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Capital Gains Tax and Inheritance Tax

The rules here apply for disposals made on or after 6 April 2008. Some changes have been made for disposals made since 23 June 2010. Click here for the old rules applying to the 2007- 2008 tax year..

Capital gains tax

When you sell or give away an asset for more than you paid (or it's worth more than when you were given it) you have made a capital gain. Most capital gains are liable to capital gains tax but because of the various exemptions many gains can escape the tax altogether or are taxed at a low rate.

You dispose of an asset when you sell it or give it away. When you buy an asset or are given one, you acquire it. When you give an asset to your legally wed husband or wife, that doesn't count as a disposal. When your sposue disposes of it, it is the value when you first acquired the asset which counts, not the value at the time you gave it to him or her.

For assets acquired on or before 31 March 1982 it is the value at that date which counts as the original cost. If you acquired an asset later, it is the actual cost.

If you incur any expenses while buying or selling an asset (e.g. stockbroker's or agent's commission, stamp duty, legal fees) you are allowed to add these to your original cost. If you make a loss when you sell or give away an asset, this loss can be set against any gains you have made on other assets before the tax is levied. If your losses come to more than your gains you can carry forward the losses indefinitely to be set against gains you make in the future.

The "exempt band" is the first £10,600 of capital gains you make in the 2012-13 and 2011-12 tax years is tax free. A trust has a limit of £5,300).

For disposals made on or after 23 June 2010, the rate of tax on the gain in excess of the "exempt band" is 18% for basic rate taxpayers where total taxable gains and income are less than the upper limit of the income tax basic rate band or 28% . The 28 per cent rate applies to gains (or any parts of gains) above that limit. For disposals made from 7 April 2008 to 22 June 2010, the rate for all taxpayers was 18%. The rate of tax on estates held by executors rises from 18% to 28% from 23 June 2010 except where entrepeneurs' relief applies, see below.

Every individual, including husband and wife, have their own limit. So if an asset is owned jointly, husband and wife can each use their own exemption limit. Alternatively an asset standing at a gain can be gifted to the spouse (without counting as a disposal) and then sold to benefit from the other spouse's exemption limit; this gifting concession only applies to legally married couples. Each child, from when they are born, has a separate £10,600 exemption limit.

Exempt Certain assets are exempt from capital gains tax. These are:

There is no capital gains tax payable on your estate on death but see Inheritance tax below.

Entrepreneurs’ relief on disposals of business assets. The rate of tax on gains on disposals of business assets which are less than £5 million on disposals made on or after 23 June 2010, or £10 million made on disposals on or after 6 April 2011 is 10%. These limits are lifetime limits, not limits on each disposal. You will need to get advice from a professional to see if you qualify.

Gifts and gains tax If you make a gift of an asset you may be liable to pay capital gains tax if the gain is large. So give away cash or assets which are exempt, see list above. Gifts to a trust incur gains tax in the same way as gifts to an individual. Gifts between husband and wife and vice-versa are ignored. When it comes to working out the gain, the date the original owner acquired the asset counts, ignoring any transfers between husband and wife. Gifts to a charity are tax exempt.

Time to pay Where you make a gift of land (e.g. a house) or controlling shareholding of a company or a minority holding in an unquoted company, capital gains tax can be paid over ten years, but interest must be paid unless it's agricultural property.

Loopholes no longer Since 17 March 1998 it has not been possible to use bed and breakfasting to create a disposal in a tax year. Any assets repurchased within 30 days are treated as not having been sold (see below under buying and selling shares).

There may still be scope for a husband and wife to operate something like bed and breakfasting if they sell different shares or units and then buy back what their spouse has just sold. Indeed the deals can be done on the same day. It is important, however, that they buy and sell from a third party wghich will usually involve costs.

Another way would be to dispose of shares in one index-tracker fund and acquire new shares in a similar fund (using funds with no initial charge) promoted by another unit trust company. These types of transactions will incur costs such as stockbroker's commission and/or differences between buying and selling prices.

If you have holdings in PEPs and ISA's, especially self-select ones where you can trade over the internet, you could dispose of a holding in your own name and buy it back on the same day as part of your ISA or PEP.

Buying and selling shares If you are trading in shares, perhaps through an on-line stockbroker, you may have many transactions.

