Capital Gains Tax

Goodwill is a subject we hear about often but interestingly is rarely mentioned in legislation. In fact, the term 'goodwill' is not defined for the purposes of the Capital Gains legislation in TCGA 1992.

Most definitions of goodwill are derived from case law. At its simplest you could describe goodwill as the 'extra' value of a business over and above its tangible assets.

In the vast majority of cases, when a business is sold a significant proportion of the sale price will be for the intangible assets or goodwill of the company. This is essentially a way of placing a monetary value on the business's reputation and customer relationships. Valuing goodwill is complex and there are many different methods which are used and that vary from industry to industry.

HMRC’s internal manual states that:

'Most businesses can be expected to have goodwill even though its value is likely to fluctuate from time to time. The fact that goodwill may not be reflected in the balance sheet of a business does not mean that it does not exist. In the same way, the writing off of purchased goodwill in the accounts of a business does not mean that its value has decreased or that it has ceased to exist.'

There is usually no Capital Gains Tax (CGT) to be paid on the transfer of assets to a spouse or civil partner. However, the gift is still treated as a disposal that has taken place for CGT purposes, on a no- gain no-loss basis. When the asset is ultimately sold, the gain or loss will be calculated using the disposal proceeds less the asset cost when first acquired by the original spouse or civil partner.

There are a few exceptions that couples should be aware of where the relief does not apply. This mainly relates to the use of goods which are sold on by the transferee’s business and for couples that were separated and not living together for the entire tax year when the assets were transferred. Spouses or civil partners that lived together at any point in the tax year when the assets were transferred can still benefit from these rules. If a transfer did not qualify then the asset must be retrospectively valued at the date of the transfer and the transferor is liable for any gain or loss.

There are similar rules for assets that are gifted to charities. However, CGT may be due where an asset is sold to a charity for more than what was paid for it and less than the market value. The gain in this case would be calculated based on what the charity paid rather than the market value of the asset.

We would like to remind our readers that there is still time to use the annual exemption for Capital Gains Tax (CGT). In the current 2019-20 tax year, this amounts to £12,000. This means that there is no CGT to pay on the first £12,000 of gains where you dispose of chargeable assets, such as property or stocks and shares.

If you are a married couple or civil partnership, you should ensure that each of party utilises their full annual exempt amount wherever possible. Any unused part of the annual exempt amount cannot be carried forward and is forfeited if unused in the current tax year.

CGT is usually charged at a simple flat rate of 20%. If you only pay basic rate tax and make a small capital gain, they may be subject to a reduced rate of CGT of 10%. Once the total of taxable income and gains exceed the higher rate threshold, the excess will be subject to 20% CGT. A higher rate of CGT (8% supplement) applies to gains on the disposal of chargeable residential property.

Planning notes

1. If you have sold or are planning to sell any assets in the current tax year, it is important to ensure that you take full advantage of the annual CGT exemption and arrange your affairs accordingly. For example, capital losses are deducted from gains before net gains are calculated. Crystallising a loss that will waste the annual exemption should therefore be avoided.
2. Any CGT due on chargeable gains that relate to the disposal of residential property on or after 6 April 2020 will be due within 30 days of completion. If you are considering selling a property soon, it would be beneficial to do so before the end of the current tax year. In this way you will benefit from an extended time period to pay any CGT due. This is because the payment date for any CGT due on residential property sales made before 6 April 2020 will be 31 January 2021.
3. If you sell a residential property that has always been your family home – no periods of sub-letting – the new 30 day reporting and payment window will not apply as the gain will be covered by the Private Residence Relief.

A major change to the way Capital Gains Tax (CGT) is reported and paid will come into effect from 6 April 2020.  Currently, the usual due date for paying any CGT owed to HMRC on property disposals is the 31 January following the end of the tax year in which a capital gain was made. From 6 April 2020, any CGT due on the sale of a residential property by a UK resident will need to be reported and paid within 30 days of the completion of the sale transaction.

This change will apply to the sale of any residential property that does not qualify for Private Residence Relief (PRR). The new rules will mainly apply when selling a buy-to-let property or a second / holiday home. The new time-frame will also apply to the sale of any other residential property that does not qualify or only partially qualifies for PRR.

If your clients are likely to be affected by these changes, it would be worthwhile considering a property sale prior to 6 April 2020. For example, if a property is sold at the end of March 2020, any CGT will be due on 31 January 2021. If a property is sold on or after 6 April 2020, the CGT will be due just 30 days later. Interest and penalties will apply if any CGT due is not paid on time.

The 6 April 2020 will see a seismic change in the deadline for UK residents that sell a residential property when Capital Gains Tax (CGT) on the sale is due. Currently, the due date for paying any CGT you owe to HMRC is the 31 January following the end of the tax year in which a capital gain was made. This deadline gave taxpayers between 10 and 22 months to settle their CGT bill.

The deadline will change for UK residents from 6 April 2020. This change will mean that any CGT due on the sale of a residential property will need to be reported and a payment on account of any CGT due (an advance payment towards their tax bill) made within 30 days of the completion of the transaction.

This means that there will be a significant difference in your CGT payment date if you sell a residential property before the end of the current tax year compared to making a sale in the new tax year. The payment date for any CGT due on residential property sales made before 6 April 2020 will be 31 January 2021. Any CGT due for residential property sales on or after 6 April 2020 will be due within 30 days of completion.

For non-UK residents, these CGT changes came into effect from 6 April 2019.

