Introduction
In the previous chapters, we have learnt how to calculate capital gains and we
have looked at some of the reliefs available. We now look at some more of the
rules for particular assets and particular situations.
First, we look at wasting assets. Unless capital allowances have been claimed
there are special rules to ensure that the cost of the asset is restricted to reflect
the fall in value of the asset over time.
Leases of land also fall in value over their lives: a lease with ten years left to run
is worth less than one with thirty years left to run. The rules for wasting assets
are modified to reflect the fact that the value of a lease falls more steeply the
shorter it becomes.
We then look at the gains people make on their homes which are usually
exempt. This means there is no capital gains tax charge when people move
home, but also means that there is no relief if their house is sold at a loss.
We next look at the rules which apply when an asset is damaged or destroyed
and the reliefs available where insurance proceeds are applied to restore or
replace the asset.
Next, we consider how CGT applies when assets are transferred into trusts and
finally we look at the overseas aspects of capital gains tax.
In the next chapter, we will study the administration of income tax and capital
gains tax.
Study guide
| Intellectual level | ||
| 2 | Chargeable gains and capital gains tax liabilities in situations involving further overseas aspects and in relation to closely related persons and trusts together with the application of additional exemptions and reliefs | |
| (a) | The contents of the Paper F6 study guide for chargeable gains under headings: | 2 |
| | C1 The scope of the taxation of capital gains | |
| | C3 Gains and losses on the disposal of movable and immovable property | |
| (b) | The scope of the taxation of capital gains: | 3 |
| (ii) | Identify the concepts of residence and domicile and determine their relevance to capital gains tax | |
| (iii) | Advise on the availability of the remittance basis to non-UK domiciled individuals | 2 |
| (iv) | Determine the UK taxation of foreign gains, including double taxation relief | |
| (v) | Conclude on the capital gains tax position of individuals coming to and leaving the UK | |
| (vi) | Advise on the UK taxation of gains on the disposal of UK residential property by non-residents | |
| (c) | Capital gains tax and trusts: | |
| (i) | Advise on the capital gains tax implications of transfers of property into trust | 3 |
| (ii) | Advise on the capital gains tax implications of property passing absolutely from a trust to a beneficiary | 2 |
| (e) | Gains and losses on the disposal of movable and immovable property: | 3 |
| (ii) | Determine the gain on the disposal of leases and wasting assets | |
| (iii) | Establish the tax effect of capital sums received in respect of the loss, damage or destruction of an asset | |
| (iv) | Advise on the tax effect of making negligible value claims |
Exam guide
The rules for the damage or destruction of an asset are further rollover reliefs which can be used to defer capital gains. A negligible value claim can be used to crystallise a loss, and you must consider the time of the claim carefully to ensure the best possible use of the loss.
The exemption for the principal private residence and the rules for transfers into trust may be examined in a question about families; watch out for where the PPR relief is restricted.
Do not be caught out by the overseas aspects. For CGT purposes the most useful exclusion is the fact that individuals who are not resident in the UK are not taxable on their UK gains, even on assets situated in the UK. An exception is the disposal of UK resident property by non-UK residents, for which there are specific rules.
The examination team has identified essential underpinning knowledge from the F6 syllabus which is particularly important that you revise as part of your P6 studies. In this chapter, the relevant topic is:
| Intellectual level | ||
| C3 | Gains and losses on the disposal of movable and immovable property | |
| (c) | Calculate the chargeable gain when a principal private residence is disposed of | 2 |
The other topics in this chapter are new.
There are no changes in 2015/16 from the material studied at F6 level in 2014/15.
1 Chattels and wasting assets
| Gains on most wasting chattels are exempt, and losses on them are not allowable. The CGT rules are modified for assets eligible for capital allowances. |
FAST FORWARD
1.1 Introduction
Key terms A chattel is tangible movable property.
A wasting asset is an asset with an estimated remaining useful life of 50 years or less.
Special rules apply for wasting assets to prevent taxpayers from realising a capital loss simply due to the fall in value of a wasting asset over time. The rules are modified where capital allowances are available.
1.2 Chattels
Plant and machinery, whose predictable useful life is always deemed to be less than 50 years, is an example of a wasting chattel (unless it is immovable, in which case it will be wasting but not a chattel). Machinery includes, in addition to its ordinary meaning, motor vehicles (unless exempt as cars), railway and traction engines, engine-powered boats and clocks.
Wasting chattels are exempt (so that there are no chargeable gains and no allowable losses). There is one exception to this: assets used for the purpose of a trade, profession or vocation in respect of which capital allowances have been or could have been claimed. This means that items of plant and machinery used in a trade are not exempt merely on the ground that they are wasting. However, cars are always exempt.
If a chattel is not exempt under the wasting chattels rule, any gain arising on its disposal will still be exempt if the asset is sold for gross proceeds of £6,000 or less, even if capital allowances were claimed on it.
Exam focus The detailed calculations for non-wasting chattels where the cost or sale proceeds are less than point £6,000,other than knowledge of the exemption where both cost and proceeds are less than £6,000, are excluded from the syllabus.
1.3 Chargeable gains and capital allowances
The wasting chattels exemption does not apply to chattels on which capital allowances have been claimed or could have been claimed, other than those sold for gross proceeds of £6,000 or less.
