Capital Taxes Notes

Problem Question Guide – CGT

Basic Rates

• Annual gains exemption of 11,100

• The rates applicable are:

  • 18%/28% for gains on residential property and carried interest

  • 10%/20% for all other gains

  • Although pre-April 2016, the rates are just 18% or 28%.

• The rate depends on the taxpayer’s income. If taxable income is above 32,000 then capital gains will be taxable at the higher rates of 20% or 28%. If taxable income is below 32,000 then the amount by which 32,000 exceeds taxable income is the amount of taxable gains subject to the lower rate of 10% or 18%, with any remaining gain taxed at 20%/28%.

• E.g. T has a taxable income after personal allowance of 29,6000 and also a capital gain of 21,100. The first 11,100 of this is exempt, leaving a taxable capital gain of 10,000. 2,400 of the gain (32000 minus 29,600) will be taxed at 10% and the remaining 7,600 at 20%.

Central concepts: Disposal of an asset resulting in gain, taking into account any exemptions and deducting allowable losses.

What is a chargeable asset?

A chargeable asset is defined in s 21(1) TCGA as ‘all forms of property’, specifically including any currency other than sterling, and ‘any form of property created by the person disposing of it, or otherwise coming to be owned without being acquired’

Rule: Rights of action not capable of being owned in a legal sense are not assets.

• E.g. in Kirby v Thorn EMI, the court held that a company’s right to trade and compete in the marketplace was not an asset and hence a sum received for entering into an agreement not to sell shares in subsidiaries was not a capital sum derived from an asset. On the other hand, the payment which were received for agreeing not to exploit the goodwill of the company was taxable.

  • The right to sell on the marketplace was not an asset (‘property’), but a right in a free society. ‘Property’ must be capable of being owned, in a normal legal sense.

  • Goodwill, on the other hand, ‘is not something possessed by everyone’. It has a value, even though by its nature this is not assignable. It can be protected by an action, and is discernibly distinct from the mere liberty of trade.

• Further example in O’Brien v Benson’s Hosiery: Held that a bundle of rights of an employer under a service agreement was an asset, so that a sum received by an employer to secure the release of the employee was derived from that asset and liable to CGT. It was sufficient that it could be ‘turned into account’; it was irrelevant that it was not assignable by the employer.

  • Lord Russell: ‘If the employer is able to exact from the employee a substantial sum as a term of releasing him from his obligation to serve, the rights of the employer appear to me to bear quite sufficient the mark of an asset of the employee, something which he can turn into account, notwithstanding that his ability to turn it to account is limited by the nature of the asset’.

• In Marren v Ingles, shares were sold for a cash sum plus the right to receive a further sum, to be computed by reference to future, unpredictable events. The right to receive a future sum was held to be an asset. ‘Asset’ includes incorporeal rights to money’s worth which was part of the consideration given for the shareholding.

What is a chargeable disposal?

This is not defined in legislation, but by s 21(2) it includes a part disposal, and by s 22, circumstances ‘where any capital sum is derived from assets notwithstanding that no asset is acquired by the person paying the capital sum’.

Tiley: disposals are the ‘transfer or alienation of the beneficial title to an asset from one person to another, involving a disposal by one and an acquisition by another’.

There is a disposal even if the person paying does not acquire an asset e.g. O’Brien, where the person is released from employment, T had not received an asset.

General rules

• The disposal of an asset otherwise at arm’s length (e.g. by a connected person) is to be treated as a disposal at open market value (s 17, 18(2) and 286 TCGA). Section 18(2) applies s 17 to disposals between connected persons, regardless of the motive of the parties or the price paid.

  • Connected persons: spouse, civil partner, sibling, ancestor or lineal descendant, as well as the spouse or civil partner of any one of those individuals and with those relations of the spouse or civil partner.

  • Aunts, uncles, nephews and nieces are not connected persons.

• Death is not a disposal for the purposes of CGT. Instead, the assets are deemed to be acquired by the personal representative on whom they devolve ‘for a consideration equal to their market value at the date of death’ (s 62(1)(a)) i.e. a free uplift. No CGT, but IHT may nevertheless be due. The free uplift applies regardless of whether IHT is due. Therefore, when the personal representative sells the asset, CGT is charged on sale, taking the market value at the time of death.

• Gifts to charities and inter-spouse transfers are also treated as not giving rise to a chargeable gain.

• *Note also, holdover relief:

  • This is available for gifts when there is a disposal otherwise than under a bargain at arm’s length. The gain that would otherwise be chargeable to tax is held over so that the gain crystallised by the donor, D, is reduced to nil. The donee, E’s, acquisition cost is also reduced.

  • When holding-over, the chargeable gain made by disposal 1 from D to E is reduced to nil. E sells the assets at a capital gain in disposal 2; the proceeds of disposal 2 are reduced by the gain held over in disposal 1.

On compensation claims

Generally, compensation or damages received as a result of court action or by negotiated settlement of the action, is a disposal of the right of an action and is subject to CGT. The base cost of the right will be nil and hence the whole amount is subject to CGT.

Note ESC D33 (Which is not yet codified): It relates the damages to the underlying asset where the right of action relates to the damage to the asset (base cost of the asset is used to...

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