An Introduction to Capital Gains Tax (CGT)
Chargeable assets include all forms of property unless it is specifically exempt. The main assets it tends to apply to are land and buildings, shares and business assets including goodwill. CGT can be very complex and the rules are far more detailed that can be explained in this brief summary.
How a Capital Gain occurs
A capital gain occurs when the value of an asset at the date it is disposed of is higher than when it was acquired. An asset can be disposed of either by sale or by gift. If you give away an asset away in an uncommercial transaction, the market value will replace any actual consideration paid.
For assets acquired before 31 March 1982 the cost is usually taken to be the value on that day, although actual cost can be used in some circumstances.
The following also reduce the amount of the chargeable gain…
- Incidental costs of acquisition;
- Expenditure to enhance the value of the asset;
- Incidental costs of disposal; and
- Tax reliefs and allowances (see below).
There are several different tax reliefs which can reduce the chargeable gain, including…
- Rollover/holdover relief on replacement of business assets – allowing you to defer the CGT on a gain of a business asset where this is matched with a replacement of a new business asset in the period commencing one year before and ending three years after the disposal.
- Business incorporation relief – available when you transfer your business into a limited company in exchange for shares.
- Holdover gift relief – on some gifts of business assets, or gifts made into trusts mean the tax does not become payable until the person, or trustee who receives the gift disposes of it.
- Entrepreneurs’ relief – for disposals after 5th April 2008. This allows disposal of a material part or all of your business to have the CGT rate reduced to 10%. There is a lifetime limit which from 6 April 2011 is £10million.
There are some other tight restrictions to entrepreneur relief. It applies to gains made after 6 April 2008. From 6 April 2011 the relief applies to the first £10million of qualifying lifetime gains. Gains in excess of this limit or which do not qualify for other reasons will be taxed at 10% or 20% (18% or 28% for residential property and carried interest).
These are the main exemptions from (CGT)…
- Normally the sale of your only or main residence is exempt, although it can become partly chargeable in some circumstances such as if it is let out or used for business purposes;
- Transfers of assets between husband and wife or civil partners. Such transfers are treated as being made at no gain/no loss;
- Most chattels whose value decreases over time (called wasting assets);
- Non wasting and business chattels where the disposal proceeds do not exceed £6,000;
- Private motor cars;
- Gifts to charity and certain amateur sports clubs;
- SAYE contracts, savings certificates and premium bonds;
- Betting winnings and prizes including the lottery;
- Compensation for damages for personal or professional injury;
- Some compensation payouts for mis-sold pensions;
- Life assurance policies in the hands of the original owner or beneficiaries;
- Company reorganisations and takeovers where there is a share for share exchange.
Tax Schemes Available
There are certain types of investment which have been designed with preferential tax treatments for Capital Gains Tax and Income Tax, mainly to encourage investment in new companies and also to encourage employees to own shares in the companies they work for.
Schemes include the Enterprise Investments Scheme (EIS) which gives income tax and capital gains tax relief on investments made in companies with assets worth less than £15million. A similar scheme Seed Enterprise Investments Scheme (SEIS) with similar reliefs for smaller companies.The Enterprise Management Incentive Scheme is a share option scheme which can be used to provide tax efficient targeted incentives to key employees or employee groups.