Where capital allowances have been obtained on any asset, and a loss would arise, the allowable cost for chargeable gains purposes must be reduced by the lower of the loss and the net amount of allowances (taking into account any balancing allowances or charges). The result is no gain and no loss.
If there is a gain, the cost is not adjusted for capital allowances.
2 Wasting assets
FAST FORWARD
Other wasting assets generally have their cost written down over time.
2.1 Introduction
A wasting asset is one which has an estimated remaining useful life of 50 years or less and whose original value will depreciate over time. Freehold land is never a wasting asset, and there are special rules for leases of land (see below).
Wasting chattels are exempt except for those on which capital allowances have been (or could have been) claimed.
2.2 Options
An option (for example an option to buy shares) is a right to buy or sell something at a specified price within a specified time. An option is usually a wasting asset because after a certain time it can no longer be exercised.
2.2.1 The grant of an option
The grant of an option is the disposal of an asset, namely the option itself, rather than a part disposal of the asset over which the option has been granted. The only allowable expenditure will be the incidental costs of the grant, such as legal fees. If the option is exercised the CGT treatment changes.
2.2.2 The exercise of an option
Where an option is exercised, the granting of the option and the subsequent disposal of the asset under the option are treated as a single transaction taking place when the option is exercised. Proceeds from the grant of the option plus the disposal of the asset are combined and become the disposal proceeds of the grantor and the allowable base cost of the grantee.
Where tax was paid on the original grant of the option it will usually be treated as a payment on account of the tax on the exercise.
2.2.3 Example: exercise of an option
Tom owns a plot of investment land which he bought for £10,000 in May 2007. He grants an option to Penelope for £1,000 in July 2009 whereby he will sell the land for £25,000 at any time nominated by Penelope before 30 June 2016. Penelope exercises her option in July 2015.
Tom’s gain in 2015/16 will be:
£
Proceeds (£1,000 + £25,000) 26,000
Less cost (10,000)
Gain 16,000
Penelope’s base cost will be: £1,000 + £25,000 = 26,000
The date of disposal is July 2015 (ie when the option is exercised).
2.2.4 Abandoned options
Where an option is abandoned, the position of the grantor and grantee are different. The grantor makes a chargeable disposal at the time when the option is granted. The grantee acquires a chargeable asset at the same time, but the abandonment of the option amounts to a disposal only where the option is:
- a quoted option to subscribe for shares in a company
- a traded option or financial option
- an option to acquire assets for the purposes of a trade
2.2.5 Disposal of an option
The disposal (eg by sale to a third party) of an option (other than a quoted, traded or financial option) to buy or sell quoted shares or securities gives rise to a chargeable gain or allowable loss computed in accordance with the normal rules for wasting assets (see below). These options are assets which waste on a straight line basis.
2.3 Other wasting assets
The cost is written down on a straight line basis. So, if a taxpayer acquires such an asset with a remaining life of 40 years and disposes of it after 15 years (with 25 years remaining) only 25/40 of the cost is deducted from the disposal consideration.
Examples of such assets are copyrights (with 50 years or less to run) and registered designs.
Where the asset has an estimated residual value at the end of its predictable life, it is the cost less residual value which is written off on a straight line basis over the asset’s life. Where additional expenditure is incurred on a wasting asset the additional cost is written off over the life remaining when it was incurred.
Assets eligible for capital allowances and used throughout the period of ownership in a trade, profession or vocation do not have their allowable expenditure written down.
3 Leases 12/12
FAST FORWARD
An ordinary disposal computation is made on the disposal of a lease with 50 years or more to run. For leases of land with less than 50 years to run, a special table of percentages is used.
3.1 Types of disposal
The gain that arises on the disposal of a lease will be chargeable according to the terms of the lease disposed of. We must consider:
- The assignment of a lease or sub-lease with 50 years or more to run.
- The assignment of a lease or sub-lease with less than 50 years to run.
There is an assignment when a lessee sells the whole of his interest. There is a grant when a new lease or sub-lease is created out of a freehold or existing leasehold, the grantor retaining an interest. Exam focus The CGT rules for the grant of leases will not be examined.
point
The duration of the lease will normally be determined by the contract terms. The expiry date, however, will be taken as the first date on which the landlord has an option to terminate the lease or the date beyond which the lease is unlikely to continue because of, for example, the likelihood that the rent will be substantially increased at that date.
3.2 The assignment of a lease with 50 years or more to run
An ordinary disposal computation is made and the whole of any gain on disposal will be chargeable to CGT (subject to any private residence exemption, see below).
3.3 The assignment of a lease with less than 50 years less to run
In calculating the gain on the disposal of a lease with less than 50 years to run only a certain proportion of the original expenditure counts as an allowable deduction. This is because a lease is losing value anyway as its life runs out: only the cost related to the tail end of the lease being sold is deductible. The proportion is determined by a table of percentages.
Exam focus The appropriate lease percentages will be given in the exam question where relevant. point
| The allowable cost is given by:
X Original cost Y where X is the percentage for the number of years left for the lease to run at the date of the assignment, and Y is the percentage for the number of years the lease had to run when first acquired by the seller. |
Formula to learn
The table only provides percentages for exact numbers of years. Where the duration is not an exact number of years the relevant percentage should be found by adding 1/12 of the difference between the two years on either side of the actual duration for each extra month. Fourteen or more odd days count as a month.
Adrian acquired a 20 year lease on a block of flats on 1 August 2009 for £15,000. He assigned it on 2 August 2015 for £19,000. Compute the gain arising.
