Introduction »

Disposals and 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 CGT annual exemption results in the first £10,600 of gains, for 2011/12, being tax free. CGT is payable at 18% where total taxable gains and income, after taking into account all allowable deductions including losses, personal allowances and the CGT annual exemption are less than the upper limit of the income tax basic rate band (£35,000). CGT payable at 28% applies to gains or any parts of gains above this limit. These rates do not apply to gains eligible for Entrepreneurs’ Relief (see below). Such gains remain chargeable at 10%.

Certain other CGT reliefs allow chargeable gains to be deferred for a period of time such as gains deferred under the Enterprise Investment Scheme.

In working out the CGT due, taxpayers will be able to deduct losses and the annual exemption in a way which minimises the tax due.

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

Qualifying gains are taxed at a 10% rate of tax. In addition the amount of gains that can qualify for relief has been increased since it was introduced in April 2008. The original £1 million lifetime limit was increased twice in 2010/11 initially to £2 million then £5 million. The limit from 6 April 2011 is now £10 million.

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.

Introduction »