One of the biggest worries for any new business is taxation.
It’s no wonder really when you consider the complexity of the subject. One particular tax that often troubles start-ups more than others is Capital Gains Tax (CGT). The rules can be complicated and can seem daunting to anyone unfamiliar with the system, so Steven Glicher accountants thought we’d try to simplify matters for you, and give you all the information you’ll need to know about CGT, but in language that is straightforward and easily understandable.
What is CGT?
Capital Gains Tax (CGT) applies when chargeable assets are disposed of, and is applicable to individuals and trustees. Chargeable assets include all forms of property unless it is specifically exempt. The principle assets CGT applies to are land and buildings, and shares and business assets including goodwill.
What is a Capital Gain?
A capital gain occurs when the value of an asset at the date of disposal is higher than its value when it was acquired. An asset can be disposed of either by sale or by gift. If you give away an asset in a non-commercial transaction, the market value will replace any actual consideration paid. For assets acquired before 31 March 1982 the cost is usually taken to be the value on that day, although actual cost can be used in some circumstances.
What is the rate of CGT?
CGT is charged at the rate of 28% where the total taxable gains and income are above the income tax basic rate band. Below that limit, the rate is 18%. For trustees and personal representatives of deceased persons the rate is 28%.
Payment of CGT.
CGT is paid through the self-assessment system and gains and losses must be declared on your self-assessment return. The gains after all reliefs and exemptions are added to your taxable income and then taxed at your top marginal rate. The tax is payable by 31 January following the tax year in which the gain arose.
How can the amount of chargeable gain be reduced?
- Incidental costs of acquisition.
- Expenditure to enhance the value of the asset; Incidental costs of disposal; and
- Tax reliefs and allowances:
- Rollover/holdover relief on replacement of business assets – allowing you to defer the CGT on a gain of a business asset where this is matched with a replacement of a new business asset in the period commencing one year before and ending three years after the disposal.
- Business incorporation relief – available when you transfer your business into a Limited Company in exchange for shares.
- Holdover gift relief – on some gifts of business assets, or gifts made into trusts mean the tax does not become payable until the person, or trustee who receives the gift disposes of it.
- Entrepreneurs’ relief – for disposals after 5th April 2008. This allows disposal of a material part or all of your business to have the CGT rate reduced to 10%. There is a lifetime limit which from 6 April 2011 is £10million.
- Any capital losses made on a chargeable transaction are netted off against any capital gains made in of the same tax year. They are applied before the annual exemption. Unused capital losses are carried forward against future capital gains: however, they cannot normally be carried back. To make use of a capital loss it must be reported to HMRC within five years and ten months of the end of the tax year in which it arose.
- There are some other tight restrictions to entrepreneur relief. It applies to gains made after 6 April 2008. From 6 April 2011 the relief applies to the first £10million of qualifying lifetime gains. Gains in excess of this limit or which do not qualify for other reasons will be taxed at 18% or 28%.
- An annual exemption of £10,600 for 2012/13 is available to individuals so total gains made in the tax year up to this amount are exempt. Any unused annual exemption is lost and cannot be carried forward or transferred to another person.
- Normally the sale of your only or main residence is exempt, although it can become partly chargeable if it is let out or used for business purposes.
- Transfers of assets between husband and wife or civil partners: these are treated as being made at no gain/no loss.
- Most chattels and wasting assets whose value decreases over time.
- Non-wasting and business chattels where the disposal proceeds do not exceed £6000.
- Private motor cars.
- Gifts to charity and certain amateur sports clubs.
- SAYE contracts, savings certificates and premium bond.
- Betting winnings and prizes including the lottery.
- Compensation for damages for personal or professional injury.
- Some compensation payouts for mis-sold pensions.
- Life assurance policies in the hands of the original owner or beneficiaries.
- Company reorganisations and takeovers where there is a share for share exchange.
There are certain types of investment which have been designed with preferential tax treatments for Capital Gains Tax and Income Tax, mainly to encourage investment in new companies and also to encourage employees to own shares in the companies they work for. Schemes include the Enterprise Investments Scheme, (EIS) which gives income tax and capital gains tax relief on investments made in companies with assets worth less than £15million. A similar scheme Seed Enterprise Investments Scheme, (SEIS) with similar reliefs is also available for smaller companies. The Enterprise Management Incentive Scheme is a share option scheme which can be used to provide tax-efficient targeted incentives to key employees or employee groups.
Capital Gains Tax is a highly complicated area of tax law requiring specialist knowledge. If you would like to minimise your CGT liabilities, or need expert advice on EIS, SEIS or EMI, then contact Steven Glicher accountants.