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CATEGORY - CAPITAL GAINS TAX

EXEMPTIONS AND ALLOWANCES

Annual Allowance
All UK residents are entitled to an annual allowance against their capital gains tax liabilities. For 2009/10 it is £10,100 and this is in addition to your normal personal allowance against income tax. Like the personal allowance it cannot be transferred between husband and wife (or civil partners) but they are able to transfer assets between each other tax free, so if you expect to make capital gains in excess of your annual allowance before the end of the tax year, it may be wise to transfer some of the assets to your spouse before disposal or put them in joint names so that both your annual allowances can be offset against them. Transfers between spouses (or civil partners) are not considered to be disposals for capital gains tax purposes so any future capital gain by the second spouse will be based on the original acquisition cost to the first spouse. It is also worth noting that any part of your normal personal allowance that was unused during the tax year cannot be offset against capital gains.

Spouse transfers
As mentioned above, assets transferred to or from your spouse (or civil partner) are not treated as disposals and are therefore exempt from capital gains tax. However, you do have to live with them for at least part of the tax year in which the transfer was made. Recently divorced or separated couples should therefore be careful about relying on this exemption. You should also note that assets transferred to your children or unmarried partner will not be exempt unless other exemptions apply (such as cars and chattels worth less than £6,000).

Non-resident persons
Persons who are not resident or ordinarily resident in the UK (including foreign companies with no fixed UK establishment) are not liable to tax on their capital gains. This used to open up a very handy tax planning opportunity not so many years ago. Anyone expecting to make a big gain in the near future (on a house or some shares maybe) could have simply moved to another country for a year or so until the gain had crystallised and then come home the following tax year. Unfortunately it is no that easy any more. You now have to be non-resident for at least 5 years otherwise the tax simply lies in wait for you until you get home. In other words, it is only deferred whilst you are non-resident. All the same, it does enable you to avoid UK capital gains tax if you are thinking of emigrating or living in another country for at least 5 years. Simply wait until you are no longer UK resident for tax purposes and then dispose of your assets. A word of warning though – tax regimes in other countries may be even harsher than ours. Unless you are moving to a well known tax haven, such as Monaco, you might well be stepping out of the frying pan and into the fire!

Non-Doms
Persons who are UK tax resident but not domiciled in this country (non-doms) can avoid paying tax on capital gains outside the UK provided the gains are not remitted to the UK. This will usually apply to overseas visitors who do not intend to make the UK their permanent home. However, if an election is made for chargeable gains to be taxed on a remittance basis, no annual capital gains tax allowance can be claimed, so it is important to ensure that the tax saved on non-remitted gains will exceed the additional tax paid as a result of not being able to claim the annual allowance. It should be noted that capital losses on foreign disposals are not generally allowable in the UK even on the remittance basis. However, since 6th April 2008, individuals may elect for foreign capital losses arising in or after the year of election to be allowable against their chargeable gains. There are special rules restricting this relief so that capital losses (whether they arise in the UK or overseas) cannot be offset against foreign gains arising in earlier years but remitted to the UK later. The election is also irrevocable so once you have made it you must stick with it for all future years too.

Cars
Private motor vehicles used for your own pleasure are exempt from capital gains tax. It doesn’t matter how much you sell them for – you can ignore them for capital gains tax purposes altogether. This also means that you cannot claim losses on selling private cars either. Of course, that doesn’t mean there is no income tax liability if you buy and sell cars for a living. Owners of classic cars should also make sure it is beyond doubt that they bought them for pride of possession. For example, someone who bought a classic car in poor condition, restored it to its former glory and then sold it for a profit shortly afterwards would probably be deemed to have had a trading motive and assessed for income tax.

