Outline

CGT is payable on chargeable gains made during a tax year by a person who is resident or ordinarily resident and domiciled in the United Kingdom during all or part of a tax year. A non-resident non-UK domiciled individual is not subject to CGT. Whether trust property is subject to CGT will depend on a number of issues including the residency of the trust or beneficiary and depending on who takes benefit of any gains following the Finance Act 2008 ("FA2008"). The tax is due on the 31st January following the end of that tax year.

The FA2008 sets out the new CGT regime for CGT set out in 2-10 below which is also compared to the old regime as the previous CGT treatment may still need to be required. It also sets out the way in which UK resident individuals who are not domiciled in the UK will be taxed to CGT - see 13 below.

Chargeable gains

Chargeable gains accrue on the disposal of an asset, so it is important to determine whether the action you are planning to take will result in a tax charge. A gift by one person to another is a chargeable disposal, (subject to any of the exemptions being applicable to the particular disposal).

How to determine the chargeable gain

For assets disposed of on or before 5th April 2008, broadly, the chargeable gain is the difference between the "base value", and the net proceeds of sale (or its market value on any other type of chargeable disposal), subject to an allowance for inflation ("indexation allowance") since 31st March 1982 or the date of acquisition, if later. Certain other types of expenditure may be deductible.

For assets disposed of after 5th April 2008 by an individual a trustee or a personal representative, the gain using a base value as at 31st March 1982 or if the asset was acquired after that date, the date of acquisition. Indexation is not available.

Please note that the capital losses can be set off against chargeable gains of the same and later years. These allowable losses are calculated in the same way as chargeable gains. It is unusual to see a loss in recent years when looking at the disposal of works of art, but the loss or destruction of a painting is a chargeable disposal, and providing that it is uninsured and an appropriate claim is made to the Inspector of Taxes (see later), an allowable loss will occur.

The "Base Value" and "Rebasing" to 31st March, 1982

1. Position prior to 6th April 2008

   CGT was introduced by the Finance Act 1965 and, until the Finance Act 1988, the amount of the chargeable gain accruing on the disposal of an asset was, in broad terms, calculated by reference to the value of the asset on 5th April, 1965 or to the cost of, or value at, a later acquisition by the person now making the disposal. (If an asset was owned prior to 5th April 1965 it may be necessary to consider the "time apportionment" rules).

   The Finance Act 1988 introduced "rebasing". Thus, for the purposes of calculating the chargeable gain on a disposal after 6th April 1988 of an asset, the base value is its market value at 31st March 1982 (taking into account an indexation allowance for inflation) if the asset was owned on 31st March 1982 by the person now making the disposal.

   If the asset was acquired after 31st March 1982, the base value is the cost of, or market value at, acquisition. Special rules apply if the asset was acquired after 31st March 1982 on a disposal on which some form of tax deferral was claimed (such as the CGT hold-over election).

   In certain situations, and in the absence of an election by the taxpayer, rebasing will not apply. Thus, it will only apply to reduce a gain or a loss. If, for example, the effect of rebasing in a particular case would be to convert a gain to a loss then rebasing will not apply and it would be necessary to calculate the gain under the "old rules".

   To avoid keeping two sets of records, legislation therefore provides that a taxpayer can elect that rebasing will apply to every disposal by him, even if, in the absence of an election, some disposals would fall outside the rebasing rules. Any such election is irrevocable and would have to be made in relation to all the taxpayer"s assets.

2. Position post 5th April 2008

   Individuals, trustees and personal representatives must use a base value as at 31st March 1982 or such other date if the asset was required after 31st March 1982.

Rebasing on Death

Before the FA2006 the assets in which a life tenant benefited were rebased to market value at the death of the life tenant, as is the case with assets held absolutely. Generally this will continue for life interest trusts that continue to be taxed under their own regime but not for those taxed under the discretionary trust regime. Property in a BMT or an 18-25 Trust will be rebased on the death of a beneficiary who does not have an absolute interest.

Indexation and Taper Relief

1. Position prior to 6th April 2008

   Indexation takes into account the effect of inflation from 31st March 1982 and was available for disposals after April 1988 up to 5th April 1998. Taper Relief then applied to the indexed gain based on the number of complete tax years the asset has been held since 6th April 1998. Taper Relief is applied differently depending whether the disposal is of a business or a non-business asset.

   The effect of Business Asset Taper Relief is that 50% of the indexed gain is taxable after one full year of ownership and only 25% is taxable after two. Taper relief for non-business assets is less generous; after ten years of ownership a maximum of only 60% of the indexed gain is taxable, although a bonus year may be included if the asset was owned on 5th April 1998.

   The definition of a business asset has changed since 6th April 1998 and it is therefore important to establish when the period of ownership began. However business assets can now include: shares whether listed or not; a share in a partnership; a sole traded business; assets used in a business carried on by the taxpayer; and those assets if held by trustees while they trade or where an eligible beneficiary trades with trust property as a partner or sole trader.

2. Position post 5th April 2008

   Indexation and Taper Relief are no longer available to individuals, trustees and personal representatives on assets sold after 5th April 2008.

Entrepreneur's Relief

In place of Business Asset Taper Relief, Entrepreneur's Relief will apply from 5th April 2008 and from 22nd June 2010 with a collective limit of gains of £5,000,000 giving and effective CGT rate of 10%. This relief will apply to disposals of a business or an interest on a business or shares in a company providing it has been asked for a year prior to disposal and other conditions have been met as to the nature of the business being disposed of.

Assuming that the taxpayer elects to rebase to 1982, a typical calculation on the sale of a non-business item worth £100,000 in May 2006, which was worth £15,000 in 1982, would be as follows:-

Rate of Tax

Gains made after 5th April 2008 ware taxed at a flat rate of CGT at 18%. Gains made after the 22nd June 2010 are taxed at 28%.

