This two-part article is relevant to those of you who are taking TX-UK in an exam in the period 1 June 2024 to 31 March 2025, and is based on tax legislation as it applies to the tax year 2023-24 (Finance Act 2023).
The Finance (No. 2) Act 2023 did not receive Royal Assent by the exam cut-off date of 31 May 2023, and is therefore not examinable as regards exams falling in the period 1 June 2024 to 31 March 2025.
CGT is charged when there is a chargeable disposal of a chargeable asset by a chargeable person.
A chargeable disposal includes part disposals and the gift of assets. However, the transfer of an asset upon death is an exempt disposal. A person who inherits an asset will take it over at its value at the time of death.
All forms of property are chargeable assets unless exempt. The most important exempt assets as far as TX-UK is concerned are:
In determining whether or not an individual is chargeable to CGT, it is necessary to consider their residence status.
For individuals, the basic CGT computation is quite straightforward.
Capital losses are set off against any chargeable gains arising in the same tax year before deducting the annual exempt amount. This order of set off can lead to capital losses being wasted if gains would otherwise have been covered by the annual exempt amount.
Any unrelieved capital losses are carried forward, but in future years they are set off against any chargeable gains after deducting the annual exempt amount. This means that brought forward capital losses are never wasted in the same manner as current year capital losses.
The rate of CGT is linked to the level of a person’s taxable income. Taxable gains are taxed at a lower rate of 10% where they fall within the basic rate tax band of £37,700, and at a higher rate of 20% where they exceed this threshold.
However, for chargeable gains arising from the disposal of residential property, the lower rate is 18% and the higher rate is 28%. These residential property rates apply where a gain arising from the disposal of residential property is not fully covered by the private residence exemption (see later in this article).
Remember that the basic rate tax band is extended if a person pays personal pension contributions or makes a gift aid donation.
A payment on account must be made within 60 days of the date of disposal (completion date), where CGT is payable in respect of a disposal of residential property. A return must be submitted to HM Revenue and Customs (HMRC) at the same time.
The calculation of the payment on account takes into account the annual exempt amount, any capital losses incurred in the same tax year prior to the disposal of the residential property, plus any brought forward capital losses. Any other chargeable gains and capital losses incurred subsequent to the disposal of the residential property are ignored.
It is necessary to make an estimate as to how much of the taxpayer’s basic rate tax band will be available for the tax year.
CGT is otherwise collected as part of the self-assessment system, and is due in one amount on 31 January following the tax year. Therefore, a CGT liability for the tax year 2023-24 will be payable on 31 January 2025.
Self-assessment payments on account are not required in respect of CGT.
A residential property gain is still included in the self-assessment computation, with the payment on account deducted from the total CGT liability.
Although a payment on account is required in respect of a residential property gain, additional CGT may be payable on 31 January following the tax year. If a repayment is due, this will be claimed when the self-assessment tax return for the tax year is submitted.
As shown in example 7 above, where a person has both residential property gains and other gains, the annual exempt amount and any capital losses should initially be deducted from the residential property gains. This approach will save CGT at either 18% or 28%, compared to either 10% or 20% if used against the other gains.
However, how any unused basic rate tax band is allocated between chargeable gains does not make any difference to the overall CGT liability (since the differential is 10% in both cases).
Business asset disposal relief
A reduced CGT rate of 10% applies if a disposal qualifies for business asset disposal relief. This rate applies regardless of the level of a person’s taxable income. Business asset disposal relief can be claimed when an individual disposes of a business or a part of a business as follows:
The relief covers the first £1 million of qualifying gains which a person makes during their lifetime. Gains in excess of the £1 million limit are taxed as normal at the 10% or 20% rates.
The qualifying conditions must be met for a period of two years prior to the date of disposal in order for business asset disposal relief to be available.
Although chargeable gains which qualify for business asset disposal relief are always taxed at a rate of 10%, they must be taken into account when establishing which rate applies to other chargeable gains. Chargeable gains qualifying for business asset disposal relief therefore reduce the amount of any unused basic rate tax band.
The annual exempt amount and any capital losses should be initially deducted from those chargeable gains which do not qualify for business asset disposal relief (giving preference to any residential property gains). This approach will save CGT at 20% (18% or 28% if residential property gains are involved), compared to just 10% if used against chargeable gains which do qualify for relief.
There are several ways of presenting computations involving such a mix of gains, but the simplest approach is to keep gains qualifying for business asset disposal relief and other gains separate.
Where the £1 million lifetime limit is exceeded, gains in excess of the limit will be subject to the normal rates of capital gains tax.
Transfers between spouses (and between partners in a registered civil partnership) do not give rise to any chargeable gain or capital loss. This does not mean that the disposal is exempt from CGT; it means that there is no charge at the time of the transfer as the transferee takes over the original cost of the asset.
It may be the case that one spouse has not utilised their annual exempt amount and/or basic rate tax band for a particular tax year. It could therefore be beneficial to transfer an asset to that spouse before its disposal, or to put an asset into joint names prior to disposal.
When just part of an asset is disposed of, the cost must be apportioned between the part disposed of and the part retained (by reference to the current market value).
With part disposals, care must be taken with enhancement expenditure and incidental costs as these could relate to the whole asset or just to the part being disposed of.
Special rules apply to chattels. A chattel is tangible moveable property.
Wasting chattels (except chattels which are eligible for capital allowances) are exempt from CGT.
Non-wasting chattels (and chattels eligible for capital allowances) are only exempt if they are both bought and sold for less than £6,000.
Where a non-wasting chattel is sold at a loss and the sale proceeds are less than £6,000, the amount of allowable capital loss will be restricted. If capital allowances have been claimed on a chattel, no capital loss will be available at all.
A wasting asset is one which has a remaining useful life of 50 years or less. The cost of such an asset must be adjusted for the expected depreciation over the life of the asset.
If an asset is lost or destroyed, the receipt of insurance proceeds is treated as a normal disposal. However, rollover relief is available if the insurance monies are used to purchase a replacement asset within a period of 12 months.
If the insurance proceeds are not entirely reinvested there will be an immediate chargeable gain.
If an asset is damaged, the receipt of insurance proceeds is treated as a part disposal. However, if all the proceeds are used to restore the asset, a claim can be made to ignore the part disposal rules.
A gain on the disposal of a private residence is exempt where the owner has occupied the house throughout the whole period of ownership. The final nine months of ownership are always treated as a period of occupation. The following periods of absence are also deemed to be periods of occupation:
(a) Periods up to a total of three years for any reason.
(b) Any periods where the owner is required to live abroad due to their employment.
(c) Periods up to four years where the owner is required to live elsewhere in the UK due to their work.
These deemed periods of occupation must normally be preceded and followed by actual periods of occupation. However, the condition that the period of absence must be followed by a period of occupation is relaxed in the case of (b) and (c) if the owner is unable to return because they are required to reside elsewhere due to the terms of their employment.
Letting relief is only available where a property is let out and the property owner is in shared occupancy with the tenant.
There is therefore no relief where the whole property is let out without the owner also being in residence.
The second part of the article will cover shares, reliefs, basic CGT planning and the way in which gains made by limited companies are taxed. It also contains some exam guidance and a test of your understanding.
Written by a member of the TX-UK examining team