Capital gains tax is one of the taxes which everyone in the UK who makes profit on the sale of assets such as bonds, shares, buildings, property, land, jewellery as well as other antique items has to pay. The existing rate of capital gains tax is 18% which is charged over the differential amount earned as a profit by selling above mentioned classes of assets. It is also, however, critical to understand that capital gain taxes are not generally paid on inheritance, but when the inherited assets are sold in the market, the seller therefore has to pay capital gains taxes on the differential amount. There are also other tax exemptions which are given when your earnings or gains are less than a certain threshold level than you do not need to pay capital gains tax. Furthermore, passing on the assets to charities as well as paying CGT is exempted from transactions such as selling your personal car or home.
There are also different methods through which one can actually defer the liability of paying capital gains taxes by transferring the ownership of such assets to others such as children etc. However, whoever sells such assets will have to pay capital gains tax as such there is no final escape from paying of your liability under CGT.
This paper will therefore attempt to discuss the questions given in the assignments related with capital gains taxes and what type of suggestions can be put forward to manage the tax liability in most efficient manner.
Capital Gains on the Sale of Shares
Capital gains tax on shares is calculated against a given threshold level of £10,001 – i.e. if the total gain is over and above this limit, capital gain taxes will be due on such gain. It is also critical to note that the various adjustments are also made while calculating the capital gains on the sale of share. Such adjustments include any adjustment for previous losses as well as relief provided under the law.
The total tax computation is shown below:
|Proceeds from the Sale||£140,000.00|
|Gains During the Year||£84,285.71|
|Losses during the year||–|
|Annual Exempt Amount||–|
|Tax to be paid||£15,171.43|
The above computation indicates that total proceeds from the sale during 2009-2010 are £140,000, whereas cost is computed based on the weighted average cost of shares. At the prevailing tax rate of 18%, the total tax liability is £15,171.43 against a total liability of £84,285.71. It is also important to note that there are no reliefs or allowances to be claimed because there were no carried forward losses as well as other reliefs to be claimed. Under the existing laws, tax relief is provided against certain type of transactions in shares; however, there are no such transactions in this case so no relief can be availed by Robert against the transactions in shares.
Gain on Sale of Shares in Green Ltd
Entrepreneur’s relief is allowed only against the qualifying business sales of the shares. The total relief to be given under this is 10% with a maximum limit of £2M for the whole life time period. However, there are certain conditions which need to be complied with before Robert can apply for the relief under this head. These conditions include:
- Any business disposal of shares applies to the whole business and not a part of it.
- It applies only to the individual taxpayers.
- This relief is not retrospective in nature and relief on past business disposals is not allowed.
- This relief is applied only against those shares which are business shares and the seller at least holds 5% of the voting rights.
Similarly, for gaining the gift hold over relief, it is necessary that Robert must hold at least 5% of the voting rights in the firm and these shares shall be in a non-listed company. It is, however, important to note that the shares that Robert is going to sell to his sons were obtained through inheritance, and therefore any gains or losses made against such share shall be liable to tax. Further, he is selling the shares and shares are not just passed on to the sons, therefore, as per the existing laws there will be no tax relief that can be provided under the gift hold over relief.
Accordingly, Robert will be able to take only Entrepreneur’s relief in following manner:
|Proceeds from the Sale||£200,000.00|
|Losses during the year||–|
|Annual Exempt Amount||–|
|Tax to be paid||£3,600.00|
*cost is calculated at 80%
The total base cost for sons is £240,000 which is 80% of the shareholding that was held by Robert.
Transferring the shares to his wife will not affect the entrepreneur’s relief; however, it can only affect the gift hold over relief. Since his wife will be the director of the firm, she may be able to enjoy entrepreneur’s relief; but, as for as increasing the base cost for the sons, the same may not be possible as the overall cost base will remain despite the fact he has transferred some of the shareholding to his wife.
It is stated that as per law, one is not basically entitled to pay the tax when selling a private home. However, the transaction becomes taxable when the same is sold for the business purposes or the owner owns more than two homes. It will not be subject to tax if the home is used as a private home and it is for the purpose of private residence only. It is thus critical to understand the basic difference between the nature of the transaction in order to pay off the capital gain tax. It is also important to note that owner, when selling the home, can often claim private residence relief.
The tax on the old family home will not be levied as the house was used for residential purposes. Under the law, any home which is occupied for a substantial period of time and is used for the purpose of home residency will not be liable to tax. The property is also meant to be kept for residency only and has not been obtained for resale purposes. As far as this condition is concerned, the family home will not be subject to any taxes; however, the new home that has been purchase with the intentions of reselling the same in future will attract taxes.
One critical issue in this regard is the position of the garden of the home. There are certain special conditions which are applied to gardens. Gardens are, as per revenue department, considered for cultivating flowers etc. but they are not to be used for commercial agriculture purposes. However, there also arise legal complications when the owner sells part of the garden as a plot for building, so such transactions can attract tax liability for the seller.(McLaughlin,2003).
The following case study outlines what can be the consequences of selling part of the garden:
“This interpretation was confirmed by the case of Varty v Lynes (51TC419). Mr Lynes disposed of a dwelling house while retaining part of the garden, which was disposed of later. The High Court held that no relief was due on the later disposal because the tests of Section 222(1)(b) were to be applied at the date of disposal of the retained land. At that date, it was no longer land which Mr Lynes held with his residence as its garden or grounds and so relief could not be due.”(hmrc.gov.uk,2010).
The above decision of the court indicates that Robert may not be entitled to any relief for selling off the portion of the garden as the same is held for reselling purposes as well as after the sale of the property, Robert will no longer be able to claim any kind of relief for the future sell of the plot.
The second home that is to be purchased at the future date will also attract the tax as the same will not be used for residential purposes and Robert’s family will only be using it for the temporary residential purposes.
Capital gains taxes are often paid when an individual sells particular class of assets such as shares, bonds, homes for business purposes etc. The normal tax rate to be applied is 18% however there are certain reliefs and concessions which are provided under certain circumstances. There are two most important types of reliefs allowed including entrepreneur’s relief as well as gift hold over relief. Both types of reliefs provide benefits under certain conditions and in the case of Robert the relief has been sought mostly through entrepreneurs’ relief as gift hold over relief is mostly allowed under different conditions.
- CG64379 – Private residence relief: garden/grounds: date of sale test: Varty v Lynes [online]. (2010) [Accessed 18 April 2010]. Available from: <http://www.hmrc.gov.uk/manuals/CG4manual/CG64379.htm>. accessed 17 April 2010.
- McLaughlin, M (2003). Is your Principal Private Residence Property totally CGT tax-free? [online]. [Accessed 18 April 2010]. Available from: <http://www.taxationweb.co.uk/tax-articles/capital-taxes/is-your-principal-private-residence-property-totally-cgt-tax-free.html>. accessed 18 April 2010.