Capital gains tax service
Written by Ray Coman
Capital gains usually occur when an asset is sold for more than it costs to buy. Typically, the asset is a property or some other investment like shares. Unless it’s been the owner’s home throughout the period of ownership, a house will be reported on a special capital gains tax return. Other types of holdings are reported on a tax return. What follows is a step by step guide for calculating capital gains tax.
A gain is the increase in value between when the thing was acquired and when it was disposed of. Assets are usually bought, but they can also be acquired by way of gift or inheritance. When gifted, market value on the date it was given is used to establish taxable gain. For inheritances, that market value is called probate. The tax implications of assets which leave a person’s possession for reason of damage or destruction is addressed in a separate report on the tax implications of insurance payouts.
A gain occurs when an asset is traded for another asset (except in certain limited circumstances where business asset replacement relief applies.). Therefore, where one type of crypto is exchanged for another type of crypto a gain gas occurred- even if the holder has not cashed out (into a fiat currency.). For the same reason, there is a cash flow drawback to divestment of one rental property to free cash for the purchase of another, especially as stamp duty will also likely be payable.
Certain types of assets are not exempt from tax. Any gains made in an ISA or pension are tax exempt. A home is not taxable unless it has not been used as the owner’s home throughout the period of ownership. Personal possessions, such as jewellery and antiques are exempt if the item is worth less than £6,000 and this is expanded upon in the article on chattels. Assets given away on death are not liable to capital gains tax, although they are liable to inheritance tax. Transfers between spouses or civil partners are exempt from CGT. A selection of assets including cars, even vintage cars, premium bonds, gilt edged securities, gold bullion and winnings from betting do not give rise to capital gains tax. Certain types of spread betting accounts are specially tax exempt. If an asset is exempt from capital gains tax any losses are not allowable. The section below on losses explains tax relief for losing money on an asset.
Gains are reported on a capital gains tax return in the case of residential property, or capital gains tax supplement of the tax return for other types of asset.
For nearly all types of gain, costs of purchase and costs of selling can be deducted from taxable gain. For physical assets, usually buildings, improvement costs are also tax deductible. Legal fees, broker fees and other transaction costs are usual examples of what is deducted in arriving at net sales, or total costs (including cost of purchase.)
It is a common misconception that a mortgage or borrowing costs are tax deductible. Sometimes buying and selling is trading rather than investment activity. The distinction between trading and investing is covered in the report on badges of trade. The circumstances in which interest for instance on borrowing to trade on the margin is covered in a guide on the tax deductibility of interest for retail traders.
Where a part disposal is made, the calculation is more complex. The most common scenario is when some but not all shares of a particular holding are sold. In that case, average cost is compared to proceeds to establish gain. Shares which are purchased (in the same company or listing) 30 days after disposal are matched with the earlier disposal. This “bed and breakfast rule” is intended to prevent investors disposing of and shortly after repurchasing the same share with the sole, or main, purpose of using the annual exemption. The system governing which share is treated as disposed of is called matching rules.
A loss occurs when an asset is sold - or given away- for less than it was purchased for. Losses are first set against any gains of the same tax year. It is the result, or the net gain, which is taxable. An overall loss is carried forward and set against the next available gains of a future year after deduction of the annual exemption. It is rare that a capital loss can be set against other income, but an exception is made for qualifying losses on an EIS type share.
Business assets replacement relief (or roll over), hold over relief on gifts, business asset disposal relief on disposal of at least 5% of a business, or EMI shares and reinvestment of proceeds into Enterprise Investment Scheme shares. For properties that have been occupied by the owner for part of the period in which they are owned a principal private residence relief is available
It is possible to deduct the annual exemption from gain in determining the taxable amount. Any unused exemption from preceding tax years is not available. Use it or lose it. The exemption is applied to all taxable gains. Tax can be mitigated by disposing of gains arising in different tax years.
Gains after deduction of expenses, losses, reliefs and the annual exemption are referred to as taxable gains. It is to this that the CGT rates are applied.
The rate of tax applicable to capital gains on residential property is 28% to the extent combined income and gains are over the higher rate tax threshold and 18% otherwise. The higher rate of tax for other types of gain is 20% but otherwise is at 10%. A 10% rate applies to gains that qualify for business asset disposal relief.
Capital gains tax needs to be calculated via the taxpayer, often with the support of an accountant or tax advisor. The system is referred to as self assessment. HMRC select certain gains for enquiry to check that the gain has been properly reported. Residential property is declared on a capital gains tax return due within 60 days of completion. 60 days after completion is also the due date for any resulting tax. Other gains are reported on a Tax Return in a supplement for capital gains. Date of exchange determines the tax year in which the disposal occurs. Exchange is the date on which contracts become unconditional and can be some time before a vendor gets paid. Disposals occurring up to and including 5 April occur in that tax year. The earliest a Tax Return can be filed is 6 April following the end of the rax year. The deadline is 31 January following the end of the tax year. This is also the due date for any tax payable. Penalties and interest apply for late payment.
The due date is three months after a notice to file has been sent (where HMRC have been late in issuing a notice to file a Return.). That due applies if after the usual 31 January. It should be noted that -if applicable- a Tax Return is due even if not requested by HMRC, and late notification penalties apply.
Any additional tax arising because of HMRC enquiry is due within 30 days that the additional liability been determined. Time to pay arrangements can be negotiated with HMRC.
Advanced planning- potentially with the assistance of a tax professional- can help mitigate liability. Various steps can be taken to reduce or even avoid capital gains tax.
- Owning assets in a pension or ISA, which can be maximised by making use of allowances before the end of the tax year.
- Disposing of loss making assets in the same year as assets that make a gain. This is key as capital losses cannot be carried back.
- Dispose of so much investment as gives rise to the annual exemption before the end of the tax year. Spreading disposals over a number of years reduces exposure to tax. A similar asset can be immediately reacquired or the exact same asset can be reacquired after 30 days and the disposal. This gradually increases the base cost of shares.
- Priority should be afforded to tax exempt assets such as a home. A pension is tax efficient for longer term investment.
- The exemption on spousal transfers can be used to powerful effect, for instance by moving property into joint names prior to disposal.
- Non domiciled individuals who have been UK resident for less than seven years, could consider remittance basis for foreign gains where these are not brought into the UK
- Conversely, delaying certain disposals could suit certain emigrating UK residents, provided the absence from the UK is at least five years.
The rate of tax applicable to a gain is lower than that usually attached to income. Tax can be saved by investing in assets for capital appreciation than for income yield . So called growth stocks or property in more sought after areas also tend to be riskier especially in an overbought market.
At Coman&Co, we can help with:
- How to plan assets transfers before and after marriage, separation and divorce
- Reallocation of assets in anticipation of retirement
- The most tax efficient application of loss reliefs, allowances and exemptions
- Capital gains tax forecast based on different scenarios
- Tax implications of jointly held assets with siblings
- Business asset disposal relief, roll over relief, and EIS relief arising from reinvestment of proceeds into certain type of unquoted shares
- Capital gains on shares acquired because of employment.
- Gains in trusts
- Foreign assets held by non-UK domiciled individuals, non-residents and those considering emigration.