Capital gains tax - Chargeable persons and entities

Introduction

Capital Gains Tax (CGT) is a tax levied on the profit realized from the disposal of certain assets in the United Kingdom, as governed by the Taxation of Chargeable Gains Act 1992 (TCGA 1992). It applies to the gain made when a chargeable asset is sold, transferred, or otherwise disposed of for more than its acquisition cost. Understanding the scope of chargeable persons and entities is important, as CGT liabilities depend on the taxpayer's status and the nature of their assets. This analysis examines the legal framework defining who is subject to CGT, the types of assets considered chargeable, and the specific provisions affecting various entities under UK law.

Chargeable Persons and Entities

The liability to CGT is determined by the taxpayer's status and residency. The following outlines the categories of persons and entities subject to CGT under UK law.

Individuals

Individuals who are UK residents are liable to CGT on worldwide gains arising from the disposal of chargeable assets. Key factors influencing individual liability include:

• Residence Status: Under Section 2 of TCGA 1992, an individual's residence status affects their CGT liability, with UK residents taxed on global gains.
• Domicile Status: Non-domiciled individuals may claim the remittance basis under certain conditions, impacting CGT on foreign assets.
• Dual Liability: Some transactions, such as the disposal of employment-related securities, may attract both Income Tax and CGT.

Partnerships and Limited Liability Partnerships (LLPs)

In partnerships and LLPs, partners are treated individually for CGT purposes:

• Individual Liability: Each partner is personally liable for their share of any capital gains arising from the disposal of partnership assets.
• LLPs: Despite having a corporate structure, LLPs are generally treated as partnerships for tax purposes, with CGT liabilities falling on the individual members.
• Changes in Profit Sharing: Adjustments in partnership profit-sharing arrangements may have CGT implications under Section 59A of TCGA 1992.

Trustees and Personal Representatives

Trustees and personal representatives have specific CGT obligations:

• Trustees: Under Section 69 of TCGA 1992, trustees are liable for CGT on gains from trust assets. The tax rates and allowances may differ from those applicable to individuals.
• Personal Representatives: They are responsible for managing the deceased's estate and are liable for CGT on any disposals made during the administration period.

Companies

Companies are subject to Corporation Tax on chargeable gains, rather than CGT:

• Taxable Gains: Chargeable gains realized by companies are included in their profits chargeable to Corporation Tax.
• Different Reliefs and Rates: Companies benefit from indexation allowance for gains accruing before December 2017 and are subject to Corporation Tax rates, which differ from CGT rates.
• Group Relief: Special provisions allow for the transfer of gains and losses within a group of companies, affecting overall tax liability.

Chargeable Assets

Not all disposals result in a CGT liability; only certain assets are considered chargeable under TCGA 1992.

Property

Real estate transactions frequently give rise to CGT considerations:

• Residential Property: Disposals of second homes or investment properties are generally subject to CGT.
• Principal Private Residence Relief (PPR Relief): Sections 222-226 of TCGA 1992 provide relief for gains arising from the disposal of an individual's main residence, potentially reducing or eliminating the CGT liability.
• Mixed-Use Properties: Properties used partly as a residence and partly for business purposes may require apportionment of gains for CGT purposes.

Shares and Securities

Disposals of shares and securities can result in complex CGT calculations:

• Listed and Unlisted Shares: Different rules may apply depending on whether the shares are listed on a recognized stock exchange.
• Employee Share Schemes: Special provisions affect shares acquired through employee share schemes, such as Enterprise Management Incentives (EMIs).
• Substantial Shareholdings Exemption: Companies disposing of substantial shareholdings in trading companies may qualify for exemptions under certain conditions.

Chattels and Intangible Assets

Gains arising from the disposal of chattels and intangible assets are also within the scope of CGT:

• Chattels: Tangible movable property, such as antiques or art, may be chargeable if disposed of for more than £6,000.
• Wasting Assets: Assets with an expected life of 50 years or less are generally exempt, but exceptions exist.
• Goodwill and Intellectual Property: Disposals of business goodwill and intellectual property rights may attract CGT, with specific rules governing their treatment.

Other Assets

Other assets potentially subject to CGT include:

• Cryptocurrencies: HMRC treats cryptoassets as property for tax purposes, and disposals may give rise to CGT liabilities.
• Foreign Assets: UK residents are liable for CGT on worldwide assets, including foreign property and investments.

Calculating Capital Gains

Accurate calculation of chargeable gains is necessary for compliance. The basic computation involves several steps:

1. Disposal Proceeds: Determine the amount received from the disposal of the asset.
2. Allowable Costs: Deduct the acquisition cost of the asset and any incidental costs of acquisition and disposal, such as legal fees and stamp duty.
3. Capital Improvements: Deduct the costs of any capital improvements made to the asset during ownership.
4. Resultant Gain or Loss: The difference between the disposal proceeds and the total allowable costs constitutes the gain or loss.
5. Reliefs and Exemptions: Apply any relevant reliefs or exemptions to reduce the gain.

Use of Market Value

In certain circumstances, the market value of the asset is used instead of the actual disposal proceeds:

• Non-Arm's Length Transactions: Gifts or disposals to connected persons, as defined in Section 18 of TCGA 1992, require the use of market value.
• Part Disposals: When only part of an asset is disposed of, special rules apply to apportion the allowable costs.
• Assets Held on 31 March 1982: For assets acquired before this date, the market value as of 31 March 1982 can be used as the acquisition cost.