The percentage from the lease percentage table for 20 years is 72.770, for 14 years is 58.971 and for 6 years is 39.195.
£
Proceeds 19,000
Less cost £15,000 %14 years : 58.971 (12,156)
%20 years : 72.770
Gain 6,844
| 4 Private residences
4.1 General principles |
6/14, 6/15 |
FAST FORWARD
There is an exemption for gains on principal private residences, but the exemption may be restricted because of periods of non-occupation or because of business use.
A gain arising on the sale of an individual’s only or main private residence (his principal private residence or PPR) is exempt from CGT. The exemption covers total grounds, including the house, of up to half a hectare. The total grounds can exceed half a hectare if the house is large enough to warrant it, but if not, the gain on the excess grounds is taxable. If the grounds do not adjoin the house (for example when a road separates the two), they may still qualify but they may not; each case must be argued on its merits.
For the exemption to be available the taxpayer must have occupied the property as a residence rather than just as temporary accommodation.
There are special rules which apply if the residence is situated in a country other than one in which the individual (or his spouse/civil partner) is resident for tax purposes. These rules are discussed in the section on overseas aspects of capital gains tax later in this Chapter.
4.2 Occupation
The gain is wholly exempt where the owner has occupied the whole of the residence throughout his period of ownership. Where occupation has been for only part of the period, a proportion of the gain is exempted.
| The exempt proportion is:
Period of occupation Gain before relief Total period of ownership |
Formula to learn
The last 18 months of ownership are always treated as if it were a period of occupation, if at some time the residence has been the taxpayer’s main residence, even if within those last 18 months the taxpayer also has another house which is his principal private residence.
4.3 Deemed occupation
The period of occupation is also deemed to include certain periods of absence, provided the individual had no other exempt residence at the time and the period of absence was at some time both preceded by and followed by a period of actual occupation. Deemed but non-actual occupation during the last 18 months of ownership does not count for this purpose.
These periods of deemed occupation are:
- Any period (or periods taken together) of absence, for any reason, up to three years, and
- Any periods during which the owner was required by his employment (ie employed taxpayer) to live abroad, and
- Any period (or periods taken together) up to four years during which the owner was required to live elsewhere due to his work (ie both employed and self employed taxpayer) so that he could not occupy his private residence.
It does not matter if the residence is let during the absence.
Exempt periods of absence must normally be preceded and followed by periods of actual occupation. The reoccupation condition does not apply if an individual, who has been required to work abroad or elsewhere (ie the latter two categories mentioned above), is unable to resume residence in his home because the terms of his employment require him to work elsewhere.
Alan purchased a house in London on 1 April 1990 for £88,200. He lived in the house until 31 December
- He then worked abroad for two years before returning to the UK to live in the house again on 1 January 1994. He stayed in the house until 30 June 2010 before moving out to live with his mother in Scotland until the house was sold on 31 December 2015 for £150,000.
Calculate the gain arising.
£
Proceeds 150,000
Less cost )
Gain before PPR exemption
Less PPR exemption (working)
£61,800 (52,200)
Gain 9,600
| Working
Exempt and chargeable periods |
|||
| Total | Exempt | Chargeable | |
| Period | months | months | Months |
| (i) April 1990 – December 1991 (occupied) | 21 | 21 | 0 |
| (ii) January 1992 – December 1993 (working abroad) | 24 | 24 | 0 |
| (iii) January 1994 – June 2010 (occupied) | 198 | 198 | 0 |
| (iv) July 2010 – June 2014 (see below) | 48 | 0 | 48 |
| (v) July 2014 – December 2015 (last 18 months) | 18 | 18 | 0 |
| 309 | 261 | 48 |
No part of the period from July 2010 to June 2014 can be covered by the exemption for three years of absence for any reason because it is not followed at any time by actual occupation.
| To help you to answer questions such as that above it is useful to draw up a table showing period of ownership, exempt months (real/deemed occupation) and chargeable months (non-occupation). You should also provide an explanation for any periods of deemed occupation. |
Exam focus point
4.4 Business use
Where part of a residence is used exclusively for business purposes throughout the period of ownership, the gain attributable to use of that part is taxable.
The ‘last 18 months always exempt’ rule does not apply to that part.
Simon purchased a property for £35,000 on 31 May 2009 and began operating a dental practice from that date in one quarter of the house. He closed the dental practice on 31 December 2015, selling the house on that date for £130,000.
Compute the gain, if any, arising.
| £ | |
| Proceeds | 130,000 |
| Less: cost | (35,000) |
| Gain before PPR exemption | 95,000 |
| Less PPR exemption 0.75 £95,000 | (71,250) |
| Gain | 23,750 |
Exemption is lost on one quarter throughout the period of ownership (including the last 18 months) because of the use of that fraction for business purposes.
If part of a house was used for business purposes for part of the period of ownership, the gain is apportioned between chargeable and exempt parts in a just and reasonable manner. If the business part was at some time used as part of the only or main residence, the gain apportioned to that part will qualify for the last 18 months exemption.
4.5 More than one residence
4.5.1 The election for a residence to be treated as the main residence
Where a person has more than one residence (owned or rented), he may elect for one to be regarded as his main residence by notice to HMRC within two years of commencing occupation of the second residence. An election can have effect for any period beginning not more than two years prior to the date of election until it is varied by giving further notice. (The further notice may itself be backdated by up to two years.) In order for the election to be made, the individual must actually reside in both residences. Any period of ownership of a residence not nominated as the main residence will be a chargeable period for that residence.
