Capital Gains Tax Rates and Exemptions?

Capital Gains Tax (CGT) is a frequently overlooked expenditure. While it is a major consideration for investors and businesses, some individuals may never incur a CGT charge. However, when considering transferring assets into or out of a trust CGT should be at the forefront of the settlor's mind. It can represent a significant cost, either to the settlor or to the intended beneficiaries of the trust.

Capital Gains Tax Basics

A CGT charge arises when some assets are 'disposed of'. This term refers to any method by which an individual gives up the ownership of property; this might be through a sale, exchange, or gift. Furthermore, CGT charges may apply when an individual receives payment for an asset in circumstances other than a sale, for example when property is damaged and compensation is paid.

Capital Gains Tax is not charged on individual transfers. Rather, an individual's total CGT liability is calculated on an annual basis, coinciding with the regular tax year. Total gains subject to CGT are added together, and from this figure is deducted any relief or exemptions available. These are covered below.

Exemptions

CGT is payable at a flat rate of 18 per cent, or 28 per cent for higher rate taxpayers. This rate will apply to both individuals and trustees. However, the disposal of certain assets does not attract a CGT charge. These assets include cars; growth from ISAs and PEPs; gambling winnings; government bonds; any income that is subject to income tax, whether it is derived from employment or not; and any assets with a value of £6,000 or less at the time of sale.

The disposal of a family home may also be exempt, but only if it meets certain conditions. The most important of these are that it must have been your main home for the entire duration of your ownership; that the total area of the house and grounds are less than 5,000 square metres; and that you took in no more than one paying lodger at a time.

There are a number of other reliefs available against Capital Gains Tax. Many of these concern business transactions; it is possible, for example, to defer gains made on various business assets for a certain number of years. This can be useful when your annual exemption has already been accounted for as you can use allowances in further years to reduce your tax bill. This sort of relief is available, for example, when businesses are incorporated into companies in return for shares, or when business assets are sold in order to buy new assets. It is also worth remembering that significant allowances can be made for gains that have been deferred since 31 March 1982 or earlier. This process, known as 'rebasing', can effectively halve the value of the assets for CGT purposes.

Another of the key reliefs available against Capital Gains Tax is known as taper relief. This provides a downwards sliding scale for CGT charges on assets that have been held for a long period of time. Further information on taper relief is available in another article in this section.