Capital Gains Tax

HMRC’s internal manuals states that the word `trust’ describes a relationship between certain persons

• which is recognised by the law;
• concerned with particular property; and
• enforceable by reference to rules of trust law.

Effectively, a trust is an obligation that binds a trustee, an individual or a company, to deal with assets – such as land, money and shares – which form part of 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 how the assets in the trust are to be managed, transferred or held back for the future use of the beneficiaries. They 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, then 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 the 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.

In the Autumn Statement, the Chancellor announced that the annual exempt amount applicable to Capital Gains Tax (CGT) is to be more than halved next year. This rate had previously been fixed at £12,300 from April 2021 to April 2026 for individuals, personal representatives, and certain trusts for disabled people. 

The exempt amount will now be reduced to £6,000 from April 2023 before being further halved to £3,000 from April 2024. 

Any taxpayers that are thinking about the disposal of assets should consider the benefits of crystalising gains before 6 April 2023 to fully utilise the £12,300 allowance for 2022-23. 

Married couples and civil partners both qualify for the £12,300 allowance in which case organising joint ownership of these assets before disposal may be beneficial if each individual partner is not fully utilising their 2022-23 annual allowance. 

Transfers between spouses and civil partners are exempt from CGT. Making use of the full allowance can, in some circumstances, effectively double the CGT exemption before the end of the current tax year to £24,600.

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.
 

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 original spouse or civil partner first owned the asset..

There are a few exceptions that couples should be aware of where 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 were separated and not living together for the entire tax year when the assets were transferred. Spouses or civil partners that lived together at any point in the tax year when the assets were transferred can still benefit from these rules. If a transfer did not qualify 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.

In general, there is no Capital Gains Tax (CGT) on a property which has been used as a main family residence. This relief from CGT is commonly known as private residence relief.

However, there are grey areas which might result in CGT being due on the sale of a private residence. One of these areas to consider is when disposing of garden or grounds belonging to the property.

The entitlement to private residence relief is usually available if the garden or grounds, including the site of the house is no greater than 5,000 square metres (a little over an acre). Larger gardens and grounds may qualify but only if they are appropriate to the size and character of the property and are required for the reasonable enjoyment of it.

Taxpayers are still entitled to relief if they dispose of land that they occupy as their garden or grounds, up to the permitted area, at the time of disposal. The garden or grounds includes the buildings standing on that land. HMRC’s guidance is clear that a building that is not part of a dwelling house can still qualify for relief if it’s within the permitted area of garden or grounds.

No relief is allowed for land let or used for a business or for land that has been fenced or divided off from your garden for development.

Usually, 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. 

If an individual realises an allowable loss in the part of the tax year before his or her death, those losses must be set first against any chargeable gains accruing in that period. This applies even if it reduces the net chargeable gains below the annual exempt amount for that year.

If there is an excess of allowable losses after this set off, those losses may be carried back and set off against gains accruing in the three tax years before the tax year of death. 

Any losses that are not set against gains accruing before death are lost. They cannot be used by the personal representatives or the legatees.

The legislation does not provide any specific procedures or time limits for dealing with claims to carry back losses of the year of death. The normal procedures and time limits relating to claims will therefore apply.

In general, there is no CGT payable on a property disposal which has been used as the main family residence. An investment property which has never been used as a private residence 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 just to make a 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.

Where a taxpayer owns a business as a sole trader or in partnership, a capital gain will be deemed to arise if the business is converted into a company by reference to the market value of the business assets, including goodwill. This could give rise to a chargeable gain based broadly on the difference between the market value of the assets and their original cost. However, in most cases the incorporation of the business will be organised in such a way as to satisfy the conditions necessary to secure incorporation relief. One such condition is that the entire business with the whole of its assets (or the whole of its assets other than cash) must be transferred as a going concern wholly or partly in exchange for shares in the new company.

It is important to note that where the necessary conditions are met, incorporation relief is given automatically and there is no need to make a claim. The relief works by reducing the base cost of the new assets by a proportion of the gain arising from the disposal of the old assets.

Although the relief is automatic, it is possible to make an election in writing for incorporation relief not to apply. An election must be made before the second anniversary of 31 January next following the tax year in which the transfer took place. This means an election in respect of a transfer made in the current 2022-23 tax year must be made by 31 January 2026. The election deadline is reduced by one year if the shares are disposed of in the year following that in which the business was incorporated.

Business Asset Rollover Relief, usually referred to as ‘rollover relief’, is a valuable relief that allows for deferral of Capital Gains Tax (CGT) on gains made when taxpayers sell or dispose of certain assets and use all or part of the proceeds to buy new business assets. The relief means that the tax on the gain of the old asset is postponed. The amount of the gain is effectively rolled over into the cost of the new asset and any CGT liability is deferred until the new asset is sold.

Where only part of the proceeds from the sale of the old asset is used to buy a new asset a partial rollover claim can be made. It is also possible to claim for provisional rollover relief where the taxpayer expects to buy new assets at a future date. Interestingly, rollover relief can be claimed if taxpayers use the proceeds from the sale of the old asset to improve assets they already own. The total amount of rollover relief is dependent on the total amount reinvested to purchase new assets.

There are qualifying conditions to be met to ensure entitlement to any relief. This includes ensuring that new assets are purchased within three years of selling or disposing of the old asset(s) or up to one year before. Under certain circumstances, HMRC has the discretion to extend these time limits. In addition, both the old and new assets must be used by a business and the business must be trading when the old asset is sold and the new asset is acquired. Taxpayers must claim relief within four years of the end of the tax year when they bought the new asset or sold the old one, if that happened after.

The definition of a connected person for tax purposes can be complex and varies depending on the circumstances at hand. 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 linear 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 manual also states that: excluded are the widows or widowers or surviving civil partners of deceased persons, or relatives of a deceased spouse or of a deceased civil partner 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.

One of the most often used and valuable of the Capital Gains Tax (CGT) exemptions arises on the sale of the family home. In general, there is no CGT to pay on a property that has been used as the 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 or PRR.

The rules are different if you live abroad. A CGT charge on the sale of UK residential property by non-UK residents was introduced in April 2015. Only the amount of the overall gain relating to the period after 5 April 2015 is chargeable to tax. In certain circumstances PRR may apply where the property is the owner’s only or main residence.

A UK non-resident that sells UK residential property needs to deliver a non-resident CGT (NRCGT) return and pay any CGT within 60 days of selling a relevant property. The return must be made whether or not there is any NRCGT to be paid and even if there is a loss on the disposal, or where the taxpayer is due to report the disposal on their Self-Assessment tax return.

There are penalties for failing to file the NRCGT return within the deadline as well as for failing to pay any tax due on time.