The main rate of capital gains tax is 10 percent for basic rate taxpayers and 20 percent for higher rate taxpayers. In the event that the gain covers both tax bands then a combination of the two rates will be payable accordingly. These rates increase to 18 percent and 24 percent respectively for gains arising on the sale of residential properties (excluding main residence).
A valuable relief known as business asset disposal relief can apply to the gain arising on the sale of certain business assets whereby the maximum rate of capital gains tax will be 10 percent (subject to a limit of £1 million lifetime gains).
Generally speaking, business asset disposal relief can apply to the sale of an interest in a sole trader or partnership business, the disposal of shares in an individual’s personal company and the sale of assets used in any of these entities following their disposal of cessation.
In general terms, a company is an individual’s personal company if that person owns over 5 percent of the share capital and voting rights and is an officer or employee of the company – these conditions must both be met for a period of at least two years prior to the sale.
There are other conditions that may need to be satisfied and a number of different arrangements that may be made to protect and/or maximise an individual’s entitlement to this valuable relief. Therefore, it is important to review the current ownership of business assets and also future plans to ensure that the rate of tax payable on exit and/or disposal is kept to a minimum.
A common pitfall is that capital gains tax can apply to gifts of assets or transactions undertaken on a non arm’s length basis. The level of consideration used to calculate the gain is based upon the asset’s market value and therefore a simple gift of an asset such as a property can be very costly. There can be ways to mitigate the impact of this in certain circumstances and therefore advice should be sought at an early stage.
Ordinarily, capital gains will be taxed via an individual’s self assessment tax return, however gains realised on the disposal of a residential property must be reported initially via an on-line capital gains tax return and this must be submitted within a set time frame after completion (currently 60 days).
The above is a very short synopsis of some of the more common areas of capital gains tax but there are many different provisions and reliefs available depending upon the assets and specific situations so it is important to engage professional advice before undertaking any substantial disposals.
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