Capital Gains Tax: A Practical Guide to the Basic Rules for Individuals

Capital Gains Tax (CGT) is a tax levied on chargeable gains from the disposal or part-disposal of an asset. Disposal or part-disposal of assets could take various forms including sale, transfer, exchange, or gifting of the asset. It could also occur where an asset is lost, depleted or destroyed whether or not compensation or insurance payout is received, or where an individual receives capital distribution in money or money’s worth for their shares in a company commonly during a winding-up process, a take-over or a share repayment/reduction process.

According to Section 1A of the Taxation of Chargeable Gains Act (TCGA) 1992, individuals who are tax resident in the United Kingdom (UK) for a tax year are chargeable to CGT in the UK on the disposal or part-disposal of their assets wherever they are situated i.e., whether or not such assets are within or outside the UK. Individuals who qualify as non-residents in a tax year on the other hand, will only be chargeable to CGT under specific conditions.

This article provides guidance on CGT compliance for both UK and non-UK tax resident individuals. It also considers the basic rules on computation and reliefs available to manage tax liability.

Who is Liable to CGT?

As has been established in the introduction above, both UK and non-UK tax resident individuals can be liable to CGT in the UK. Individuals who qualify as UK tax resident in a tax year (based on the statutory residence tests (SRTs)) are often taxed on their worldwide chargeable gains except maybe when the individual opts for the Foreign Income and Gains Regime. Non-residents on the other hand are only liable to CGT in the UK where any of the conditions listed below are met:

1. There is a disposal or part-disposal of assets situated in the UK that are relevantly connected with the non-resident individual’s branch or agency and at a time when the individual has that branch or agency. To simplify this, Section 1B of the TCGA 1992 explains that a person (individual in this case) has a UK branch or agency at any time if at that time, the person carries on a trade, profession or vocation in the UK through a branch or agency in the UK.
2. There is a disposal of interest in UK land.
3. There is a disposal of assets located within or outside the UK that derive at least 75% of their value from UK land and the individual has a substantial indirect interest in the land.

Determining if UK resident and non-resident individuals are liable to CGT on a disposal can be quite complex as there are several conditions to consider. For instance, UK resident individuals may need to consider split year rules and CGT implications in tax years where they come from abroad and begin to live or work in the UK and vice versa. However, the TCGA 1992 and CGT manuals by His Majesty’s Revenue and Customs (HMRC) provide helpful guidance in resolving these complexities.

What is an Asset for CGT Purposes?

Section 21 of the TCGA 1992 identifies all forms of property as assets for CGT purposes. This generally includes options, debts, incorporeal/intangible property, currency (excluding the UK Pound sterling). Assets also include any form of property created by the person disposing of it and property that comes to be owned without being acquired in the conventional sense.

Although the CGT Act considers all forms of property as assets for CGT purposes, gains (or losses) on the disposal of certain assets do not come under the scope of or are exempt from CGT. Some of such assets include:

1. Private motor vehicles.
2. Tangible movable property sold £6,000 or less.
3. Tangible movable property that is a “wasting asset” (i.e., an asset with a predictable life of 50 years or less) unless such asset is used for a trade, profession, or vocation. This is subject to some exceptions.
4. Foreign currency sold by an individual at a gain where the foreign currency was acquired for personal use outside the UK by the individual, a family member or on foreign currency bank accounts.

How is CGT Computed and Reported?

The TCGA 1992 provides rules for the computation of gains or losses for CGT purposes under different circumstances. For instance, the calculation of gains or losses on the disposal of land or building will involve considering if a market value assessment is required (e.g., for assets owned before April 1982, inherited at no cost, gifted etc.,) and for non-residents, one would need to consider what computation method is most favourable amongst the three methods generally available for use (the rebasing, time apportionment and the whole period methods). On the other hand, the calculation of gains or losses on the disposal of securities such as shares will involve identifying and matching the shares that have been disposed of under specific rules as set out in Section 106A of TCGA 1992.

Notwithstanding the above, gains or losses are generally calculated as the difference between disposal proceeds and the original acquisition cost (or market value in some instances) with due consideration for certain costs incidental to the acquisition and disposal of the asset as well as costs incurred to improve or enhance the asset as deductible costs. The resulting taxable gain, after deducting allowable losses and the annual exempt amount (currently £3,000), is then taxed at 18% to the extent that it falls within the individual’s unused basic-rate band and at 24% to the extent that it exceeds that band.

CGT is generally reported in the individual’s self-assessment tax return which is due for filing on or before 31 January following the end of the relevant tax year. However, for disposals involving UK residential property, these must be reported to HMRC through a UK property account within 60 days of completing the sale with any CGT due paid as well. UK-resident individuals can also report their CGT using HMRC’s real-time CGT service, with the gain generally required to be reported by 31 December following the end of the tax year and any CGT due paid by 31 January following the end of the tax year. However, this cannot be used to report gains on UK residential property and gains in some other specific situations. Any gains reported through a UK property account or the real time CGT service must also be reported on the self-assessment tax return where the individual is already registered for this.

What Reliefs are Available to Reduce CGT Liability?

There are different tax reliefs available for individuals liable to CGT in the UK. These tax reliefs, comments on their effect and applicability are listed below: