How are chargeable disposals and calculations carried out for capital gains tax purposes?
First, what is a disposal? A disposal for CGT purposes in relation to an asset is its sale, gift or exchange.
These are the most recognisable forms of disposal. However, there are others which include
- a sale, gift or exchange of rights over an asset without transferring the asset itself
- the entire loss, destruction, dissipation or extinction of an asset
- a part-disposal of an asset, that is a disposal of part of an asset itself or rights over the asset
- the receipt of compensation for giving up rights (the asset may not be a physical asset)
This article deals with disposals that give rise to a charge to CGT. In previous articles, I have outlined disposals that do not give rise to a charge to CGT, such as transfers between spouses living together and gifts to charities.
The legislation refers to “consideration or deemed consideration” rather than disposal proceeds. This is because the reward for disposing of an asset may be cash, another asset, forgiveness of a debt or (in the case of a gift) nothing at all.
Sales – the proceeds will be the price received. However, where the sale is to a connected person, the market value is substituted for the sale proceeds. It should be noted that if the sale proceeds are less than the market value the difference will be considered a gift for inheritance tax purposes.
The legislation refers to ’consideration or deemed consideration’ rather than disposal proceeds. This is because the reward for disposing of an asset may be cash, another asset, forgive ness of a debt or (in the case of a gift) nothing at all
Gifts – disposal value is the market value of the asset on the date of gift. Again, there will be IHT considerations.
Loss, destruction, etc – the disposal proceeds are whatever is received to compensate for the loss, usually insurance proceeds.
Incidental costs of disposal – disposal proceeds are net of any incidental costs incurred in selling the asset, such as agents’ fees.
An example may help. Mary has a second home by the seaside which she decides to gift to her daughter on the occasion of her daughter’s wedding.
The property was purchased in 1993 for £160,000. At the time of the gift to her daughter, it was worth £375,000. Mary has not received a penny in return for the gift. The property is mortgage-free. Mary is deemed to have disposed of the property at its market value (£375,000), leaving her with a chargeable gain of £215,000.
In another example, George agrees the sale of a painting for £200,000. The agent selling the painting deducts his fee of 7.5 per cent so, for CGT purposes, George’s disposal proceeds are £185,000.
What constitutes allowable expenditure is governed by sections 37 to 43 TCGA 1992. The following items can normally be deducted from the proceeds of disposal:
- acquisition cost (price paid) of the asset, including any incidental costs such as professional fees, such as valuation, survey, etc, as well as the cost of advertising and stamp duty
- expenditure incurred wholly and exclusively for the purpose of enhancing the value of the asset, such as renovation, upgrading, etc.
- expenditure wholly and exclusively incurred in establishing, preserving or defending title to the asset
- incidental costs of disposal, for example, fees, commission, remuneration of professional advisers, such as accountants or surveyors, stamp duty and any other conveyancing charges, advertising, etc.
Time for another example.
George acquired a painting in 1996 for £75,000. The painting had suffered some damage prior to George’s acquisition. He decided to have it restored. In 1997, the restoration was completed at a cost of £42,000. Each year, George paid £1,500 in insurance premiums in respect of the painting. During 2002 and 2003, the painting was put in safe storage while George travelled around the world.
Storage costs totalled £2,500.
For CGT purposes, the base cost is £75,000 plus £42,000. The storage and insurance costs are not allowable.
Certain items of expenditure are specifically disallowed in computing profits or losses for CGT and these include the following:
expenditure which is deductible in computing profits or losses for income tax purposes
insurance premiums paid to cover the risk of damage or loss or depreciation of the asset
any expenditure recoverable from any government or public or local authority
income tax chargeable on shares acquired under certain employee share schemes, that is, generally speaking, a charge in respect of unapproved share schemes.
And, finally, another simple example.
Maria bought a flat as an investment for £75,000 in 1989. At the time, she paid solicitor’s fees of £500 and stamp duty of £750 in addition to the purchase price. The flat was sold in August 2010 for £260,000. Agent’s fees were £2,600 and solicitor’s fees £1,000. The computation is as follows:
Less incidental disposal costs £3,600
Less original cost £75,000
Less incidental acquisition costs £1,250
Capital gain £180,150