Capital Gains Tax in the United Kingdom

The introduction of capital gains tax to the United Kingdom was engineered by the fast growth in the value of property after World War II. This resulted in property developers deliberately closing off office blocks, leaving them empty so that no rental income could be established in order to make greater capital gains. The system of capital gains tax was thus introduced in 1965 by Chancellor James Callaghan.

Overview

Persons who are residents in the United Kingdom or trustees of various trusts are subject to 18% capital gains tax. From June 23, 2010, the percentage increased from 18% to 28% for individuals paying more than the basic rate of income tax.

Capital gains tax exceptions exist however. Investments in certain start-up businesses are exempt from paying capital gains tax. Some other gains are permitted to be rolled over upon re-investment. Principal Private Residences, holdings in ISAs or gifts also fall under exceptions where capital gains tax is concerned. Also, where eligible, Entrepreneurs’ Relief allows individuals who have been involved with a trading company for up to a year and have acquired at least 5% shareholding to pay a lower rate of capital gains tax (10%). Notably, only shares in companies with trading properties are acceptable under the Entrepreneurs’ Relief scheme, and not companies with investment properties.

Each individual is allotted an annual capital gains tax allowance: profits lesser than the allowance are exempted from CGT and losses to capital can be set against capital gains in other ventures before taxation. All individuals in the UK are exempted from tax up to a specified amount of profit on capital in a year.

Capital Gains Tax

Capital Gains Tax (CGT) is a tax payable on increase in the worth of possessions in the period of ownership. Example of possessions which capital gains can be paid on include a second home, shares or antiques. However, capital gains tax is usually not payable on gains made on the sale of a main or only home. If the individual owns more than one home, CTG is charged on the second or on the others.

Antiques, shares, second homes and precious metals sold at a substantial profit could be liable to capital gains tax if enough money is made from them.  Working out exactly how much needs to be paid is quite complicated. Capital gains tax is only necessary if a certain amount of profit is made from the sale of possessions in any given tax year.

Deciding on Rate of Capital Gains Tax

The rate of capital gains tax to be paid will depend on an individual’s overall earnings. The government is in charge of fixing the amount of tax for profit made in each year. In most cases, an individual’s profit is the amount an item is sold for subtracted from its initial price i.e. tax would only be paid on the excess.

The principles on capital gains tax can be a lot complicated. Capital gains tax bill might be necessary in any of the following conditions:

  • When home development projects are carried out on a home for instance, converting a portion of it into flats
  • In cases where part of a garden and total plot is bigger than half a hectare (1.2 acres)
  • When part of a home is used exclusively for business
  • When the individual lives far away (however, gains relating to certain absences are tax-free)
  • In cases where a home is bought or improved for the purpose of profit-making

Working Out Capital Gains Tax

Capital Gains Tax needs to be paid in the event of the sale of an asset and the total taxable gains are greater than the annual Capital Gains Tax Allowance. To work out Capital Gains Tax,

The gain for each asset or the gains of the gains from a jointly owned asset will be worked out first. Personal possessions, shares, business assets or property that have been disposed of in a tax year should be calculated. A tax year runs from April 6 of a current year to April 5 of the next. The gains from each asset will then be added together and all allowable losses subtracted. If taxable gains end up to be above the CGT allowance, then the individual will need to report and pay Capital Gains Tax. However, total taxable gains which fall under the CTG allowance do not need to be taxed.

Companies in the UK

The rules regulating capital gains tax in the United Kingdom for both companies and individuals can be found in the 1992 Taxation of Chargeable Gains Act. Companies are liable to pay corporation tax on their “chargeable gains”. The quantity of these gains are calculated using the principles of capital gains tax in the United Kingdom. Taper relief cannot be claimed by companies, but an indexation allowance can be collected to offset the consequences of inflation.

On April 1, 2002, a corporate substantial shareholdings exemption was introduced for holdings of at least 10% in another company’s shares and at least 30% for shares belonging to a life assurance company’s long term insurance fund. Almost all of the corporation tax made on chargeable gains is paid by life assurance companies paying tax on I minus E basis, making it an effective form of UK participation exemption.

Changes in Capital gains Tax Percentage

From 6 April, 2008 changes to applicable rates of capital gains tax were put in place. The introduction of the changes was because of the fact that the UK government saw that private equity firms made exorbitant profits on excessive taper relief on business assets. The changes called for:

  • Cessation of taper relief while the annual exemption entitlement of the individual’s annual income continued
  • A single rate of 18% capital gains tax to be applied to chargeable gains.

Individual marginal (Income Tax) rate of tax for the purpose of capital gains tax would therefore be replaced by the new single rate of 18%.

The changes in the required CTG percentage were however criticised by certain groups including the Federation of Small Businesses, concerned about its possible consequences. One of such includes raising capital gains tax liability of small businesses which would discourage entrepreneurship in the UK.

Related Questions

Published on 9th June 2017

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