Capital Gains Tax
A capital gain is the gain or profit made when something is sold or otherwise disposed of. Tax is charged on the proceeds of a sale (or in some, circumstances the market value of the asset at the time of the disposal) less the cost of acquiring it.
In some cases, it is also possible to deduct the expense of improving property, and some taxes paid regarding the property, but not maintenance costs.
Capital gains taxes are often less than the equivalent income tax rates. This is true (in most circumstances) of the UK and US tax systems, and therefore a lot of tax planning centres around realising a return in the form of an increase in capital value, rather than as income, to utilise these lower rates.
I have highlighted below some of the basics of the UK system, with a focus on areas which particularly impact expat populations. Details regarding the US system of capital gains will follow next week.
Capital Gains Tax Rates
Capital gains are charged at 28% where an individual has total income and gains above the basic tax rate allowance. Up to this limit, gains are charged at 18%.
Capital Gains Tax Allowance
The capital gains annual exception is available to offset the first £11,100 of gain (for 15/16). Tax will be charged on the element of the gain above this amount.
If you have stored up gains, it can be useful from a tax perspective to sell an amount equivalent to the annual allowance each tax year (assuming that you have no other taxable gain that year), in order to realize the gain without paying tax on the amounts. However, you should talk to your tax adviser before taking any such action.
Capital disposals are reported on the UK self-assessment tax return on the dedicated capital gains pages. Any costs are also reported here, and the gain calculated.
Please see below regarding the sale of UK residential property by non-residents for details of the special reporting rules.
As discussed in a previous article, UK resident non-domiciled individuals who elect the remittance basis of taxation can realize capitals gains free from UK tax as long as the gains are realized and retained outside of the UK.
Leaving the UK
Individuals who have broken UK residence can potentially realize a gain free from UK tax despite an asset being acquired during a period of UK residency. However, in order to avoid the capital gains tax charge, the individual must be non-resident for 5 full tax years.
This offers individuals who plan to dispose of an asset with a substantial gain the opportunity to mitigate the capital gains tax which would otherwise be due by leaving the UK for a period. However, any such action should only be taken along with professional advice.
Relief and Exemptions
Various assets are exempt from capital gains tax, including individual’s primary residence. Reliefs are also available for assets held for business purposes amongst others.
UK Residential Properties Owned by Non-Residents.
These properties are now subject to UK capital gains tax. The cost of the property that is used to calculate the gain is set at the value of the property at April 2015. If you have not already done, so it is advisable to have your property valued in order to establish this for when the property is sold.
Sales of UK residential properties owned by non-residents need to be reported to HMRC within 30 days of the sale on a specific tax return.
Just one follow up from last week’s article: the final increase in the IHT tax thresholds was missing. This will be £175,000 in 20/21. Therefore the calculation to get to passing a £1m property free of IHT looks like 2 (1 each per spouse) x £325,000 = £650,000, plus 2 (1 each per spouse) x £175,000 = £350,000 gets to the £1m. Thanks to those of you who pointed this out.