Capital Gains Tax
(For more information purchase TaxCalc from Which Software)
Over recent years, capital gains tax and income tax have become increasingly interlinked - for example, the rate of capital gains tax you pay depends on your income. TaxCalc takes both your income and capital gains into account.
The simplest example of making a capital gain is selling something you own at a profit. For example, you buy a Victorian etching for £10,000 and sell it a couple of years later for £12,000. Your capital gain (ignoring any allowance for inflation) is £2,000 or a bit less if you can claim some expenses of buying and selling. But you can make a capital gain even though no buying or selling is involved, eg if you give something away.
So here are the basic rules
* You can make a capital gain (or loss) whenever you dispose of an asset, however you came to own it.
* Broadly, anything you own counts as an asset, eg houses, jewellery, shares and antiques. But gains made on some assets are
tax-free.
* You dispose of an asset not only if you sell it, but also if you give it away, exchange it or lose it. You also dispose of an asset if: you sell rights to it, for example, grant a lease; it is destroyed or becomes worthless; you get compensation for damage to it, for example insurance money,and do not spend all the money on restoring it.
* Not every gain you make will be taxable, nor will every loss be allowed by the Revenue. However, in general, allowable losses can be used to reduce taxable gains: the first £6,800 of taxable capital gains made in 1998-99
and £7,100 made in 1999-2000 is tax-free.
* Gains made purely because of inflation between 6 April 1982 and 5 April 1998 are not taxable - this is allowed for by giving you an indexation allowance to deduct from your gain. Gains after 5 April 1998 qualify for taper relief instead.
* There is no capital gains tax to pay when you die.
* Gifts between a husband and wife are not taxable at the time - instead any tax is deferred until the recipient disposes of it, when tax is worked out on the gain over the period both husband and wife owned it.
* Some assets qualify for special treatment.
* If you are 'domiciled' in the UK, capital gains tax applies to gains you make anywhere in the world - eg the profit when you sell your holiday cottage in France. If the gains cannot be remitted to the UK (eg because of exchange or currency controls) you can ask the Inland Revenue to defer bringing them into the tax net until they can be remitted. If you are not domiciled in the UK you are taxed only on gains you bring into the UK.
Fuller information is given in the Inland Revenue's notes on Capital Gains Tax which accompany the capital gains tax pages of the tax return - these are available on TaxCalc's Help menu.
Calculating the gain
This is how to work out your taxable gain or loss (or what the Revenue calls your chargeable gain or allowable loss) for each asset you dispose of. TaxCalc will carry out the whole of the calculation, for straightforward disposals, and will then work out the amount of tax you owe.
In general, only gains or losses since 31 March 1982 are taken into account, and some gains are tax-free altogether. If the gain is not tax-free, the taxable amount is based on the increase in the value of the asset during the time you owned it. This is worked out by taking the disposal proceeds of the asset and then deducting the initial value of the asset, together with any allowable expenses of acquiring, improving or disposing of an asset (but not just maintaining it).
The figures for the disposal proceeds and initial value are generally based on the price paid for the asset, or its market value if it was given or inherited, but there are special rules for assets owned on 31 March 1982.
Deducting indexation allowance
For assets owned before 6 April 1998, you can also deduct indexation allowance. This is an allowance which prevents you from paying tax on gains made purely because of inflation. It applies to disposals on or after 6 April 1982 but does not apply to gains made after April 1998 (for assets disposed of after that date you can still claim it for the period up to and including April 1998).
To work out your allowance for assets disposed of after April 1998, take the initial value or allowable expense and multiply by the indexation factor published by the Inland Revenue (TaxCalc can work out indexation allowance for you). Note that the indexation allowance can only reduce or eliminate a gain - it cannot be used to create or increase a loss. For example, if your final value is £10,000, your initial value is £8,000, and your indexation allowance is £3,000, your gain will be reduced to nil - but you cannot claim a loss of £1,000.
The figure you end up is your chargeable gain (or allowable loss).
Allowing for losses
Total allowable losses for 1998-99 are deducted from the total chargeable gains for the year. If the allowable losses are greater than the chargeable gains, this loss is carried forward to be set against gains you make in future years. If the allowable losses are less than your chargeable gains, other losses can be set against the remaining gains in a strict order laid down by the Revenue:
first, you can set against your gains various types of trading losses made in 1998-99, which you have not been able to set against income. However, this is not worth doing if it would reduce your gains to below the level of the £6,800 amount of gains which you can have tax-free in any case
next, you can set off allowable losses made on disposals of assets between 6 April 1996 and 5 April 1998
finally, you can set off allowable losses made on disposals of assets before 6 April 1996.
Note that when deducting allowable losses brought forward from earlier years, you use only enough losses to reduce the gains you have made to the level of the 'tax-free' exemption (£6,800 for 1998-99). When working out your tax, TaxCalc takes just enough losses from previous years to reduce your chargeable gains to zero after deducting the tax-free exemption: any losses left-over can be carried forward to future years.