There are further rules about electing for a UK property to be treated as the main residence where such a property is disposed of by a non-UK resident (see later in this chapter).
4.5.2 Job-related accommodation
The rule limiting people to only one main residence is relaxed for individuals living in job-related accommodation.
| A person lives in job-related accommodation where:
(a) It is necessary for the proper performance of his duties, or (b) It is provided for the better performance of his duties and his is one of the kinds of employment in which it is customary for employers to provide accommodation, or (c) There is a special threat to the employee’s security and use of the accommodation is part of security arrangements. |
Such individuals will be treated as occupying any second dwelling house which they own if they intend in due course to occupy the dwelling house as their only or main residence. Thus it is not necessary to establish any actual residence in such cases. This rule extends to self-employed persons required to live in job-related accommodation (for example tenants of public houses). Key term
4.6 Spouses/civil partners
Where a married couple/civil partners live together only one residence may qualify as the main residence for relief. If each owned one property before marriage/registration of the civil partnership, a new two year period for electing for which is to be treated as the main residence starts on marriage/registration.
Where a marriage/civil partnership has broken down and one spouse/civil partner owning or having an interest in the matrimonial home has ceased to occupy the house, by concession the departing spouse/civil partner will continue to be treated as resident for capital gains tax purposes provided that the other has continued to reside in the home and the departing spouse/civil partner has not elected that some other house should be treated as his or her main residence for this period. This only applies where one spouse disposes of his interest to the other spouse.
Where a house passes from one spouse/civil partner to the other (for example on death), the new owner also inherits the old owner’s periods of ownership and occupation for PPR relief purposes.
4.7 Letting relief
FAST FORWARD
There is also a relief for letting out a principal private residence if the gain arising during the letting would not be covered by the main relief.
The principal private residence exemption is extended to any gain accruing while the property is let, up to a certain limit. The two main circumstances in which the letting exemption applies are:
- When the owner is absent and lets the property, where the absence is not a deemed period of occupation.
- When the owner lets part of the property while still occupying the rest of it. The absence from the let part cannot be a deemed period of occupation, because the owner has another residence (the rest of the property). However, the let part will qualify for the last 18 months exemption if the let part has at some time been part of the only or main residence.
In both cases the letting must be for residential use. The extra exemption is restricted to the lowest of:
- The amount of the total gain which is already exempt under the PPR provisions (including the last 18 months exemption)
- The gain accruing during the letting period (the letting part of the gain)
- £40,000
The letting exemption cannot convert a gain into an allowable loss.
If a lodger lives as a member of the owner’s family, sharing their living accommodation and eating with them, the whole property is regarded as the owner’s main residence.
Carole purchased a house on 1 April 2001 for £90,000. She sold it on 31 August 2015 for £340,000. In 2006 the house was redecorated and Carole began to live on the top floor renting out the balance of the house (constituting 60% of the total house) to tenants between 1 July 2006 and 31 December 2014. On 2 January 2015 Carole put the whole house on the market but continued to live only on the top floor until the house was sold. What is the chargeable gain?
£
Proceeds 340,000
Less cost (90,000)
Gain before PPR exemption 250,000 Less PPR exemption (working)
£250,000 (170,231)
79,769 Less letting exemption: Lowest of:
- gain exempt under PPR rules: £170,231
- gain attributable to letting: £250,000 = £79,769
- £40,000 (maximum) (40,000)
Gain 39,769
Working
Total
ownership Exempt Chargeable Period Notes months months Months
1.4.01 – 30.6.06 100% of house occupied 63 63 0
1.7.06 – 28.2.14 6040% of house let% of house occupied 92 36.8 55.2
1.3.14 – 31.8.15 Last 18 months treated as 100% of house occupied 18 18 0
173 117.8 55.2
Note. The gain on the 40% of the house always occupied by Carole is fully covered by PPR relief. The other 60% of the house has not always been occupied by Carole and thus any gain on this part of the house is taxable where it relates to periods of time when Carole was not actually (or deemed to be) living in it. Carole cannot claim exemption for the part of the period of letting under the 3 year absence rule since during this time she has a main residence which qualifies for relief (ie the rest of the house). However, she can claim exemption for the whole of the house for the last 18 months since the let part was part of her only residence prior to the letting.
Loss, damage or destruction of an asset
| The gain which would otherwise arise on the receipt of insurance proceeds may, subject to certain conditions, be deferred. |
FAST FORWARD
5.1 Destroyed assets
If an asset is destroyed (compared to merely being damaged – see below) any compensation or insurance monies received will normally be brought into an ordinary CGT disposal computation as proceeds. The date of disposal is the date the insurance proceeds are received and not the date the asset is destroyed. If all the insurance proceeds from a non-wasting asset are applied for the replacement of the asset within 12 months, any gain can be deducted from the cost of the replacement asset. If only part of the proceeds are used, the gain immediately chargeable can be limited to the amount not used. The rest of the gain is then deducted from the cost of the replacement. This is similar to rollover relief for replacement of business assets (see earlier in this Text).
Fiona bought a non-business asset for £25,000 in June 2010. It was destroyed in March 2015. Insurance proceeds of £34,000 were received in September 2015, and Fiona spent £35,500 on a replacement asset. Compute the chargeable gain and the base cost of the new asset.
