A contractor’s guide to Capital Gains Tax
A Capital Gain (or loss) arises when there is a “Chargeable Disposal” of a “Chargeable Asset” by a “Chargeable Person”.
But be aware, this is a very simple definition of Capital Gains Tax which perhaps plays down what can be a very complex area of tax law, writes Tom Wallace, director of tax investigations at HMRC dispute advisory WTT Consulting.
Who is a Chargeable Person?
UK resident individuals, trusts, and companies are all within the scope of Capital Gains Tax (CGT), although companies pay corporation tax on any gain rather than CGT.
Generally, non-UK tax residents do not pay CGT regardless of where the asset is situated, however there is an exemption to the rule for transactions in UK land and buildings.
What is a Chargeable Asset?
Most assets except sterling in cash form are chargeable assets for CGT purposes.
The most common type of assets we see held are shares, land and buildings, and more recently, cryptocurrency. There are however several specific exemptions in the legislation, of which the most useful to know about are:-
- Wasting Chattels (tangible moveable property with a useful life expectancy of less than 50 years)
- Foreign Currency acquired for personal expenditure
- Shares held in ISA, VCT, EIS or SEIS wrappers as long as certain conditions are met.
What is a Chargeable Disposal?
A chargeable disposal occurs when a chargeable asset is sold, gifted, swapped, or lost or destroyed with compensation received.
Death is not a chargeable disposal event, however the probate value becomes the new base cost of the asset for the purposes of calculating any gain on future disposal.
A transfer between husband and wife, or civil partners, is a Chargeable Disposal but is treated as taking place at no gain/no loss. This means that such transfers do not trigger and immediate CGT charge. This can be a useful tax planning tool to utilise any unused annual exemption or lower tax bands.
How is CGT calculated?
A gain or loss is calculated by taking the proceeds received for the disposal, and deducting the cost of acquiring the asset (‘the base cost’). In calculating these two figures you can include the incidental costs of the disposal such as legal and valuation fees, and the associated costs of acquisition such as stamp duty and commission.
The cost of any enhancement to the asset can also be included, as long as the expenditure is reflected in the state or nature of the asset at disposal. For instance, if you built an extension to a rental property, the cost of the work could be reflected in the base cost of the property when calculating any gain. However, if you were to demolish the extension and therefore it was no longer part of the property when you sold it, then the cost of building could not be taken into account in the CGT calculation.
Is there a CGT annual exemption?
Under HMRC’s CGT rules, any capital losses must be used against any capital gains made in the same year. Any remaining loses can then be carried forward to future years. Individuals also have an Annual Exemption each year which will mean that there is no CGT to pay if the total chargeable gains are below this exempted amount. For 2022/23, the annual exemption is £12,300.
Basic rate taxpayers pay tax of 10% on any gains. Higher and additional rate taxpayers suffer CGT at 20%. Where residential property is disposed of, then it is subject to CGT at 18% and 28% respectively.
A reduced rate of CGT of 10% is available where the disposal is eligible to claim Investors’ Relief or Business Asset Disposal Relief (formerly Entrepreneurs Relief). But there are lifetime limits that once exceeded, mean that the reduced rate can no longer apply.
Can the gain be deferred or exempted?
Where a business asset is disposed of, then it is possible for the donor and the donee to make a joint election to claim gift relief on the transfer. This has the effect of rolling over the gain against the base cost of the asset when later disposed of by the new owner -- in effect, shifting any gain on to the person in receipt of the gift.
Where you dispose of land and/or building, or plant and machinery used by a business, then you may be eligible to claim ‘roll over relief’ if you reinvest the proceeds into certain replacement assets for use in the business. This will have the effect of delaying all or part of the gain until the replacement asset is sold.
While the above deferral reliefs are useful, they are of course restricted to situations where no consideration is received or where proceeds are being reinvested in a business. A more flexible deferral relief that is available to be used against gains on the disposal of any asset is EIS, SEIS, and Social Enterprise Reinvestment Relief. Where the proceeds of a disposal are used to invest in shares of any of these, then the gain can be frozen until those shares are disposed of, at which point the earlier gain will also crystalise.
In addition, Principle Private Residence Relief will exempt any capital gain on the disposal of a residential property for the period that you lived in it, if it was your only or main residence, plus the final nine months regardless -- as long as it was your main home at some point. Certain periods of absence may also be treated as ‘deemed occupancy,’ such as when you have been abroad by reason of your employment.
Reporting and paying CGT to HMRC
Where you complete a tax return, any gain or loss can be reported on that within the normal self-assessment time limits. Any tax due will be payable by January 31st following the end of the tax year in which the gain arises.
Furthermore, any gain from UK residential property must be reported to HMRC and a provisional payment of the tax made within 60 days of the date of disposal. The gain must also be reported on the annual tax return.
For individuals who do not complete a self-assessment tax return, a real-time transaction return can be submitted using the Government Gateway. This can be made at any time before December 31st following the end of the tax year that the disposal was made in. HMRC will then advise how the tax should be paid by the due date of the following January 31st. Should that advice not be clear, or correct in your view, and for any other CGT queries, consult a reputable, trusted or chartered tax advisory for guidance tailored to your individual circumstances.