General Capital Gains Tax Principles
Assets which are liable for Capital Gains Tax include all forms of property (unless it is specifically exempt), certain gifts made, inheritance, shares and assets transferred through divorce or civil partnership which has been dissolved.
The main assets that it applies to are land, buildings, shares and business assets including goodwill.
Capital Gains Tax rates
In the UK, Capital Gains Tax is charged at the rate of 28% where the total taxable gains and income are above the income tax basic rate band. Below that limit, the rate is 18%. For trustees and personal representatives of deceased persons the rate is 28%.
Capital Gains Tax reliefs
There are several different tax reliefs which can reduce the chargeable gain:
- 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.
Absorption of capital losses
Any capital losses made on a chargeable transaction are netted off against any capital gains made in the same tax year. They are applied before the annual exemption. Unused capital losses are carried forward against future capital gains; they cannot normally be carried back. To make use of a capital loss it must be reported to HMRC within five years and ten months of the end of the tax year in which it arose.
An annual exemption of £11,000 for 2014/15 is available to individuals so total gains made in the tax year up to this amount are exempt. Any unused annual exemption is lost and cannot be carried forward or transferred to another person.
- 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 normally 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 acquisition cost and disposal proceeds do not exceed £6000;
- Certain 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 pay-outs for miss-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.
UK Capital Gains Tax rules for British expats
It used to be the case that by simply leaving the UK for a complete tax year, and then disposing of any profitable assets (property, shares etc.) during that year could relieve you of the burden of Capital Gains Tax.
However, one year is no longer a sufficient length of time. An individual now has to be non-resident for a minimum of five complete UK tax years to take advantage of this rule. Proper planning is clearly very important in these situations as a few months miss calculation here or there can make a significant difference in your tax liability.
Sometimes it may even be worth taking an extended holiday rather than risk coming back to the UK too soon, when significant asset sales have occurred.
Even though you may be deemed non-resident for income tax purposes, you are treated as temporarily non-resident for capital gains tax purposes for up to 5 years. Certain gains made during that time are taxed in the year you return to the UK if within five years.
If, however, the asset was acquired after you had left the UK, then the gains are not subject to UK Capital Gains Tax. When double taxation agreements are taken into account, capital gains may be completely exempt from UK tax but taxable in your host country. As such there is still room for planning where the host country charges a lower rate than the UK.
New Capital Gains Tax rules being introduced in 2015
The UK tax loophole which allowed overseas investors and British Expats to avoid Capital Gains Tax (CGT) on the sale of residential property is soon to be closed.
The new rule, which comes into effect in April 2015, will particularly affect British Expats looking to sell a property whilst living overseas.
Make sure you understand the new Capital Gains Tax Rules and the full array of options which could reduce your exposure to all types of UK and international taxation - now and in the future - by applying for a free tax consultation with a leading British independent financial adviser in your region.