Chattels
A chattel is anything which is tangible moveable property. In other words they are personal possessions. All chattels are exempt from capital gains tax if the sale proceeds on disposal are less than £6,000. Note that this amount may be substituted by the actual market value if it is very much different, so gifts and items sold cheaply are not necessarily exempt. If an asset is owned by more than one person, the £6,000 is split between them in proportion to their ownership. If the sale proceeds exceed £6,000 tax will be due on the smaller of the chargeable gain or five-thirds of the amount by which the proceeds exceeded £6,000. For this purpose, sale proceeds are deemed to be the gross consideration before deducting any selling expenses such as auction fees. Interestingly, you are allowed to claim capital losses on chattels even if the sale proceeds (or market value if sold to a connected person) are less than £6,000. However, the loss must be based on a deemed consideration of £6,000 even if the actual figure was less, so it is likely to be restricted. There are special rules to prevent people avoiding capital gains tax on sets of chattels, such as antique chess sets, by selling them individually for less than £6,000. It is worth noting that wasting assets with a predictable life of 50 years or less (which automatically includes machinery of any sort) is always exempt from capital gains tax provided that it is a personal possession and you have not claimed capital allowances on it. This exemption does not include intangible assets such as leases, goodwill, trademarks, patents or licenses (to which special rules apply) or living things such as livestock, bloodstock or rare plants and animals.

Savings and Investments
Various forms of savings and investments are exempt from capital gains tax, including PEPs and ISAs, UK government gilts, premium bonds, National Savings certificates and shares bought under a VCT or EIS scheme. Shares acquired through an approved employee scheme such as a SIP or EMI options may be partially exempt from capital gains tax subject to the rules of the scheme.

Gaming wins
Betting, lottery or pools winnings are always exempt from capital gains tax, including spread-betting, which can be akin to share trading or currency dealing in many respects. However, there is duty to pay on any form of gambling, either on the bet itself or on whatever winnings you make. This applies whether you are betting on a horse or on some complex trading position. Normally a spread betting company will pay the duty automatically but it is worth checking with your broker or indexation company.

Foreign currency
Foreign currency purchased for your own use outside the UK is exempt from capital gains tax on any gains arising as a result of movements in the exchange rate. There is no limit on this although of course you should not hold so much that it would undermine your claim that it was all for your own use. For example, a bank account with $100,000 in it would probably not qualify unless you needed that much to pay for the upkeep and maintenance of a foreign property or something similar.

Damages
Damages awarded for personal injury are always exempt from capital gains tax, such as compensation for defamation or unfair discrimination. They could also include a claim against a consultant for negligent financial advice, such as tax (we shouldn’t really mention that one!). However, if the damages were compensation for loss or damage to an asset, then they would be treated as proceeds on a disposal (or part disposal) of that asset. If the damages were for giving up the right to take legal action, then that right would be regarded as an asset and the damages would be treated as consideration received for giving it up. Were that to be the case though, it should be noted that the Revenue would allow the proceeds to be treated as a part-disposal of an underlying asset by extra-statutory concession D33. This allows the taxpayer to allocate a proportion of the asset acquisition cost against the damages received in order to calculate the chargeable gain, for example compensation from an estate agent for negligent advice on the sale of a house.

Charitable donations
Any assets you donate to a registered charity or a Community Amateur Sports Club (CASC) are always exempt from capital gains tax. If you sell an asset to a charity or CASC for less than its market value but more than its original cost, then you may have to pay capital gains tax but only on the amount you actually received for it, not on its true market value. The gift or sale must also be without any reservation of benefit. For example, you cannot donate your house to a charity and continue to live in it. If you sell the assets on behalf of the charity after you have donated it to them, you will need some evidence such as an exchange of letters to show that the charity accepted it before you sold them.

Wills
Capital gains are extinguished on death so any assets that form part of the estate of a deceased person will not be subject to capital gains tax. However, any assets disposed of by the deceased person in the tax year during which he or she died may have already incurred capital gains tax in the normal way, so if this has not been paid yet it will need to be deducted from the estate as an outstanding debt. And of course, the estate could be liable to Inheritance Tax anyway.


Acumen Tax Solutions
2 Purley Bury Avenue, Purley Oaks, Surrey CR8 1JB
Tel: 020 8406 9425 Mobile: 07813 582890 E-mail: info@acumentaxsolutions.co.uk

For information of users: Although every care has been taken in compiling this material, it only provides an overview and does not take the place of an individual consultation. We strongly advise all users to consult the detailed legislation or seek professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or this firm.

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