Answer
2015/16 £
Proceeds 34,000
Less cost (25,000)
Gain (can be fully deferred as all insurance monies are spent on replacement) 9,000
5.2 Damaged assets
If an asset is damaged and compensation or insurance money is received as a result, then this will normally be treated as a part disposal.
By election, however, the taxpayer can avoid a part disposal computation. A capital sum received can be deducted from the cost of the asset rather than being treated as a part disposal if:
- Any amount not spent in restoring the asset is small (taken as the higher of 5% of the capital sum and £3,000), or
- The capital sum itself is small (taken as the higher of 5% of the value of the asset and £3,000).
There are special restrictions if the asset is wasting (that is, it has a remaining useful life of 50 years or less).
- The whole capital sum must be spent on restoration.
- The capital sum can only be deducted from what would have been the allowable expenditure on a sale immediately after its application. If the asset is a wasting asset this will be less than the full cost of the asset, because the cost of a wasting asset is written down over its life.
If the amount not used in restoring the asset is not small, then the taxpayer can elect for the amount used in restoration to be deducted from the cost; the balance will continue to be treated as a part disposal.
Frank bought an investment property for £100,000 in May 2015. It was damaged two and a half months later. Insurance proceeds of £20,000 were received in November 2015, and Frank spent a total of £25,000 on restoring the property. Prior to restoration the property was worth £120,000. Compute the chargeable gain immediately chargeable, if any, and the base cost of the restored property assuming Frank elects for there to be no part disposal.
How would your answer differ if no election were made?
As all the proceeds have been applied in restoring the property Frank has elected to disregard the part disposal.
The base cost of the restored property is £(100,000 20,000 + 25,000) = £105,000.
| £ | |
| Proceeds | 20,000 |
| Less cost £100,000 20,000/(20,000 + 120,000) | (14,286) |
| Gain | 5,714 |
If no election were made, the receipt of the proceeds would be a part disposal in November 2015. The gain would be:
The base cost of the restored asset is £(100,000 – 14,286 + 25,000) = £110,714.
Assuming this is Frank’s only disposal in the tax year, the gain is covered by the annual exempt amount. It may therefore be preferable not to make the election.
5.3 Negligible value claims 12/14
If a chargeable asset’s value becomes negligible a claim may be made to treat the asset as though it were sold, and then immediately reacquired at the value stated in the claim. This will usually give rise to an allowable loss.
The sale and reacquisition are treated as taking place when the claim is made, or at a specified earlier time. The earlier time can be any time up to two years before the start of the tax year in which the claim is made. (For companies, it can be as far back as the start of the earliest accounting period which ends within two years of the date of claim.) The asset must have been of negligible value at the specified earlier time. On a subsequent actual disposal, any gain is computed using the negligible value as the acquisition cost.
Exam focus Since a negligible value claim can be backdated it can be used to generate an allowable loss to set against point a gain that has already been realised.
6 CGT and trusts
FAST FORWARD
CGT may arise when assets are transferred into and out of trusts.
6.1 Assets being put into trusts
If a settlor puts an asset into any type of trust during his lifetime, he makes a disposal for CGT purposes. It will be deemed to take place at market value and gift relief will be available (unless the trust is a settlor-interested trust – see below). This is because there is also an inheritance tax charge (see later in this Text) when the assets enter the trust.
As there is no CGT on death, where a trust is created on death there is no deemed disposal. The trustees of a trust created under a will or on intestacy acquire the trust assets at their market value at death (ie probate value).
Exam focus Inheritance tax for trusts is covered later in this Text. You should return to this section once you have point completed your study of the relevant chapters.
6.2 Settlor-interested trusts
It is not possible to claim gift relief on transfers to a settlor-interested trust. This is a trust from which the settlor, or his spouse/civil partner or minor child (who is neither married nor in a civil partnership) can benefit.
6.3 Assets leaving trusts
When an asset leaves a trust, for example, when a beneficiary becomes entitled to trust property, the trustees make a disposal of the asset at market value. This may lead to a gain or loss.
If there is a gain, usually gift relief will be available because there will also be a charge to inheritance tax when property leaves a trust.
7 Overseas aspects of CGT 12/11, 6/13, 6/15
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CGT applies primarily to individuals resident in the UK. Individuals who are not UK domiciled may be entitled to use the remittance basis.
7.1 Liability to CGT
7.1.1 UK resident and domiciled individuals
In general, individuals are subject to CGT on the disposal of assets situated anywhere in the world if they are resident and domiciled in the UK in the tax year of the disposal.
7.1.2 Non-UK resident individuals
In general, an individual who is not UK resident in a tax year is not subject to CGT on the disposal of any assets, wherever situated, in that tax year. There is an exception where the individual is operating a business through a UK branch or agency: this exception is discussed later in this section. There are also special rules for disposals of interests in UK residential property by non-UK residents which are also discussed later in this section.
Exam focus It is important to note that a non-UK resident is not liable to CGT on investment assets, other than point residential property, even if those assets are situated in the UK.
7.1.3 UK resident but not UK domiciled individuals
If an individual is resident in the UK but not domiciled in the UK, gains on the disposal of assets situated overseas are taxable only to the extent that the proceeds of the disposal are remitted to the UK if the individual has made a claim for the remittance basis or it applies automatically because his unremitted income and gains are less than £2,000 in the tax year.
