Capital Gains Tax

The present UK system of Capital Gains Tax (CGT) was introduced in 1965 by the Finance Act.  The intention back then was simply to tax individuals on the realisation (liquidation) of assets.  However, the secondary effect was a tax on the inflationary appreciation in value of these assets.

A definition of Capital Gains Tax could be:

‘A tax on chargeable gains when an individual disposes of assets’

Each UK resident has an allowance that enables him/her a certain amount of tax relief on CGT.  Any amount over and above the allowance will be charged at the appropriate rate.  The current rates can be found on the website of the HMRC on this link.

To be regarded as a UK resident:

  • A person must spend at least 6 months of a tax year in the UK or have a residence in the UK (whether it is used or not, or owned or not).
  • The person must have spent at least 3 years continually in the UK.
  • For a company to be considered resident in the UK, it must be incorporated in the UK or have its registered office and main correspondence address in the UK.

People and companies exempt from CGT are:

  • Local Authorities
  • Trade Unions
  • Non-residents, not having a business in the UK.
  • Registered Charities
  • Pension funds

The definition of ‘Disposal’ is (in the words of HMRC):

‘An asset is disposed of whenever its ownership changes or whenever the owner divests himself of his rights in or interests over that asset, for example by sale, exchange or gift’.

This includes the sale of a leasehold property interest, receiving substantial insurance money or gifts.  However, it does not include death.

To calculate the amount of Capital Gains a taxpayer will be taxed upon, the following should be subtracted from the eventual amount received:

  • The cost of original acquisition.
  • Any expenditure made to improve the quality of the asset that has been disposed of.  This has to be an ‘identifiable change’ in the asset value.
  • Any costs incurred by the owner in defending or establishing his right to ownership of the asset.  For example, if someone has to incur legal costs to prove inherited ownership of a deceased relative’s property.

So to use an example, a person sells their second property that was bought 5 years ago.  From the eventual sum the property sells for, the value at purchase, the amount spent on it to increase value and any legal costs incurred when the owner had to establish a boundary are subtracted.  The remaining sum is the amount that will be taxed.  Subsequently, it is the amount of gain that is taxed, not the value that is received.

Calculating the amount of CGT payable on the net gain, can be quite complicated.  This is because there are 2 different rates of CGT, an individual allowance and Entrepreneurs relief to consider.   However, I’ll do my best to explain using another example:

Amount subject to CGT – £50,000

Individual CGT exemption allowance – £10,100 (for tax year 2010-2011)

Subtotal liable for CGT – £39,900

Entrepreneurs Relief allows all gains that qualify* to be taxed at 10% (for June 2010 onwards).  Therefore from the initial sum of £50,000, a CGT tax bill of £3,990.00 would be likely†.

Note * to qualify for Entrepreneurs relief, the capital must have come from the disposal of a business asset, not a personal one.   There is also now (from April 2011) a lifetime limit of £10m.

Note † this figure is merely a guide.  It should not be relied upon and professional advice should be sought.

An alternative relief to Entrepreneurs Relief is Business Asset Roll-Over Relief.  This applies to capital income from the sale of a business asset such as a property, provided the capital is used to purchase another business property or certain type of asset.  If it ‘leaves’ the company, it will be subject to CGT.

 

All About Stamp Duty Land Tax (SDLT)

Stamp Duty Land Tax (SDLT) was introduced in 2003; and although it is often still known as ‘Stamp Duty’, it is now different from it.

The original Stamp Duty was first introduced in 1694, and was a tax on documents (i.e. documents used in transactions).  Several years ago, Stamp Duty was referred to as a ‘voluntary tax’.  This is because there wasn’t much control over registration for it (it was meant to be compulsory).  Now however, there is no escaping it.

Stamp Duty (as opposed to SDLT) is payable at the point of purchase, on transactions that are evidenced in writing.  When the duty has been paid (this should be within 30 days to avoid penalties), the Stock Transfer Form (in the case of shares) is stamped.  HMRC delegates the determination of the Head Charge to the Stamp Office who states the amount of stamp duty that must be paid.  Stamp Duty Reserve Tax is payable on electronic transactions (such as some company share purchases).

The property equivalent to Stamp Duty is SDLT.  It is paid in the following circumstances:

  • At the point of purchase (on qualifying properties)
  • At the commencement of a long-leasehold occupation
  • At the commencement of commercial tenancy agreements, where the total rent payable before the tenant’s first opportunity to ‘break’ amounts to a sum that qualifies for SDLT.

Current SDLT rates are:

  • For properties up to £125,000, the rate is zero.  No SDLT is payable.
  • For properties from £125,000 to £250,000; the standard rate is 1% of the property value , and for first-time buyers, it is zero.
  • For properties from £250,000 to £500,000; the rates for standard and first-time buyers is 3% of the property value.
  • For properties from £500,000 to £1m, the rates are 4%.
  • For properties over £1m, the rate is 5%.

SDLT is not tapered, like income tax.  This means that if the value is over any of the thresholds, the whole value is taxed, not just the amount that is over the threshold.

So, if a property is bought for £126,000; the amount of SDLT (at current rates) payable is £1,260.00 (1% of £126,000).  Likewise, if the property is bought for £124,000, then no SDLT is payable.

This situation results in an accumulation of property values at just below the threshold values.  For example, there are many properties for sale at around £249,950.  There really aren’t many at £255,000 (assuming these values are the sale prices).

It must be stressed, that SDLT is paid by the purchaser (although the Coalition Government is understood to be considering plans to transfer the SDLT liability to the vendor).  It must also be paid in a way that is completely separate from the mortgage.  I have heard of first time buyers enquiring whether they can include the SDLT charge in their borrowing from the mortgage company.  This is not permitted!

If a new leasehold property is occupied by a tenant, the rates are:

  • For tenancies that total less than £125,000 for the life of the lease, no SDLT is payable.
  • For tenancies that total more than £125,000 over the life of the lease, 1% of the value that exceeds £125,000 is payable (so if a tenancy will total £130,000 over the total lease term, £50 is payable (1% of £5,000)).

Clearly, the lease term and rent would have to be quite substantial to qualify for this.

On commercial property, slightly different rates apply.

For properties that are not newly built:

  • For purchase values up to £150,000; or annual rent is below £1,000, the rate is zero.
  • On purchase values up to £150,000; or annual rents above £1,000, the rate is 1%.
  • For purchase values between £150,000 and £250,000, the rate is 1%.
  • For purchase values between £250,000 and £500,000, the rate is 3%.
  • For purchase values above £500,000, the rate is 4%.

For commercial properties that are newly built:

  • For tenancies with a term-value of up to £150,000, the rate of SDLT is zero.
  • For tenancies with a term-value of more than £150,000, then 1% of the value that exceeds £150,000 is payable.

For further information on SDLT, a visit to the HMRC website is recommended – http://www.hmrc.gov.uk/sdlt/intro/rates-thresholds.htm