Contents

Introduction and historical note
Quick guide to capital gains tax rates
GCT in relation to property
Gifts between Spouses and Civil Partners
Irish investors and the Double Taxation treaty

Introduction and historical note

Capital Gains was first introduced to the UK in 1965.  Before then, a person was not taxed upon the profits that they made from buying and selling an asset unless it was a trade within their business.  In that situation, the profit would form part of the calculation for income tax purposes. 

Capital Gains Tax (GCT) was introduced as a tax on all capital gains within a particular tax year.  The tax applied to all assets bought and sold and if a capital loss was made, it could be offset against gains.  Cars are an asset which rapidly depreciate.  The Government made cars exempt from CGT (purely because they did not want people to use the loss on the sale of the car to be offset against gains)

In theory, at least, the tax is a simple one.  In order to work out a capital gain, you deduct the acquisition value (the cost of buying the asset) from the disposal value (the cost of selling it).  If there are any costs of buying the asset, that is added to the acquisition value.  Similarly, if there are any costs of sale, that reduces the disposal value.  You would then add up all of your capital gains and capital losses within a particular tax year and compute the net annual gain.  The following is a very simple example of how an individual’s capital gains tax might be calculated.

Harry is unmarried and in the top bracket for income tax purposes.  In October 2007 he takes £50,000 out of his building society account and buys some shares in X Limited for that amount.  There is no cost in buying the shares.  Within 3 months, the price of the shares shoot up following a take-over bid for X Limited.  Harry sells the shares and after payment of stock broker fees nets £100,000 on the sale.  He puts the £100,000 into the building society again.  He does not deal in any more assets during the same tax year.

Harry’s annual net capital gain is £50,000.  The annual allowance (see below) for gains in £2007-8 was £9,200.  The chargeable gain is  £40,800 (50,000 minus 9200).  The Capital Gains Tax is 40% of the chargeable gain, i.e. £16,320

In practice, the tax is not so simple.  A Disposal can also be a gift (unless it is on death).  There are also offsets, allowances, asset categorisations, exemptions, reliefs and overlaps with other taxes which make the tax complex by nature.  In addition, Corporation Tax (the tax which applies to Companies) is a tax on the combination of its income and capital gains.  A company enjoys the fact that they can offset capital losses against income profits and income losses against capital profits.

Some basic information about the tax is provided here for quick reference.  What we hope you get from it is that you ask good questions, rather than seek answers.  Each person’s tax situation is different and taxes, particularly CGT should never be looked at in isolation from others.  Unless you have specialist knowledge of tax, there is no substitute for taking professional advice.  However, if you really wish to take in detail, visit the Inland Revenue Website by clicking here.

Quick guide to current capital gains tax rates

Capital Gains Tax rate

How to calculate the tax?

(a)      For tax year 2007 /8

The amount of the chargeable gain is firstly added to the top of the income which is liable to income tax and is then charged Capital Gains tax at the following rates

• below the starting rate limit at 10%,
• between the starting rate and basic rate limits at 20%,
• and above the basic rate limit at 40%.

In practice, most people who have a capital gain are above the basic rate limit and will be liable to capital gains tax at 40%

(b)      For tax year 2008 /9

Simply deduct the allowance from the gain.  The tax is 18% of the taxable gain.

Abolition of  Taper relief

This relief, together with its predecessor (indexation) will be withdrawn from 7th April 2008.  Until then, tapering relief works in the following way

(1) Calculate the net gain after the indexation allowance (note that this allowance is nil if the assed is acquired after 5th April 1998)

(2) Use the following tables to work out the percentage of the gain chargeable (depending on whether the asset is a business or non-business asset)

Non – Business Assets

Business Assets

CGT in relation to Property

There is no distinction for Capital Gains Tax purposes between residential and commercial property.  However, there are other distictions depending on what is done with the property.

If the property is your home

There is no capital gain on a  property if it is your own home.  There can be a gain during a period of ownership when it was not part of the home.  If a non-resident owner owns a property jointly with a resident owner, the gain is assessed purely on the share of the non-resident owner.

If the property is a business asset

In order to be a business asset the property must be used for some particular purpose connected with a business.  That would rule out investment property.  As a business asset, it would qualify for special tapering relief (see table above).  Also, the asset may be eligible for retirement relief. 

Note here that under current proposals, this is set to change in April when all tapering relief is set to become abolished.  This could be a serious blow for businessmen in the future that could be paying 18% CGT instead of 10% (25% of 40%).  If you are thinking of selling your business asset or wish to take advantage of business tapering relief while it is still alive, consider transferring the business asset into a trust before 5th April 2008.

Gifts between spouses and civil partners

No tax is payable if a gift is made between one spouse to the other or if a gift is made by a person to another where they are partners under the Civil Partnerships Act.   This exemption is very important when it comes to overall tax planning for families as it enables transfers to be made to suit a particular situation.   

Irish investors and the Double Taxation treaty

At the moment, the UK tax rates (Usually 40%) are significantly higher than the Irish rates (20%).  From April 2008, this is about to change and could trigger a change in the way the double taxation treaty works.  At the moment, an Investor domiciled in the Republic of Ireland who sells in the UK is not accountable to the UK government for his tax.  Instead, his responsibility is to the Irish Government so that any profits he makes in the UK are declared on his tax form to the Irish Government and he is taxed in Ireland on his profits at 20%.  A UK investor in Ireland can not do that.  He has to pay 20% to the Irish Government. He is then taxed at 40% by the UK Government but will get credit for any tax already paid to the Irish Government. 

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