As with non-UK income, there is no charge on remittance if the money is brought into the UK in order to pay the Remittance Basis Charge, to acquire shares in or make a loan to a trading company or member of a trading group.
An individual who claims the remittance basis is not entitled to an annual exempt amount against chargeable gains.
Some of the rules about where assets are situated are contained in legislation. Some of them are a matter of general law. Most of the rules are obvious, for example, land is situated where it actually is, chattels are situated where they are physically present. There are special rules relating to intangible assets, the most important of which are shares and securities in a company. All shares and securities of a UK incorporated company are treated as situated in the UK, regardless of where the share certificate is kept.
Exam focus June 2015 Question 5(c) Ravi concerned the capital gains tax position of an individual who was resident in point the UK but domiciled overseas. The examiner commented that ‘Although some candidates did reasonably well here, almost all candidates could have scored more marks if they had organised their thoughts before they began writing. There was a mark for making the point that Ravi was liable to UK capital gains tax because he was UK resident and a further mark for recognising that the remittance basis was available because he was domiciled overseas. In order to score these two marks, candidates had to make it clear that the liability to capital gains tax was due to his residence status and the remittance basis was due to his domicile status. Many candidates did not make these two points clearly, such that they only scored one of the two available marks.’
7.1.4 Split year treatment
If an individual is UK resident in a tax year, that individual may be entitled to split year treatment so that the tax year is split into a UK part and an overseas part. The availability of split year treatment is determined in the same way as for income tax (see earlier in this Text).
If an individual makes a disposal in the UK part of the tax year, the individual will be subject to CGT on that disposal as a UK resident.
Conversely, if the individual makes a disposal in the overseas part of the tax year, the individual will treated as non-UK resident and so will not be subject to CGT on that disposal (unless the disposal is of UK residential property – see later in this chapter).
7.2 Losses on non-UK situated assets
7.2.1 UK resident and domiciled individuals
Losses are allowable losses if the individual is UK resident and domiciled.
7.2.2 UK resident but not UK domiciled individuals
An individual who is non-UK domiciled but has not claimed the remittance basis, for example because his income and gains are less than £2,000 in the tax year, is also automatically given relief for losses on assets situated outside the UK.
An individual who has claimed the remittance basis must make an irrevocable election to treat losses on assets situated outside the UK as allowable losses. The election must be made in relation to the first occasion when a non-UK individual claims remittance basis for a tax year.
If the individual does not make an election on that occasion, overseas losses of that tax year and all future years will not be allowable losses.
If the individual does make the election, there are special rules relating to the deduction to allowable losses where there are foreign chargeable gains. Broadly, losses cannot be set against non-UK gains arising in previous years and where losses are available for deduction, they are set first against non-UK gains arising and remitted in that year, then against other non-UK gains and lastly from UK gains arising in that year.
7.3 Non-UK residents operating through a UK branch or agency
The general rule is that an non-UK resident individual who makes a disposal of an asset situated in the UK is not liable to CGT on that disposal.
However, there will be a liability to CGT where:
- the individual is carrying on a trade, profession or vocation in the UK through a branch or agency, and
- there is a disposal of an asset, which has been:
– used in or for the purposes of the trade, profession or vocation, or – used or held or acquired for the purpose of the branch or agency.
There will also be a deemed disposal at market value where an asset ceases to be a chargeable asset either by being removed from the UK or because the UK trade, profession or vocation ceases.
7.4 Disposals of UK residential property by non-UK residents NEW
|
| From 6 April 2015, disposals of UK residential property by non-UK residents are subject to CGT. However, generally only the gain or loss accruing since 6 April 2015 is chargeable/allowable. |
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7.4.1 Non-resident CGT (NRCGT) disposals
From 6 April 2015, non-UK resident individuals are subject to capital gains tax on the disposal of interests in UK situated residential property.
In general only the gain or loss accruing since 6 April 2015 is chargeable/allowable. If the residential property was acquired before 6 April 2015 the default method of calculating the gain or loss is:
£
Proceeds X
Less market value of residential property at 5 April 2015 (X) enhancement expenditure incurred after 5 April 2015 (X)
Gain/loss X/(X)
The individual can make an election to use either of the following methods of calculating the gain or loss:
- Straight line time apportionment of the gain/loss calculated under normal CGT rules over the whole period of ownership with the part accruing after 5 April 2015 being chargeable/allowable; or
- Whole period gain/loss. This method may be useful where there is a loss on the property since it was acquired as it will allow the whole of the loss, not just the part accruing since 5 April 2015.
Lenny acquired a house in the UK on 1 October 2010 at a cost of £211,500. He disposed of it on 1 March 2016 for net disposal proceeds of £244,000. The house had a market value of £230,000 on 5 April 2015. Lenny is not UK resident in the tax year 2015/16. The house has never been used as Lenny’s main residence. Advise Lenny whether he should make an election for the straight line time apportionment method of calculating his NRCGT gain.
First calculate the gain using the default method.
Default method
£
Proceeds 244,000
Less market value at 5 April 2015 (230,000)
Gain 14,000
Next, calculate the gain using the straight line time apportionment method.
Straight line time apportionment method
£
Proceeds 244,000
Less cost (211,500)
Gain 32,500
Lenny owned the house from 1 October 2010 to 1 March 2016 (65 months). The period from 6 April 2015 to 1 March 2016 is 11 months.
