UK capital gains tax

Capital Gains Tax


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Liability to capital gains tax (CGT)

CGT is charged on net gains, ie 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.

Disposal of assets

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 certain gifts 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.
Indexation allowance (see Capital Gains Tax: Indexation allowance).

Losses

Losses brought forward from previous tax years can offset gains. For individual taxpayers, such losses do not reduce net gains below £7,700, so the annual exemption is not wasted. (See Corporation Tax: Capital gains by companies.)

Rate of tax

The first £7,700 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 £1,920, 20% on the next £27,980 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 it 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.

Indexation allowances to April 1998

	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sept	Oct	Nov	Dec
1982	-	-	1.047	1.006	0.992	0.987	0.986	0.985	0.987	0.977	0.967	0.971
1983	0.968	0.960	0.956	0.929	0.921	0.917	0.906	0.898	0.889	0.883	0.876	0.871
1984	0.872	0.865	0.859	0.834	0.828	0.823	0.825	0.808	0.804	0.793	0.788	0.789
1985	0.783	0.769	0.752	0.716	0.708	0.704	0.707	0.703	0.704	0.701	0.695	0.693
1986	0.689	0.683	0.681	0.665	0.662	0.663	0.667	0.662	0.654	0.652	0.638	0.632
1987	0.626	0.620	0.616	0.597	0.596	0.596	0.597	0.593	0.588	0.580	0.573	0.574
1988	0.574	0.568	0.562	0.537	0.531	0.525	0.524	0.507	0.500	0.485	0.478	0.474
1989	0.465	0.454	0.448	0.423	0.414	0.409	0.408	0.404	0.395	0.384	0.372	0.369
1990	0.361	0.353	0.339	0.300	0.288	0.283	0.282	0.269	0.258	0.248	0.251	0.252
1991	0.249	0.242	0.237	0.222	0.218	0.213	0.215	0.213	0.208	0.204	0.199	0.198
1992	0.199	0.193	0.189	0.171	0.167	0.167	0.171	0.171	0.166	0.162	0.164	0.168
1993	0.179	0.171	0.167	0.156	0.152	0.153	0.156	0.151	0.146	0.147	0.148	0.146
1994	0.151	0.144	0.141	0.128	0.124	0.124	0.129	0.124	0.121	0.120	0.119	0.114
1995	0.114	0.107	0.102	0.091	0.087	0.085	0.091	0.085	0.080	0.085	0.085	0.079
1996	0.083	0.078	0.073	0.066	0.063	0.063	0.067	0.062	0.057	0.057	0.057	0.053
1997	0.053	0.049	0.046	0.040	0.036	0.032	0.032	0.026	0.021	0.019	0.019	0.016
1998	0.019	0.014	0.011	-	-	-	-	-	-	-	-	-

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.

Example Allowable expenditure of £1,000 in June 1984. Indexation allowance: £1,000 x 0.823 = £823.

Identification of securities

Shares and securities disposed of 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.

Taper relief

Taper relief reduces a chargeable gain by reference to how long the asset has been held. It is applied to net gains after any indexation allowance. Losses are deducted so as to minimise the total chargeable gain. Different rates of taper relief apply to business assets and non-business assets. Business assets include:

Assets used in an unincorporated business.
All shareholdings in unlisted trading companies, including AIM companies.
Any shareholding of 5% or more in a quoted trading company and any shareholding in such a company held by any employee or director.
Employee holdings of up to 10% in non-trading companies.
Assets used in the company's trade where the shares are business assets in relation to the individual.

Number of complete years after 5 April 1998 for which asset is held*	Business assets % of gain taxable	Non-business assets % of gain taxable

0	100.0	100
1	50.0	100
2	25.0	100
3	25.0	95
4	25.0	90
5	25.0	85
6	25.0	80
7	25.0	75
8	25.0	70
9	25.0	65
10 or more	25.0	60
*Non-business assets acquired before 17 March 1998 qualify for an extra year's worth of taper relief.

Example A business asset acquired for £10,000 in May 1985 is sold for £45,000 net of expenses in June 2002. The asset qualifies for maximum taper relief, so only 25% of the gain is charged.

	£	£
Sale proceeds		45,000
Less: allowable expenditure	10,000
indexation allowance	7,080
		(17,080)
Gain before taper relief		27,920
Percentage of gain taxable		25%
Taxable gain = 0.25 x £27,920		£6,980

Main exemptions

Gains on certain assets are exempt (and losses not allowable).

An individual's or married couple's only or main residence.
Certain works of art, historic buildings and their maintenance funds, decorations for valour, private motor cars.
Enterprise investment scheme and venture capital trust shares (see Income Tax: Tax privileged personal investments).
Shares issued after 18 March 1986 under the Business Expansion Scheme.
Government securities, loan stocks, qualifying corporate bonds and National Savings and Investments certificates.
Individual savings account and personal equity plan investments.
Life assurance policies disposed of by their original owner, foreign currency for personal expenditure.
Betting and lottery wins and compensation or damages for personal wrong or injury.
Assets transferred to charities or to trustees for the benefit of employees.
Shares held by the trustees of share incentive plans up to the point they are transferred to the employee (see Income Tax: Fringe benefits for employees).

Other main reliefs

Retirement relief may be available where an individual aged at least 50 or retiring on grounds of ill-health disposes of qualifying business assets. These include an employee's shareholding of 5% or more in their employing company.
Maximum relief may be available where the individual has qualified for the previous ten years. In 2002/03, the relief is limited to the first £50,000 of gains with 50% relief on the next £150,000 of gains. There is no relief for disposals after 5 April 2003. Retirement relief is given before business assets taper relief.
The disposal of tangible moveable property (chattels) is exempt from CGT provided that the consideration is not more than £6,000. Otherwise, the chargeable gain is the lesser of the actual gain or 5/3 of the difference between £6,000 and the consideration. The disposal of chattels with a predictable life of less than 50 years is exempt from CGT provided the asset did not qualify for capital allowances.
Reinvestment relief is available on all chargeable gains made by individuals who reinvest the gain in shares eligible for the enterprise investment scheme (even if income tax relief is not given) or shares in a venture capital trust. All or part of the gain (depending on the amount reinvested) is deferred until the shares are sold, subject to certain qualifying conditions being met. The reinvestment must be within a period starting one year before and ending three years after the disposal (one year after for venture capital trust reinvestment).
Rollover relief may be available when disposing of a qualifying business asset and using the proceeds to acquire another qualifying business asset. All or part of the chargeable gain is postponed until the replacement asset is disposed of without replacement.
CGT on gifts of certain assets may be held over, ie the gain is postponed until the recipient disposes of the asset. They include: assets used in a business; shares in the transferor's family trading company (except when the gift is to another company), and assets owned by the transferor and used in the company's trade; certain agricultural property; and transfers that are not potentially exempt for IHT purposes (eg to discretionary trusts).

Residence and domicile status

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.

UK resident individuals who are resident and ordinarily resident outside the UK for less than five tax years starting after 16 March 1998 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, or in respect of periods of non-residence starting before 17 March 1998.
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.