In practice, this change will apply to the sale of any residential property that does not qualify for Private Residence Relief (PRR). The PRR relief applies to qualifying residential properly used wholly as a main family residence. The new deadline will mainly apply if you are disposing of a second / holiday home, an investment rental property or a home that does not qualify or only partially qualifies for PRR.

Usually, if you sell an asset for less than you paid for it you would make a capital loss. As a general rule, if the asset would have been liable to CGT if a gain had resulted when sold, then the loss should be an allowable deduction. 

The exact treatment of losses depends on whether they are:

• losses of the same year of assessment as the gains,
• losses of earlier years of assessment,
• losses of the tax year of death, or
• particular losses which may, exceptionally, be carried back from a later year of assessment.

These deduction of an allowable loss from chargeable gains does not require a claim and does not extend the time limit for enquiring into the original loss claim.

Gains accruing in a tax year may be chargeable to CGT at different rates. Therefore, the tax effect of losses and the annual exempt amount set off against those gains can vary.

In most circumstances, allowable losses and the annual exempt amount can be deducted in the way that is most beneficial to the individual. This will usually be against gains that are charged at the highest rate.

Gift Hold-Over Relief is a relief that defers Capital Gains Tax (CGT) when assets are given away (including certain shares) or sold for less than they’re worth to the buyer. The relief means that any gain on the asset is 'Held-Over' until the recipient of the gift sells or disposes of the item.

The person gifting a qualifying asset is not subject to CGT on the gift. However, CGT may be payable where the asset is sold for less than it’s worth. Gifts between spouses and civil partners don’t trigger capital gains. A claim for the relief must be made jointly with the person to whom the gift was made.

To claim relief when giving away business assets the person making the gift must:

• be a sole trader or business partner, or have at least 5% of voting rights in a company (known as your 'personal company')
• use the assets in their business or personal company

The person gifting the asset can usually get partial relief if they used the assets only partly for their business.

If the person is giving away shares, then the shares must be in a company that's either:

• not listed on any recognised stock exchange
• their personal company

The company's main activities must be in trading, for example providing goods or services rather than non-trading, investment activities.

Capital Gains Tax (CGT) is a tax on the profit made on the disposal of an asset that has increased in value. Whilst most taxpayers are aware of their annual tax-free allowance (currently £12,000) and the exemption for the, qualifying, sale of the family home – there are other items that are exempt from CGT.

These include:

• your car
• personal possessions worth up to £6,000 each, such as jewellery, paintings or antiques
• stocks and shares you hold in tax-free investment savings accounts, such as ISAs and PEPs
• UK Government or 'gilt-edged' securities, for example, National Savings Certificates, Premium Bonds and loan stock issued by the Treasury
• betting, lottery or pools winnings
• personal injury compensation
• foreign currency you bought for your own or your family's personal use outside the UK

So, if you are lucky enough to win the National Lottery this weekend, you won’t have to pay any CGT…

Please note:

None of the above exemptions apply when the gains arise from trading or business activities as distinct from occasional sales and disposals.

If you are in business as a self-employed sole trader or as part of a partnership, then you will be liable to pay Capital Gains Tax (CGT) if you make a profit selling all or part of a business asset. CGT is normally charged at a flat rate of 20%. However, there are various reliefs available that can reduce the amount of CGT you are required to pay.

We have listed below the main CGT tax reliefs for businesses:

Entrepreneurs' Relief – Where this relief is available, you will pay CGT of 10% in place of the standard rate. There are a number of qualifying conditions that must be met in order to qualify for this relief.

Business Asset Rollover Relief – This is a valuable relief that allows you to defer payment of CGT on gains made when you sell or dispose of certain assets and use all or part of the proceeds to buy new assets. The relief means that the tax on the gain of the old asset is postponed. The amount of the gain is effectively rolled over into the cost of the new asset and any CGT liability is deferred until the new asset is sold.

Incorporation Relief – A capital gain will be deemed to arise if your business is converted into a company. The computation of any taxable gain will be made by reference to the market value of the business assets including goodwill. The incorporation relief means that you can delay the payment of CGT when you transfer your business in this way to a company.

Gift Hold-Over Relief – This relief can help when you give away assets or sell them for less than their full value. The relief means that any gain on the asset is 'Held-Over' until the recipient of the gift sells or disposes of the asset. Your gifting of the asset is not subject to CGT as the person you gave it to will pay tax when they sell it.

Planning note

It is important to remember that CGT is not payable by limited companies or unincorporated associations when they sell an asset and make a gain. Instead, the gain (less any allowable costs and reliefs) is subject to Corporation Tax.

Please call if you need to clarify the impact of any future sales that will incur a CGT charge.

Gift Hold-Over Relief is effectively a deferral of Capital Gains Tax (CGT) when assets are given away (including certain shares) or sold for less than they’re worth to help the buyer. The relief means that any gain on the asset is 'Held-Over' until the recipient of the gift sells or disposes of them.

The person gifting a qualifying asset is not subject to CGT on the gift. However, CGT may be payable where the asset is sold for less than it’s worth. Gifts between spouses and civil partners don’t trigger capital gains. A claim for the relief must be made jointly with the person to whom the gift was made.

If you are giving away business assets then you must:

• be a sole trader or business partner, or have at least 5% of voting rights in a company (known as your 'personal company')
• use the assets in your business or personal company

You can usually get partial relief if you used the assets only partly for your business.

If you are giving away shares, then the shares must be in a company that's either:

• not listed on any recognised stock exchange
• your personal company

The company's main activities must be in trading, for example providing goods or services, rather than non-trading activities like investment.