Post 6 April gain 11/65 £32,500 5,500
Lenny should therefore make an election to use the straight line time apportionment method.
An individual who has NRCGT gains is entitled to the annual exempt amount. The rate of CGT on NRCGT gains depends on the total of the individual’s taxable UK income and gains.
7.4.2 Interaction with replacement of business assets relief
If the UK residential property is a business asset under normal rules (for example, furnished holiday accommodation) replacement of business assets relief is only available if the new asset is also a UK residential property.
7.4.3 Interaction with gift relief
If the UK property is a qualifying asset for gift relief (again an example is furnished holiday accommodation), then gift relief is available on a gift to a non-UK resident person. This is an exception to the usual rule that gift relief is available only if the donee is UK resident. The exception applies because the residential property remains within the charge to CGT in the hands of the non-UK resident donee.
7.4.4 Interaction with PPR relief
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PPR relief may be available on disposals of UK residential properties by non-UK resident individuals but is restricted for tax years where the individual is neither UK tax resident nor satisfies a ‘day count test’. A similar restriction applies to UK residents who dispose of non-UK residential properties.
Where an individual has a NRCGT disposal of a main residence, principal private residence relief may be available for the period of ownership after 5 April 2015.
However, no period of actual occupation after 5 April 2015 is taken into account unless the individual (or his spouse/civil partner) was UK tax resident or satisfied the ‘day count test’ in the relevant tax year. The day count test is met if the individual (or his spouse/civil partner) stayed overnight at the property for at least 90 days in the tax year. If the property is owned for only part of a tax year, the day count test is scaled down in accordance with the period of ownership (eg if the property is owned for four months (one-third) of the tax year, then 90 days becomes 30 days).
The last 18 months of ownership are always treated as if it were a period of occupation, regardless of whether the individual satisfies the residence test or day count test during the tax year(s) for that period.
Michaela bought a UK house on 6 April 2012. She lived in the house until 5 April 2016 when she left the UK to live in Utopia in her sister’s house and ceased to be UK tax resident on that date.
Michaela did not stay overnight in the house between leaving it and selling it on 5 April 2022. Her NRCGT gain on the sale was £126,000.
Calculate Michaela’s taxable gain for 2021/22, assuming that the tax rules and allowances in 2015/16 continue to apply.
| £ | ||
| Gain before PPR exemption | 126,000 | |
| Less PPR exemption (working) |
£126,000 (45,000)
Chargeable gain 81,000
Less annual exempt amount (11,100) Gain 69,900
Working
Total
ownership Exempt Chargeable Period Period months months months
6.4.15 – 5.4.16 Actual occupation, UK resident 12 12 0
6.4.16 – 5.10.20 Absent 54 0 54 6.10.20 – 5.4.22 Last 18 months 18 18 0
84 30 54
Letting relief is available if the property is let out regardless of whether the individual satisfies the residence test or day count test during the letting period.
Similar PPR rules apply to UK resident individuals who dispose of a residential property situated in a country in which neither they nor their spouse/civil partner are tax resident nor in which they satisfy the day count test in a tax year.
7.5 Temporary non-residence
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Individuals who are temporarily non-UK resident are subject to CGT if they make disposals, during the nonUK resident period, of assets acquired before the individual became non-UK resident.
An individual who wishes to dispose of assets might decide to become non-UK resident for a short period of time, make disposals during that non-UK resident period, and then become UK resident again. There are anti-avoidance rules relating to temporary non-UK residence.
Temporary non-UK residents are subject to CGT whilst they are non-UK resident if:
- They were UK resident in a tax year (either a full tax year or a UK part of a split tax year) – this is referred to as Period A, and
- Immediately following that Period A, one or more residence periods occur for which they are not UK resident, and
- They were UK resident for at least four out of the seven tax years immediately preceding the tax year of departure (the tax year consisting of or including period A), and (d) The temporary period of non-residence is five years or less.
Net gains realised in the tax year of departure (either the full tax year or the UK part of a split tax year) are subject to CGT under general principles.
Gains/ losses made by temporary non-UK residents in the non-UK resident period (including the overseas part of a split tax year) are chargeable/allowable in the period of return. This is the first residence period after period A for which the individual is UK resident (either for a full tax year or a UK part of a split tax year).
Gains on assets acquired in the non-UK resident period are not included in the above charge nor are gains which are already chargeable either because they arise on branch or agency assets or because they are NRCGT disposals (see earlier in this chapter).
Sue had always been resident in the UK until (and including) the tax year 2015/16. She left the UK on 1 February 2016 to begin full-time work overseas.
Sue was then not resident in the UK for the tax years 2016/17, 2017/18, 2018/19 and 2019/20. Sue returned to the UK on 1 July 2020 when she ceased full-time work overseas. She was thereafter present in the UK so as to be UK resident.
Sue made the following disposals of shares:
| Date of disposal | Proceeds | Date of acquisition | Cost |
| £ | £ | ||
| 9 December 2015 | 28,000 | 11 June 2010 | 15,000 |
| 10 March 2016 | 150,000 | 15 May 2014 | 87,000 |
| 19 June 2018 | 80,000 | 10 August 2011 | 100,000 |
| 25 November 2019 | 60,000 | 11 June 2017 | 55,000 |
Explain how these disposals will be treated for CGT purposes and compute the amount of taxable gains. Assume 2015/16 tax rates and allowances continue to apply.
