Answer ... (a) What taxes are levied and what are the applicable rates?
UK resident individuals are subject to capital gains tax on gains realised on the disposal of their worldwide assets. A UK resident foreign domiciliary who claims the remittance basis of taxation in respect of the year of disposal is generally subject to capital gains tax on the disposal of non-UK situs assets only if the proceeds are remitted to the United Kingdom.
Non-UK residents are not generally subject to capital gains tax, but there are some exceptions relating to:
- UK land, including the disposal of commercial or residential property; and
- ‘property-rich companies’, which include companies that derive 75% or more of their gross asset value from UK land.
Special rules apply to ‘temporary non-residents’, which ensure that certain types of gains arising to, or remitted by, an individual who is temporarily non-resident in the United Kingdom will be taxable on their return. Generally, the rules apply where a period of non-residence is five years or less, subject to certain other conditions.
The rate of capital gains tax is generally 10% for basic rate taxpayers and 20% for higher and additional rate taxpayers. Gains on residential property and carried interest are subject to a higher rate of capital gains tax, which is 18% for basic rate taxpayers and 28% for higher and additional rate taxpayers.
(b) How is the taxable base determined?
For sales on arm’s-length terms, the gain realised is generally calculated by deducting the transferor’s acquisition cost and allowable deductions from the consideration received for the sale. If the transfer is a gift or sale at an undervalue to a ‘connected person’ (including any relative of the transferor), the transfer will be deemed to take place at the market value of the asset on the date of the transfer. The gain is generally calculated by deducting from this the transferor’s acquisition cost and allowable deductions.
Special rules apply to transfers between spouses and civil partners. Generally, transfers between them will not be subject to capital gains tax, as they will be treated as taking place for no gain and no loss. On a subsequent disposal by the transferee spouse, the base cost will be the value of the asset at the time it was originally acquired by the transferor spouse.
Allowable deductions include:
- incidental costs of acquiring an asset;
- costs spent enhancing the asset;
- costs spent establishing, preserving or defending title to or rights over the asset; and
- incidental costs of disposal of the asset.
Assets comprised in an individual’s estate at the date of death are subject to an uplift to their market value as at that date. No capital gains tax is payable and the transferee will receive the asset with the benefit of the uplifted base cost. This includes assets transferred to a surviving spouse on death.
(c) What are the relevant tax return requirements?
Taxable gains should generally be included in the individual’s tax return in the normal way, to be submitted by 31 January following the tax year of disposal.
Where full relief applies on the disposal of an individual’s principal or sole residence, it is not necessary to file a tax return. However, if only partial relief applies, this must be claimed.
Since 6 April 2020, Her Majesty’s Revenue and Customs (HMRC) has introduced an online service for reporting gains arising on the direct or indirect disposal of UK land, called the ‘capital gains tax on UK property’ service. UK residents must use the service to report, and pay any tax due on, gains arising on UK property disposals within 30 days of the completion date. Non-UK residents must use the service to report any disposals within 30 days of completion, whether or not a gain arises.
(d) What exemptions, deductions and other forms of relief are available?
Several forms of relief are available for capital gains tax purposes. Full relief from capital gains tax is generally available on the disposal of an individual’s only or main residence, known as private residence relief, subject to certain conditions being met, including in relation to the area of gardens or grounds eligible for relief.
Rollover relief is available to individuals disposing of assets used for the purposes of a trade if the proceeds are reinvested in other business assets, subject to certain conditions. If the relief applies, any gain is deferred until a subsequent disposal, as the base cost of the replacement asset is treated as the base cost of the original asset.
Holdover relief is another relief that enables any gain realised on the disposal of qualifying assets to be deferred until a subsequent disposal by the new owner. Disposals to which the relief may be available, subject to certain conditions being met, include lifetime gifts of business assets and chargeable lifetime transfers on which inheritance tax is immediately chargeable.
Business asset disposal relief, previously known as entrepreneurs’ relief, reduces the rate of capital gains tax payable to 10% on all gains on qualifying assets, including interests in privately owned businesses that have been held for at least two years, subject to meeting certain other qualifying conditions.
Most individuals benefit from an annual exempt amount up to which gains are tax free, which is £12,300 in the 2021/22 tax year. The annual exempt amount is not available to remittance basis users.