If you have a holding of shares which you add to and then partially dispose of, assuming all the shares were acquired after 1 April 1998, then the Last in First Out principal now applies in deciding which shares are the ones you bought. If you bought some before 1 April 1998, the rules are more complex and you you seek advice or look at the free booklet, see below.

If you buy shares, then sell them, and then buy again within 30 days, you will be deemed by the taxman not to have sold the assets. In that case transactions are matched differently. Suppose you buy shares for £5 and sell for £15 a few months later. Then the shares rise to £24 and you buy back again within 30 days. Then you later sell at £40. Your tax bill will be based on £5 minus £40 giving a gain of £35. However you will also have a loss based on the matching of the two other transactions, your sale at £15 and your purchase of £24 which gives a loss of £9 (despite the fact that you made the sale before you made the purchase). Setting the £9 loss against the £35 gain gives a net gain of £26. HM Revenue & Customs describes the share identification rules rules on this web page. Sorry if they are as clear as mud but that's HM Revenue & Customs for you.

Non-residents are not usually liable to UK capital gains tax. However if you go abroad, having previously been a long term UK resident, you must now remain non-resident for five complete tax years to avoid UK capital gains tax on a UK disposal of an asset which you acquired before you left, while you are non-resident. Disposals of assets bought after you left the UK are unaffected. Previously in practice you had to be away for only one complete tax year during which the disposal was made to avoid capital gains tax.

Inheritance tax

Inheritance tax is a tax on what you leave in your will (and on gifts you make in your lifetime to some trusts and companies). It only affects people who are likely to leave more than £325,000 since 2009-2010. This allowance will remain the same until the 5 April 2018 (extended to this date in the 2013 Budget) after which it will be index-linked.

Where the estate, plus non exempt gifts which were made within seven years before death, comes to more than £325,000, then the tax starts to bite at a rate of 40% of the excess. So if your estate is worth £375,000 (after deducting debts like mortgages, bank loans and outstanding bills) then deduct £325,000 which leaves £50,000 and the tax is 40% which is £20,000. If you have £3 million then there will be £1,070,000 tax to pay!

If an estate is left to a surviving spouse (or civil partner), then on the second death the estate can benefit from two £325,000 exempt allowances provided that the earlier allowance has not already been used on legacies left by the spouse who died first.

Charity donations in a will For deaths since 6 April 2012, the rate of tax on the whole estate is reduced to 36% instead of 40% if at least 10% of the net estate is left to charity. This gives a 4% tax reduction on the whole taxable estate in addition to a 40% tax reduction on the amount given to charity. The calculations used to define net estate are complex and may also depend on the legal way joint holdings of property are held, see the examples given by HMRC here.

Non exempt gifts made within 3 years of death are added to the estate. For gifts made between 3 and 7 years of death only part of the gift is added to the estate:

Exempt giftswhich are not added to the estate even if the giver dies within seven years of making them are:

More information about gifts and details of the use of trusts is contained in Giving Money to Adult Children and Children's Investments.

Other exemptionsare assets of unincorporated businesses, owner-occupied farms and farm tenancies, and any holdings of shares of unquoted, USM or Alternative Investment Market (AIM) companies.

There are 50% exemptions for controlling holdings in quoted companies and certain other assets including the interest of a landlord in let farmland and land, buildings or machinery used inthe business of a controlling shareholder or partner.

You can also avoid tax on works of art thought to be part of the National Heritage provided these are listed on The Register of Conditionally Exempt Works of Art which is no longer available on the Internet. The works of art in many cases were only available for view by the public by appointment, however existing owners now have to make the articles more accessible to the public. For claims for new exemptions since 31 July 1998, the owner cannot require an advance appointment for viewing. The criteria for inclusion is now more restrictive as articles have to be "pre-eminent for their national, scientific or artistic interest" unless they are associated with a qualifying building.

There may be some other conditions attached to these exemptions. If it is important to you, check with a knowledgeable chartered accountant or specialist tax lawyer.

Excepted estates An excepted estate is exempt from inheritance tax and full forms don't need to be lodged. This applies where the gross value of the estate for IHT purposes, plus the chargeable value of any transfers made in the 7 years prior to death, does not exceed the IHT threshold (i.e. £325,000) although this will be subject to some limitation for applications made after 5 April and before 6 August in any year.

It is also an excepted estate where the person who died has left everything to a spouse or civil partner living in the UK or to a registered UK charity (and the estate is valued at under £1 million). More details at Excepted Estates.

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