Capital Gains Tax

Most payments a company makes to its shareholders, in respect of their shares, will be qualifying distributions and be subject to Income Tax.

However, if certain conditions are met, the payment can be treated as an exempt distribution. An exempt distribution is a payment that is treated as consideration for the disposal of shares and is subject to CGT.

When a company makes a purchase of its own shares, any excess paid over the amount of capital originally subscribed for the shares is usually treated as a distribution (a dividend). However, there are special provisions that enable an unquoted trading company or an unquoted holding company of a trading group to undertake a purchase of its own shares without making a distribution.

To check out the tax implications of an intended buy back, a clearance application may be made to HMRC. Under this procedure a company wishing to make a purchase of its own shares can obtain advance confirmation from HMRC that the distribution arising will be an exempt distribution.

Broadly there are two situations where a payment on the purchase by a company of its own shares is not treated as a distribution:

• the company must be an unquoted trading company; and
• either Condition A: purchase benefiting a company’s trade or Condition B: purchase in connection with Inheritance Tax liability must be met.

A trust is an obligation that binds a trustee, an individual or a company, to deal with the assets – such as land, money and shares – held by the trust. The person who places assets into a trust is known as a settlor and the trust is for the benefit of one or more 'beneficiaries'.

The trustees make decisions about the assets in the trust. These assets are to be managed, transferred or held back for the future use of the beneficiaries. Trustees are also responsible for reporting and paying tax on behalf of the trust. A trust needs to be registered with HMRC if it pays or owes tax. CGT may be payable when assets are placed into or taken out of a trust.

If assets are placed into a trust, tax is paid by either the person selling the asset to the trust or the person transferring the asset (the 'settlor').

If assets are taken out of a trust, the trustees usually have to pay tax if they sell or transfer assets on behalf of the beneficiary. However, the rules are complex and there are different types of trusts that need to be considered, for example, bare trusts or non-UK resident trusts.

Most trusts have an annual exemption from CGT, currently £3,000 (2022-23: £6,150). There is a higher limit of £6,000 if the beneficiary is vulnerable, a disabled person or a child whose parent has died.

In most cases, there is no Capital Gains Tax (CGT) to be paid on the transfer of assets to a spouse or civil partner. There is, however, still a disposal that has taken place for CGT purposes, effectively, at no gain or loss on the date of the transfer. When the asset ultimately comes to be sold the gain or loss will be calculated from when the asset was first owned by the original spouse or civil partner.

There are a few exceptions that couples should be aware of when the relief does not apply. This mainly relates to the use of goods which are sold on by the transferee’s business and for couples that are separated or divorced. The CGT rules that apply during separation and divorce changed for disposals that occurred on or after 6 April 2023.

These changes extended the period for separating spouses and civil partners to make no gain/no loss transfers extended to up to three years after they cease to live together. The new rules also provide for an unlimited time if the assets are the subject of a formal divorce agreement. Previously, the no gain/no loss treatment was only available in relation to any disposals in the remainder of the tax year in which the separation occurred. If a transfer does not ultimately qualify for relief, then the asset must be retrospectively valued at the date of the transfer and the transferor is liable for any gain or loss.

There are similar rules for assets that are gifted to charities. However, CGT may be due where an asset is sold to a charity for more than was paid for it and less than the market value. The gain in this case would be calculated based on what the charity paid rather than the market value of the asset.

The definition of a connected person for tax purposes can be complex.

A statutory definition of “connected persons” for Capital Gains Tax purposes is set out in Section 286 of the Taxation of Chargeable Gains Act (TCGA) 1992.

The legislation states:

" A person is connected with an individual if that person is the individual’s spouse or civil partner, or is a relative, or the spouse or civil partner of a relative, of the individual or of the individual’s spouse or civil partner"

In this context, "‘relative’ means brother, sister, ancestor or lineal descendant and spouses or civil partners of relatives. The term 'relative' does not cover all family relationships. In particular, it does not include nephews, nieces, uncles and aunts.

HMRC’s internal guidance on this definition also states that:

• widows or widowers, or surviving civil partners of deceased persons, or relatives of a deceased spouse or of a deceased civil partner are excluded unless connection can be established by a route not involving the deceased.
• a dissolution of a civil partnership or a divorce can similarly lead to persons in addition to the former civil partner or spouse ceasing to be connected with the individual.

If you inherit property, you are usually not liable to pay tax on the inheritance you receive. This is because any Inheritance Tax (IHT) due should be paid out of the deceased’s estate before any cash or assets are distributed to the estate beneficiaries. 

The rate of IHT currently payable is 40% on death and 20% on lifetime gifts. IHT is payable at a reduced rate on some assets if an individual leaves 10% or more of the 'net value' of their estate to a charity.

If you inherit a property, you are generally not liable for Stamp Duty, Income Tax or Capital Gains Tax and HMRC would make contact if you had IHT to pay.

If you receive an inheritance, you will be liable to Income Tax on any profit or gains received or earned after the inheritance. For example, Capital Gains Tax (CGT) on any increase in property value if you dispose of the property after the date of inheritance or tax on any rental income received. If inheriting a property means you then own two properties, you must tell HMRC which property is your main home within two years. There are special rules if the property is held in trust.

As with the Income Tax personal allowances, taxpayers have an annual exempt amount for Capital Gains Tax (CGT) which is forfeited if not used. The annual exemption for individuals in 2023-24 was reduced to £6,000 (from £12,300) and is set to be further halved to £3,000 from April 2024. A married couple each have a separate exemption. This also applies to civil partners who are treated in the same way as married couples for CGT purposes. 

