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T85 - Capital Gains Tax

(This article appeared in the September 2010 issue of "The Dentist") 

Most people know that you can barely move these days without being taxed, but did you know that a different tax applies on the sale of assets? And more importantly, do you know what you can do to minimise its effects? Read on… 

If you make a gain on the sale of an asset there is capital gains tax (or CGT as we affectionately refer to it as) payable subject to certain conditions. This doesn’t apply if the sale is in the normal course of your business, so for example, it doesn’t apply on the sale of toothbrushes which fall under the scope of good old income tax.

 The two main assets, which people seem to sell are cars and houses, and you will be glad to learn that in many cases, these are exempt. Cars are always exempt unless they are valuable vintage cars in which case Mr Osbourne will want his cut. If you only have one house and it is your principal private residence, this is also exempt (don’t get me started on PPRs! With all the rules, conditions and planning points it truly is a fascinating subject. I’m serious!)

 What about everything else? What about the CD collection you sold last year in a garage sale? The old desk you sold on ebay? Are you suddenly going to have to start recording this, reporting to HMRC and paying tax on it?

 No.

 There are two useful rules here. The first one applies to “chattels” which means that if you buy or sell anything for less than £6,000 it is generally going to be exempt.

 The second is your annual exemption which is set at £10,100 in 10/11. Whatever gain you make, the first £10,100 will be exempt from CGT! Handy! Anything above this is taxable at a flat rate of 18% or 28% if you are a higher rate taxpayer.

 There are a lot of planning strategies around when it comes to CGT . One of the simplest and most useful is that transfers between husbands and wives (or civil partners) are CGT free. So, if you had some shares which you were going to sell and would have produced a gain of, say, £20,000 – you could give half to your spouse/civil partner first and then each of you could sell your share. This way, each of you would make a gain of £10,000 and as this is below the annual exemption (assuming neither of you had any other chargeable gains) would have saved yourself CGT of between £1,782 and £2,772 depending on whether you are a higher rate tax-payer or not!

 For business assets (this is different to assets being sold in the course of your business and relates more to business property or goodwill) there is another handy relief called the Entrepreneurial relief (or ER which is MUCH easier to spell!).

 This relief enables you to pay only 10%, again subject to certain conditions being met. There is a lifetime limit of £2m (increased to £5m from 23/06/10) so if you make business gains of more than this, the excess will be taxable at 28% (or 18% if you are not a higher rate taxpayer). Remember if you are thinking of incorporating, it is possible that you will have to dip into the ER band twice so make sure you discuss it thoroughly with your specialist dental accountant first.

 Sometimes, you may feel like we really are taxed for everything other than breathing. But spare a thought for our old Russian friends in the 17^th century who were taxed on beards.

 Let’s hope Mr Osbourne isn’t reading this as it might give him ideas…

  

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