Capital Gains & Other Taxes Manual - Section 5 - Part 1 - Capital Gains Tax

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Introduction

5.1 General

5.2 Chargeable Gains

5.3 Legislation

5.4 Rate of Tax

5.5 Annual Exemption

Occasions of Charge

5.6 Post transaction Valuation checks (PTVC)

5.7 Prior Agreement of Property Portfolio Valuations

5.8 Options

Allowable Losses

5.9 General

Connected Persons

5.10 General

5.11 Definition

5.12 Transfers subject to restrictive covenant (s.18(6))

5.13 Series of transactions (s.19)

5.14-20 Reserved

Part 1 : Introduction and Background

Introduction

5.1 General

The Taxation of Chargeable Gains Act 1992 provides for the taxation of capital gains accruing on the disposal of assets except for those given specific exemption or relief.

The Act provides for Capital Gains Tax (CGT) on chargeable gains realised by individuals trustees and personal representatives and Corporation Tax on chargeable gains realised by companies.

5.2 Chargeable Gains

A chargeable gain is broadly speaking the excess of the consideration received on a disposal over the expenditure incurred in acquiring, creating or improving the asset.

When the tax on capital gains was originally introduced in 1965 the basic principle was that it was charged on the actual gain accruing between the date of disposal and the date of acquisition or

(6 April 1965 if acquired earlier). However, for disposals occurring after 5 April 1988 CGT has been rebased to 1982 so that tax is now normally only charged on the gain which is attributable to the period since 1982.

Since 1982 the amount of chargeable gains have also been reduced by various forms of indexation allowance, aimed at excluding the element of gain attributable to inflation (see paras 5.29-32).

CGT is chargeable on the total amount of chargeable gains accruing to the taxpayer in the year of assessment after deducting any allowable losses and the annual exemption (see para 5.5 below).

5.3 Legislation

The provisions relating to CGT are now contained in the TCGA 1992, having formerly been contained in the Capital Gains Tax Act 1979 and originally the Finance Act 1965. The administration of CGT is dealt with in the Taxes Management Act 1970 and Statutory Instrument 1967 No.149. All references below are to the TCGA 1992 unless otherwise stated.

5.4 Rate of Tax

CGT on a chargeable gain is charged at rates equivalent to the rates of income tax which would apply if the gains were treated as the top slice of an individual’s income. Companies are liable to corporation tax on any chargeable gain.

5.5 Annual Exemption

There is an annual exemption for individuals and certain trusts. In 1995/96 this exempts the first £6,000 of an individual's chargeable gains. (For previous years see Appendix 18).

Occasions of Charge

5.6 Post transaction Valuation checks (PTVC)

All taxpayers, individuals and companies, may submit any CGT valuations to their tax office for checking before they submit their returns. The main features of this service are:

i. Applications must be made to the Tax office handling that taxpayer and not the VOA.

ii Applications may be made only after the relevant transaction has taken place.

iii Taxpayers must put forward a valuation supporting their proposed figure together with full information about the property concerned and a CGT computation.

iv Although extending to simple apportionments the service is not available for complex apportionmemts where there may an underlying technical issue i.e. private residence relief.

Applications are made by submitting form CG 34, see Appendix 14, following the guidance notes set out in Appendix 15.

Further details on this procedure is set out in para 6.128.

5.7 Prior Agreement of Property Portfolio Valuations

A new service was introduced in May 2000 which enables certain companies to ask for prior agreement of the 1982 value of properties held by them since that time even if no disposals are being considered.

To enter this scheme, which is being treated as a pilot for two years from March 2000 a company, or group of companies, must meet the following requirements:

i The portfolio includes 30 or more properties held since 1982, or,

ii if fewer than 30 the properties have a current value in excess of £30 million.

Requests for inclusion into the scheme must be addressed to that companies tax office who will respond with the letter, and notes, set out in Appendix 16.

5.8 Options

It should be be noted that the grant of an option to purchase is treated as a separate chargeable asset and there will generally be no allowable expenditure (apart from any costs of drawing up the option agreement). If the option is abandoned, no allowable loss can be can be claimed by the grantee. If the option is exercised the consideration for the option is added to the consideration for the transfer and this is treated as a single transaction occurring at the date of transfer. (S.144-146).

Allowable Losses

5.9 General

Allowable losses are computed in the same way as chargeable gains. Although they do not normally give rise to a repayment of tax they can be set off against chargeable gains arising in the same or subsequent years.

Connected Persons

5.10 General

In order to forestall the transfer of assets between connected persons at little or no value for the avoidance of tax, the TCGA provides that such transfers are not regarded as bargains made at "arms length" and the property will be deemed to pass at its market value (apart from certain no gain/loss situations including transfers between spouses).

5.11 Definition

It is important to note that the Act defines "connected persons" and whilst they may be substantially the same for Income Tax, Corporation Tax and CGT purposes, the rules were extended for CTT and IHT. A summary of the position regarding "connected persons" can be found in Appendix 19 and it should be noted that persons can be connected by way of trade as well as blood.

5.12 Transfers subject to restrictive covenant (s.18(6))

If assets are transferred to a connected person subject to a restrictive covenant imposed by the transferor, then the disposal is deemed to have taken place for a consideration which is:-

a. The market value of the asset as if it were not subject to the restriction, less

b. the market value of the right or restriction, or, the amount by which its extinction would enhance the value of the asset to its owner, whichever is the less.

5.13 Series of transactions (s.19)

Where a person enters into a series of transactions with a connected persons, over a period of 6 years or less ending on the date of the last transaction, on each occasion where the market value of the asset transferred is less than appropriate portion of the aggregate market value of the asset, the disposal is deemed to be for a consideration equal to the appropriate portion of the aggregate market value.

5.14-20 Reserved

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