Sue was UK resident in the tax year 2015/16. She can split this tax year into UK and overseas parts since she left the UK to begin full time work overseas. Period A therefore ended on 31 January 2016 and the year of departure is 2015/16. Sue can also split the tax year 2020/21 into overseas and UK parts as she is returning to the UK following a period of full time work overseas.
The disposal in December 2015 is in the UK part of the split tax year 2015/16 and is therefore subject to CGT in that tax year.
December 2015 disposal
£
Proceeds 28,000
Less cost (15,000)
Gain 13,000
Less annual exempt amount (11,100) Taxable gain 2015/16 1,900
Sue is then non-UK resident from 1 February 2016 until 30 June 2020. Since this period of temporary non-UK residence is five years or less, she will be subject to CGT on the disposal of assets acquired before she became non-UK resident. The net gains will be chargeable in the period of return which starts on 1 July 2020.
| £ | |
| Proceeds | 150,000 |
| Less cost | (87,000) |
| Gain | 63,000 |
| June 2018 disposal | |
| £ | |
| Proceeds | 80,000 |
| Cost | (100,000) |
| Loss | (20,000) |
March 2016 disposal
| The disposal in November 2019 is not subject to CGT because the asset was acquired in the non-UK | |
| resident period.
Taxable gains 2020/21 |
|
| £ | |
| Gain | 63,000 |
| Less loss | (20,000) |
| 43,000 | |
| Less annual exempt amount | (11,100) |
| Taxable gains 2020/21 | 31,900 |
7.6 Double taxation relief
If a gain made on the disposal of an overseas asset suffers overseas taxation, relief will be available in the UK against any CGT on the same disposal.
7.7 Calculation of non-UK gains
If an asset is bought and/or sold for amounts in a foreign currency, each such amount is first translated into sterling (using the rate at the time of purchase or sale), and the gain or loss is computed using these sterling amounts.
7.8 Non-remittable proceeds
Tax on gains accruing on assets situated outside the UK may be deferred, until the gain becomes remittable, if:
- The taxpayer makes a claim;
- The gain could not be remitted to the UK because of the laws of the country where it arose, because of executive action of its government or because it was impossible to obtain foreign currency, and
- This was not because of any lack of reasonable endeavours on the taxpayer’s part.
Chapter roundup
| | Gains on most wasting chattels are exempt, and losses on them are not allowable. The CGT rules are modified for assets eligible for capital allowances. |
| | Other wasting assets generally have their cost written down over time. |
| | An ordinary disposal computation is made on the disposal of a lease with 50 years or more to run. For leases of land with less than 50 years to run, a special table of percentages is used. |
| | There is an exemption for gains on principal private residences, but the exemption may be restricted because of periods of non-occupation or because of business use. |
| | There is also a relief for letting out a principal private residence if the gain arising during the letting would not be covered by the main relief. |
| | The gain which would otherwise arise on the receipt of insurance proceeds may, subject to certain conditions, be deferred. |
| | CGT may arise when assets are transferred into and out of trusts. |
| | CGT applies primarily to individuals resident in the UK. Individuals who are not UK domiciled may be entitled to use the remittance basis. |
| | From 6 April 2015, disposals of UK residential property by non-UK residents are subject to CGT. However, generally only the gain or loss accruing since 6 April 2015 is chargeable/allowable. |
| | PPR relief may be available on disposals of UK residential properties by non-UK resident individuals but is restricted for tax years where the individual is neither UK tax resident nor satisfies a ‘day count test’. A similar restriction applies to UK residents who dispose of non-UK residential properties. |
| | Individuals who are temporarily non-UK resident are subject to CGT if they make disposals, during the nonUK resident period, of assets acquired before the individual became non-UK resident. |
Quick quiz
- What is the general treatment of intangible wasting assets (eg a copyright)?
- When a lease with less than 50 years to run is assigned, what proportion of the cost is allowable?
- For what periods may an individual be deemed to occupy his principal private residence?
- What is the maximum letting exemption?
- Emma drops and destroys a vase. She receives compensation of £2,000 from her insurance company. How can she avoid a charge to CGT arising?
- Clive has always been UK resident. He acquires an asset in 2012. Clive becomes non-UK resident for the tax year 2015/16. He disposes of the asset in 2017, realising a gain of £50,000. Clive becomes UK-resident again in the tax year 2018/19. Clive is not entitled to split year treatment in any relevant year. How will the gain on the disposal in 2017 be taxed (if at all)?
Answers to quick quiz
- The cost is written down on a straight line basis.
- Allowable cost is original cost X/Y where X is the % for the years left of the lease to run at assignment and Y is the % for the years the lease had to run when first acquired by the seller.
- Periods of deemed occupation are:
- last 18 months of ownership, and
- any period of absence up to three years, and
- any period during which the owner was required by his employment to work abroad, and
- any period up to four years during which the owner was required to live elsewhere due to his work (employed or self-employed) so that he could not occupy his private residence.
- £40,000
- Emma can avoid a charge to CGT on receipt of the compensation by investing at least £2,000 in a replacement asset within 12 months.
- Clive is temporarily non-UK resident for five years or less (non-residence period from 6 April 2015 to 5 April 2018). He will be taxed on the gain made in 2017 in the period of return to UK residence which is the tax year 2018/19.
| Number | Level | Marks | Time |
| Q15 | Introductory | 25 | 49 mins |