For disposals made before then the regime had been in place since 1988, where chargeable gains were taxed at rates equivalent to the income tax rates. An individual's net chargeable gains for the year of assessment were treated at the top slice of his taxable income to compute the CGT liability.

Annual Allowance

An individual has an allowance for chargeable gains for each tax year, within which no CGT will be payable (the exempt amount for the tax year 2009-2010 being £10,100 for an individual and £5,050 for trustees). Spouses each have a separate allowance and, of course, will be assessed separately to CGT.

The £6,000 Exemption "Small Chattels Exemption"

There is an exemption for CGT for low value chattels, and this is quite separate from the annual allowance. It affects disposals in which the amount paid for the chattel (in the case of auction, the hammer price, not the net proceeds), or its market value where there is no sale, does not exceed £6,000. The disposal of two or more items forming part of a "set" is treated as a single disposal with only one £6,000 exemption being available if the disposal is to one person (or to a number of recipients who are connected or acting together in concert). There is no statutory definition of "set" for these purposes, but it is understood that HMRC's view is that a "set" is a finite grouping which was originally conceived as an entity rather than one which has become so. For example, a set of dining room chairs which were obviously made to be together. Determination of what is or what is not a set can still provokes lengthy discussion.

There are also anti-avoidance provisions on successive part disposals of £6000 or under, relating to a chattel worth more than £6000. Where there is a disposal of a right in a chattel, it is aggregated with the market value of the remaining part.

If the amount exceeds £6,000, but not by very much, there is marginal relief, which may have the effect of reducing the amount of chargeable gain.

If the ownership of the chattel is shared, each joint owner enjoys the £6,000 chattels exemption in respect of the chattel in question.

"Hold-Over" Relief

Until the Finance Act 1989, when a person made a gift which was a chargeable disposal, he could elect not to pay CGT at that time but to "hold-over" the gain and effectively pass his CGT base value to the donee.

This relief is now only available in certain circumstances for instance when: the gift is chargeable to IHT (for example, on a gift to a trust that is taxed under the discretionary trust regime); the disposal enjoys the IHT conditional exemption (although in that case the equivalent CGT exemption would probably also apply to exempt the gain in any event); the disposal enjoys IHT exemption on being made to a charity, political party or for the public benefit. Holdover relief is also available for disposals of business property.

Holdover relief is not available for disposals into trusts in which the settlor/donor has retained an interest and following later legislation, this now includes a trust in which the settlor’s minor children may benefit.

Chattel Licences - Resident Beneficiaries of Offshore Trusts

In addition to agreements for the use of chattels following a transfer so that the donor may continue to benefit from chattels under the IHT regime, offshore owners may also wish to allow UK resident beneficiaries the use of chattels held in offshore vehicles. In these cases, any such benefit would result in a matched CGT liability to any untaxed gains within the offshore trust.

In order to avoid this tax liability a full consideration should be paid by the resident beneficiary to ensure a CGT liability does not arise in a given tax year.

Taxation of UK & Non-UK Resident individuals (Domicile & Residency)

Although this section deals with CGT, the concept of domicile generally relates, in taxation terms, to IHT. An individual who is neither domiciled nor deemed domiciled in the UK is only subject to IHT on UK assets. An individual who is UK domiciled is subject to IHT on his worldwide assets.

Residency relates for these purposes to CGT. Generally speaking a UK domiciled and resident person will be subject CGT on his worldwide gains. A person who is neither resident nor ordinarily resident in the UK is not normally liable to CGT on disposals of UK assets or those elsewhere. The position for non-UK domiciled but UK resident individuals is more complicated.

Before the FA2008, a UK resident non-domiciled person was subject to CGT on UK gains but not to offshore gains made provided they were not brought onshore, also known as remitted, to the UK. After 5th April 2008, non-UK domiciled persons who have been UK resident for seven out of the last nine years will pay CGT on their worldwide changeable gains unless they claim to pay CGT on the remittance basis. To use the remittance basis, such a person must pay a fee of £30,000 although the remittance basis remains available without penalty in certain circumstances such as where the offshore gains and income do not exceed £2,000 and where the person is under 18 years old.

In addition to the preceding paragraph and from 6th April 2008, if a non-domiciled resident person brings an asset into the UK that has been bought using untaxed foreign gains or any untaxed foreign income, a tax charge is triggered, and for these purposes, as a remitted gain on the foreign gain.

Certain assets are excluded from the remittance rule and some are excluded by virtue of the reason they have been brought onshore, such as:-

1. Personal effects such as clothing, footwear, jewellery and watches;
2. works of art, collectors items or antiques (at least 100 years old) brought onshore for public exhibition;
3. property brought onshore for repair and restoration provided it is in the UK for not more than 275 days to the extent that it was bought from untaxed foreign income;
4. property worth less than £1,000.

Trusts on Divorce

Before decree absolute is declared the spouse exemption continues. Following FA2006 22nd March 2006, this exemption still applies after decree absolute on a transfer of assets pursuant to a court order and where the assets were not intended to confer any gratuitous benefit or the transfer was for the maintenance of the ex-spouse.

Before 22nd March 2006, trusts could secure the children's interests, while giving the former spouse a life interest, there were no exit or periodic charges and the initial transfer was either exempt or a PET.

After 22nd March 2006 trusts created as a result of a divorce will be treated for IHT purposes as any other trust after that date. On an initially positive note holdover relief for CGT should be available going into a trust. However as minor children are likely to be beneficiaries, holdover relief will not be available. The taper relief position should have been carefully reviewed before making a holdover claim.