Capital Gains Tax (CGT)
Introduction
Making the most of your investments requires some understanding of CGT. CGT arises on the sale of most assets and, subject to various reliefs and exemptions, is payable on the difference between the sale proceeds and the original cost. The first £10,100 of gains, for 2009/10 (and 2010/11), are tax free. A flat rate of CGT then applies to any chargeable gain (after losses, reliefs etc) of 18%.
Some assets are exempt from CGT such as motor cars (including classic cars), personal goods such as jewellery or antiques sold for less than £6,000, UK government bonds and, crucially, your only or main home.
Where a gain is chargeable, there are a number of reliefs which could be considered mainly in relation to business assets. Such reliefs are mainly used to defer tax until a later date rather than reduce the gain permanently. Entrepreneurs’ Relief is the exception.
Entrepreneurs’ Relief
The effect of the relief is to reduce the gains liable to CGT at 18% by 4/9ths resulting in an effective rate of 10% (18% x 5/9ths). The relief is available for gains of up to £1 million for 2009/10 (£2 million for 2010/11) on qualifying business disposals by an individual over their lifetime.
Qualifying business disposals include:
- qualifying shareholdings
- the whole or part of an unincorporated business
- disposal of assets on cessation of a business
There also needs to be a qualifying period of ownership of one year up to the disposal. Where an individual makes a qualifying business disposal, relief may also be available on an ‘associated disposal’.
An ‘associated disposal’ is a disposal of an asset:
- used in a qualifying company or group of companies of the individual or
- used in a partnership, where the individual is a partner.
The ‘associated disposal’ must be part of the withdrawal of the individual from participation in the business and the available relief may be diluted due to various restrictions. Trustees may benefit from the relief but only in very limited circumstances.
Tax Planning
Specific detailed conditions apply for each type of qualifying business disposal and any associated disposal.
It is essential to maximise reliefs that various conditions are met over a period of time prior to any such disposals, so please contact us if this is likely to affect you in the future.
Main residence
An individual’s or married couple’s only or main residence is exempt from CGT. The exemption extends to grounds of up to half a hectare. Larger grounds may also be exempt.
The sale of a part of the garden or grounds for development may also be covered by the exemption. Subject to exceptions, periods of absence are chargeable but, if the main residence was let during absences, as a result of which a charge arises, a ‘letting relief’ may apply to reduce the chargeable gain.
Where an individual (or married couple) have two or more residences, only one residence at any one time can be treated as the main home for exemption. This is done by an election. Provided a particular residence has been the main home at some time, then the last three years of ownership will always be exempt. This applies even if another residence has now become the main home during this time.
