation factors derived from increases in the RPI (Retail Prices Index) between the date of expenditure and the earlier of the date of disposal and April 1998. The indexation allowance is calculated by multiplying the allowable expenditure by the indexation factor for the month in which the expenditure was incurred or for March 1982 if later.
IDENTIFICATION OF SECURITIES
Shares and securities disposed of after 5 april 1998 are identified with acquisitions in the following order: Same day acquisitions. Acquisitions within the following 30 days (thereby rendering "bed and breakfasting" ineffective). Previous acquisitions after 5 April 1998, taking the most recent acquisition first. Any share in the "pool" at 5 April 1998. Any shares held on 5 April 1982. Any shares acquired before 6 April 1965.
IMPORTANT NOTE
Our corporate, tax and securities lawyers have extensive experience in the issues involved in all type of business entities, including corporations, private limited companies, public companies, limited liability companies, limited partnerships, general partnerships, limited liability partnerships and professional associations. Our lawyers advise clients in the choice of entity to utilize for any given business venture. Such advice includes the tax advantages of the respective entities as well as the non-tax or business issues involved in each type of entity.
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Our attorneys monitor the latest developments in both tax and non-tax laws affecting estates and trusts and lecture extensively on those subjects around the country to numerous professional groups and organizations. The firm's Trust and Estate attorneys are proficient in analyzing and implementing the latest techniques to reduce estate and gift taxes, including, for example, family limited partnerships, GRATS and charitable remainder and lead trusts.
The firm's Trusts and Estates attorneys also advise our clients on the income, gift and estate tax consequences of charitable gifts; handle the negotiation and preparation of marital agreements; provide asset protection planning for individuals; and have extensive experience in the establishment of private and publicly supported charitable organizations, international estate planning and estate and trust litigation, as well as post-mortem tax planning. We recognize that a client's estate planning needs and matters that arise in the course of estate planning and administration frequently require expertise in other areas of the law, and we work closely with the firm's attorneys in other practice areas, including litigation, real estate, corporate and tax, to provide our clients with thorough legal advice.
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