September 2006

77.53 Capital gains and losses

Capital gains tax was introduced with effect from 06 April 1965 to tax the capital gains made by individuals, personal representatives and trustees.

When an asset is disposed of, the profit or loss on disposal is a capital gain or loss. Certain assets are exempt from capital gains tax on their disposal, e.g. an individual's only or main residence, and those that are not exempt are called chargeable assets.A gain or loss is calculated on each asset disposed of, and then totaled together to give the net gain or loss for the year.

A company's capital gains are included in its profit figure and are charged to corporation tax. An individual (including a partner) must give details of any chargeable gains or allowable losses on their self assessment return, and is charged capital gains tax on gains made.

77.54 Capital gains in a liquidation

A company remains liable for corporation tax on capital gains resulting from disposals made after the liquidation [note 1]. Any corporation tax due on chargeable gains made in the realisation of an asset is payable as an expense in the liquidation [note 2].See also paragraph 77.15

77.55 Capital gains in a bankruptcy

Although assets vest in the trustee on appointment, this does not constitute a disposal for capital gains tax purposes [note 3]. If the trustee disposes of assets, any gains on disposal are liable to capital gains tax and the tax is payable as an expense in the bankruptcy, in due order of priority [note 4].

77.56 Inheritance Tax

Inheritance tax may be charged on wealth passed on after death, on certain gifts made before death if death occurs within seven years of the gift being made, and on certain transfers into and out of trusts. A running total is kept of chargeable lifetime transfers and inheritance tax is not payable either on lifetime gifts or wealth at death below a certain threshold.See paragraph 77.58

Worldwide assets belonging to UK domiciledindividuals are chargeable to inheritance tax. For an non UK domiciled individual, only UK assets are chargeable to inheritance tax.Domicile essentially means the place than an individual regards as "home".

77.57 Lifetime transfers

Gifts given or transfers made during a person's lifetime may have different consequences for inheritance tax, depending on the type of gift or transfer. A transfer or gift may be classed as follows:

Chargeable. The most common form of transfers which are immediately chargeable are transfers into a discretionary trust (i.e. a trust to which no-one has a right to the income, and it is up to the trustees how much of the income of the trust they distribute to the beneficiaries.) If the gift exceeds the taxable threshold, tax is payable at 20% immediately, and if the donor dies within seven years of the gift, inheritance tax on the amount that the transfer exceeds the taxable threshold is payable at the full rate of 40%, although a credit will be given for the tax already paid at 20%.

Exempt. Certain gifts are exempt from inheritance tax, as follows:

1. gifts to spouses or civil partners(the exemption is without limit except where the spouse or civil partner receiving the gift is domiciled outside the UK)
2. gifts not exceeding £3,000 in any one tax year
3. gifts made in consideration of marriage or civil partnership up to the following limits:
    - £5,000 if the transferor is a parent of one party to the marriage or civil partnership. 
    - £2,500 where the transferor is either a remoter ancestor than a parent of the party to the marriage or civil partnership.
    - £1,000 in respect of any other transfer.
4. gifts to UK charities
5. gifts for national purposes
6. small gifts (not exceeding £250 to any one person in a year)
7. gifts which are normal expenditure out of income

Potentially exempt. Most lifetime gifts will be potentially exempt from inheritance tax. If the donor does not die in the seven years following the gift, it will be exempt from inheritance tax. If the donor dies within seven years of the gift, if the taxable threshold has been exceeded inheritance tax will be payable on the gift.

77.58 Taxable threshold for inheritance tax

Inheritance tax is not chargeable where the total estate of the deceased person (including potentially exempt lifetime transfers and chargeable lifetime transfers) is below a certain amount. If the estate, including any assets held in trust and gifts made within seven years of death, is less than the threshold, no inheritance tax will be due on it.

Gifts and transfers made in the seven year period ending with the date of death will be taken into account and will reduce the amount of the nil rate threshold available to set against the value of the estate at death, and will therefore subsequently increase the amount of inheritance tax payable against the estate if the value of the gifts, transfers and estate at death exceeds the threshold. For details of the historic and current threshold amounts see http://www.hmrc.gov.uk//cto/customerguide/page15.htm

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