Time limit for claiming losses
Any losses made in 1996-97 or later years have to be claimed. These losses are not allowable losses until you have given notice of the amount of the loss to your Tax Inspector. The tax return (and consequently TaxCalc) gives you the ability to send a summary of your allowable losses to the Revenue.
Allowable losses for 1996-97 and later years must be claimed within five years and ten months of the end of the tax year in which they were made. This applies whether the losses are actually used during that time period or not - under current rules, as long as the Revenue are notified of the losses by the time limit, they can be carried forward indefinitely. The latest date for claiming losses made in the 1998-99 tax year is therefore 31 January 2005.
Taper relief
Taper relief reduces the chargeable gain depending on the length of time you've owned an asset since 5 April 1998. The relief is more generous for business assets (if the asset is used both for business and privately, you can claim the higher rate of relief on the part used for business).
For 1998-99 it has not yet been possible to accumulate more than one whole year. However, for assets held before 17 March 1998, an extra year is allowed. This means that for 1998-99 taper relief will only reduce your tax bill if you are disposing of business assets which you acquired before 17 March 1998.
One unwelcome consequence of the introduction of taper relief is that, because it is deducted after any losses, you can end up deducting more losses than necessary to reduce the tapered gains (after relief) to the level of the tax-free slice. However, you can allocate your losses to those gains that will qualify for the least taper relief: TaxCalc will do this automatically.
No. of whole years after 5 April Percentage of gain chargeable -
Percentage of gain chargeable -
1998 that asset has been held
business assets
business assets
1
92.5
100
2
85
100
3
77.5
95
4
70
90
5
62.5
85
6
55
80
7
47.5
75
8
40
70
9
32.5
65
10+
25
60
How much tax?
Your gains after losses and after taper relief are added together. The first slice of taxable capital gains (£6,800 in 1998-99) is free of tax. The gains above that are taxed as if they were the top slice of your income. Income here means your taxable income, less any deductions and allowances for full tax relief, but there are special rules if your total taxable income excluding savings income is within the lower-rate band (20 per cent in 1998-99). To save wasting your lower-rate band on savings income (which is taxable at 20 per cent anyway), the unused lower-rate band is set against your savings income in priority to your capital gains.TaxCalc takes these special rules into account.
Assets owned on 31 March 1982
For these assets, you normally use the market value on 31 March 1982 as the initial value. If you do this, you cannot deduct allowable expenses incurred before that date. However, you can use the market value of the asset when you got it as the initial value and deduct expenses, including those incurred before 31 March 1982, if this would result in a lower gain (eg if the asset dropped in value between the date you acquired it and March 1982). Whichever method is used, indexation allowance runs from March 1982 to April 1998 only. And note that you cannot use the market value when you got the asset if you have already elected to have all your assets treated as if you had acquired them on 31 March 1982.
If you are married
Husband and wife are taxed separately for CGT and each get their own tax-free slice. However, on gifts between husband and wife there is no tax to pay at the time of the gift. When the recipient finally disposes of the asset, the tax is worked out over the whole period during which both partners owned it. In this case, remember to use the date the first partner acquired the asset as the date of acquisition, and its value at that date as the initial value. The taper relief on the subsequent disposal is based on the combined period of ownership.
Special treatment for some assets
Owner-occupied property
Gains on your only or main home are usually tax-free, but may not be if you do not live there all the time you own it or if you let part or all of it. See Inland Revenue Help Sheet IR283 Private Residence Relief (available on the 'Help' menu of TaxCalc).
If you own more than one home, you can usually choose which home is treated as your main tax-free one. Preferably choose the one on which you think you'll make the largest gain. You must tell your tax office of the choice within two years of buying the second home. You can change your choice, but it takes effect only from two years before the date you notify your tax office.
Business assets
You may be able to defer the tax, or get tax relief if you are disposing of a business on retirement. See Inland Revenue Help Sheets IR 289 Retirement relief and Capital Gains Tax and IR290 Business asset roll-over relief.
Shares
If you bought shares of the same type in the same company at different times, and dispose of only part of them, there are special rules for deciding which ones you have sold. See Inland Revenue Help Sheet IR284, Shares and Capital Gains Tax and IR285, Share reorganisations, company takeovers and Capital Gains Tax (both of which are available in the Help Sheets section of TaxCalc's Help files).
Note that recent tax changes have largely put a stop to 'bed and breakfasting' where shares are sold at the end of one tax year and bought back the same day, in order to use up unused tax-free slices and create a new, higher price from which to work out any future gain. The new rules say that if you buy back shares within 30 days of selling them, the sale and purchase are ignored for capital gains tax purposes.
Building society mergers, conversions and takeovers
If you have
received cash as a result of a merger of two or more societies, or
received cash, or been issued with shares, or received both cash and shares, as a result of either:
- a conversion of a building society to a company or
- a takeover of a building society by a company
there may be a liability to either income tax or capital gains tax.
The building society concerned should be able to tell you whether there is any tax liability, but if not, contact your tax office or tax adviser for guidance.
©Which?-IDP 1999
Last updated 05/05/03