Annual Exempt Amount

Individuals are entitled to an Annual Exempt Amount (AEA), which is deducted from the total gains:

• Current AEA: For the tax year 2023/24, the AEA is £6,000, as updated from April 2023.
• Unused Allowance: The AEA cannot be carried forward to future tax years if unused.

Practical Example: Calculating CGT on Share Disposal

Suppose an individual sells shares for £20,000 that were purchased for £10,000. They incurred £500 in brokerage fees when buying and £500 when selling. The calculation would be:

1. Disposal Proceeds: £20,000
2. Allowable Costs: £10,000 (purchase price) + £500 (purchase fees) + £500 (selling fees) = £11,000
3. Gain: £20,000 - £11,000 = £9,000
4. Annual Exempt Amount: £6,000 (for 2023/24)
5. Taxable Gain: £9,000 - £6,000 = £3,000

The individual would pay CGT on £3,000 at the applicable rate.

Reliefs and Exemptions

Various reliefs and exemptions can reduce CGT liabilities when certain conditions are met.

Business Asset Disposal Relief (BADR)

Formerly known as Entrepreneurs' Relief, BADR provides a reduced rate of CGT on qualifying business disposals:

• Qualifying Assets: Includes the disposal of all or part of a business, assets following the cessation of a business, and shares in a personal trading company.
• Reduced Rate: Gains qualifying for BADR are taxed at 10%, up to a lifetime limit of £1 million.
• Conditions: The individual must meet specific ownership and employment criteria for at least two years prior to disposal.

Investors' Relief

Investors' Relief offers a reduced CGT rate for external investors:

• Qualifying Shares: Unlisted shares in trading companies acquired after 17 March 2016.
• Reduced Rate: Gains are taxed at 10%, with a separate lifetime limit of £10 million.
• Conditions: The investor must not be an employee or officer of the company.

Gift Hold-Over Relief

Gift Hold-Over Relief allows the deferral of CGT when certain assets are gifted:

• Eligible Assets: Includes business assets and shares in unlisted trading companies.
• Deferral Mechanism: The gain is deferred until the recipient disposes of the asset.
• Conditions: Both the donor and recipient must jointly elect for the relief.

Principal Private Residence Relief (PPR Relief)

PPR Relief can exempt gains on the disposal of an individual's main residence:

• Qualifying Periods: Periods of actual occupation, certain absences, and the final nine months of ownership may qualify.
• Restrictions: Letting relief has been restricted from April 2020, and relief may be limited if the property was not exclusively used as a main residence.

Practical Example: Applying PPR Relief

An individual sells their main residence, which they owned for ten years. They lived in the property for eight years and rented it out for two years. The gain on disposal is £100,000.

• Qualifying Occupation: 8 years + final 9 months (treated as occupied) = approximately 8.75 years.
• Total Ownership: 10 years
• Exempt Gain: (£100,000 gain) × (8.75 years / 10 years) = £87,500
• Taxable Gain: £100,000 - £87,500 = £12,500
• Annual Exempt Amount: £6,000
• CGT Payable On: £12,500 - £6,000 = £6,500

Complex Scenarios and Legislative Provisions

Advanced CGT scenarios involve detailed legislative provisions requiring careful analysis.

Connected Persons and Market Value Rules

Transactions with connected persons are subject to special rules:

• Definition: Connected persons include relatives, spouses, and business associates.
• Market Value Substitution: Under Section 18 of TCGA 1992, disposals to connected persons are deemed to occur at market value, regardless of the actual consideration.

Non-Resident Capital Gains Tax (NRCGT)

Non-residents may be liable to CGT on UK property and certain assets:

• Scope: From 6 April 2015, non-residents are liable on gains from UK residential property; from 6 April 2019, this extended to all UK property and land.
• Reporting Requirements: Non-residents must report disposals and pay any CGT due within 60 days.

Double Taxation Relief

Where a disposal is subject to CGT in the UK and a comparable tax in another country:

• Double Taxation Agreements (DTAs): DTAs may provide relief to prevent double taxation.
• Foreign Tax Credit Relief: Credit may be given for foreign tax paid on the same gain.

Corporate Reorganizations

Companies undergoing reorganizations must consider CGT implications:

• Share Exchanges: Under Sections 135-137 of TCGA 1992, certain share-for-share exchanges may not trigger an immediate CGT charge.
• Demergers and Reconstructions: Specific provisions allow for deferral of CGT where assets are transferred under a statutory reorganization.

Conclusion

Capital Gains Tax encompasses a detailed structure of rules affecting various persons and entities under UK tax law. Understanding the precise application of CGT requires careful consideration of:

1. Chargeable Persons and Entities: Identifying who is liable, including individuals, partnerships, trustees, and companies, each with specific provisions under TCGA 1992.
2. Chargeable Assets: Determining which assets are subject to CGT, such as property, shares, and certain chattels, and recognizing exemptions.
3. Calculating Gains: Accurately computing gains by applying allowable costs, understanding market value rules, and acknowledging the impact of connected persons.
4. Reliefs and Exemptions: Utilizing reliefs like BADR, Investors' Relief, and PPR Relief to mitigate tax liabilities when conditions are met.
5. Complex Provisions: Managing advanced scenarios involving non-residents, double taxation, and legislative requirements that affect CGT obligations.

A comprehensive understanding of these principles enables precise compliance with the Taxation of Chargeable Gains Act 1992 and ensures accurate tax positions for various transactions. By integrating the core concepts and legislative frameworks, practitioners can adeptly manage CGT considerations within the UK legal context.