What is Capital Gains Tax (“CGT”)?

What is Capital Gains Tax (“CGT”)?

Capital Gains Tax (CGT) is payable to HMRC when an asset or a property is ‘disposed of’ and where the disposal proceeds exceed the acquisition costs. The gain is chargeable to CGT.

What is a ‘disposal’ for Capital Gains Tax (CGT) purposes?

 A disposal happens when an asset is sold, gifted to another person or transferred into a trust.

What are the ‘disposal proceeds’ and the ‘acquisition costs’?

When an asset is sold, the disposal proceeds are usually the sale proceeds, but there are special rules which substitute the market value if the disposal is made to a ‘connected’ person and is not sold at the market value. If there is a sale for less than the market value, the market value may be substituted for the disposal proceeds, depending on the circumstances.

Where an asset is gifted to another or transferred into a trust, the market value of the asset is deemed to be the disposal proceeds (even though no money may change hands).

The acquisition costs will usually be the price originally paid for the asset. If the asset was acquired as an inheritance, a gift or (in most cases) a purchase for less than full value, the market value at the date the asset was acquired will be used.

Any costs incurred in improving the asset will also be allowed in reducing the gain arising, but the cost must be capital expenditure (such as adding a conservatory, for example) and repairs or maintenance (such as decorating costs).

What is the rate of Capital Gains Tax (CGT)?

The rate at which Capital Gains Tax is paid depends on the amount of taxable income received. The chargeable gain (i.e. the gain after deducting the annual exemption and any tax reliefs) is added to the taxable income for the year and the rate worked out from there.

If the chargeable gain is within the basic rate income tax band, CGT is charged at 10% on the gain (or 18% on residential property); and if the gain exceeds the basic rate band, CGT is charged at 20% (or 28% on residential property).

Are there any reliefs from Capital Gains Tax (CGT)?

There are certain circumstances in which reliefs can apply to reduce or eliminate the amount of the chargeable gain, reduce the rate of tax or to defer the gain to a later date or take the gain out of scope of CGT completely.

A disposal between a married couple or civil partners effectively defers the chargeable gains until a later chargeable disposal by the recipient. A similar relief (called ‘hold-over relief’) applies to gifts of to certain types of trusts, subject to qualifying conditions being met in each case.

An example where CGT is reduced or eliminated entirely is the relief applicable to a disposal of a person’s only or main residence if the relevant conditions are met (called ‘principal private residence relief’).

A relief which reduces the rate of tax is ‘business asset disposal relief’ (formerly known as ‘entrepreneurs’ relief’), which applies to the disposal of an interest in a trading business or shares in an unlisted trading company. If applicable, this relief reduces the rate of CGT to 10% for a higher rate taxpayer.

Contact Us

For more information about Wills, Estate Planning and Trusts and how to prepare effectively to limit exposure to Capital Gains Tax please contact Bruce Clarke e. bruceclarke@rixandkay.co.uk or t. 01732 440 853