To work out capital gains for a tax year, you should take the following steps:

1. Work out the gain for each asset (or your share of an asset if it’s jointly owned). Do this for the personal possessions, shares or investments, UK property or business assets you have disposed of in the tax year.
2. Add together the gains from each asset.
3. Deduct any allowable losses.

If the total gains are less than the relevant annual exempt amount, then no CGT is due. Taxpayers still need to report gains in their tax return if both of the following apply. The total amount they sold the assets for was more than 4 times their allowance and they are registered for Self-Assessment.

Married couples and civil partners should ensure that assets sold at a gain are either jointly owned or that each partner utilises their annual exempt amount wherever possible. Any unused part of the annual exempt amount cannot be carried forward and is forfeited if unused in the current tax year.

CGT is usually charged at a simple flat rate of 20%. If you only pay basic rate tax and make a small capital gain, they may be subject to a reduced rate of CGT of 10%. Once the total of taxable income and gains exceed the higher rate threshold, the excess will be subject to 20% CGT. A higher rate of CGT (8% supplement) applies to gains on the disposal of chargeable residential property.

If you have sold or are planning to sell any assets in the current tax year it is important to ensure that you take full advantage of the annual CGT exemption and arrange your affairs to ensure the optimum CGT position. For example, capital losses are deducted from gains before net gains are calculated. Crystallising a loss that will waste the annual exemption should therefore be avoided.

As a general rule, if you are resident in the UK, you are liable to pay Capital Gains Tax (CGT) when you sell (or dispose of) an overseas property at a gain.

The annual exempt amount applicable to CGT was reduced to £6,000 (from £12,300) for the current 2023-24 tax year. CGT is normally charged at a simple flat rate of 20% and this applies to most chargeable gains made by individuals. If taxpayers only pay basic rate tax and make a small capital gain, they may only be subject to a reduced rate of 10%. Once the total of taxable income and gains exceed the higher rate threshold, the excess will be subject to 20% CGT. 

A higher rate of CGT applies to gains on the disposal of residential property (apart from a principal private residence). The rates are 18% for basic rate taxpayers and 28% for higher rate taxpayers.

You may also have to pay tax in the country where the overseas property was located. If you are subject to paying double taxation, there may be reliefs available depending on what tax agreements are in place with the UK and the country where you made the taxable gain. There is also additional guidance available for dual residents.

There are special rules if you are resident in the UK, but your permanent home or domicile is abroad.

Gift Hold-Over Relief is a tax relief that results in a deferral of Capital Gains Tax (CGT). The relief can be claimed when assets are given away (including certain shares) or sold for less than they are worth to help benefit the buyer. The relief means that any gain on the asset is 'held-over' until the recipient of the gift sells or disposes of them. This is done by reducing the donee's acquisition cost by the amount of the held over gain.

The person gifting a qualifying asset is not subject to CGT on the gift. However, CGT may be payable where the asset is sold for less than it’s worth. Gifts between spouses and civil partners don’t trigger capital gains. A claim for the relief must be made jointly with the person to whom the gift was made.

If you are giving away business assets, you must:

• be a sole trader or business partner, or have at least 5% of voting rights in a company (known as your 'personal company'); and
• use the assets in your business or personal company.

You can usually get partial relief if you used the assets only partly for your business.

If you are giving away shares, then the shares must be in a company that is either:

• not listed on any recognised stock exchange; or
• your personal company.

The company's main activities must be of a trading nature, for example, providing goods or services rather than non-trading activities like investment.

If you sell an asset for less than you paid for it, you would make a capital loss. As a general rule if the asset would have been liable to CGT had a gain taken place, then the loss should be an allowable deduction. 

These allowable losses are deducted automatically from gains in the same tax year. It is not necessary to make a claim for set-off of losses. However, it is possible to claim that losses are allowable, and preference be given to such losses.

If a taxpayer’s total taxable gain is still above the tax-free allowance, they can deduct unused losses from previous tax years. When unused losses remain and that cannot be set against gains of the same year, then these losses are carried forward to be set against future gains. It is only possible to use losses brought forward if net gains exceed the annual CGT exempt amount for the year.

In most circumstances, allowable losses and the annual exempt amount can be deducted in the way that is most beneficial to the individual. This will usually be against gains that are charged at the highest rate. A claim for losses does not have to be made straight away and can be made up to 4 years after the end of the tax year that the relevant asset was disposed.

In general, there is no Capital Gains Tax (CGT) on a property which has been used as a main family residence. An investment property which has never been used will not qualify. This relief from CGT is commonly known as private residence relief.

Taxpayers are usually entitled to full relief from CGT where all the following conditions are met:

1. The family home has been the taxpayers only or main residence throughout the period of ownership.
2. The taxpayer has not let part of the house out – this does not include having a lodger.
3. No part of the family home has been used exclusively for business purposes (using a room as a temporary or occasional office does not count as exclusive business use).
4. The garden or grounds including the buildings on them are not greater than 5,000 square metres (just over an acre) in total.
5. The property was not purchased to purely make a financial gain.

If a property has been occupied at any time as an individual’s private residence, the last 9 months of ownership are disregarded for CGT purposes – even if the individual was not living in the property when it was sold. The time period can be extended to 36 months under certain limited circumstances. There are also special rules for homeowners that work or live away from home.

Married couples and civil partners can only count one property as their main home at any one time.

If the conditions outlined above are not met, then CGT may be due on some or all of the gain.