Knowing your rate of capital gains tax...

Historically there was only one rate of capital gains tax which made life relatively simple when budgeting for tax bills.

Additional rates have been added over time differentiating between gains arising for basic and higher rate taxpayers and gains on certain business assets. Since 6 April 2016 things have become even more complex as there are now five potential rates of capital gains tax. This can cause confusion over the amount of tax payable on the sale of an asset. The rates are as follows:

  1. 0% - this rate applies where there are special reliefs or exemptions available. For example relief from capital gains tax on the sale of your main residence or exemption from capital gains tax on qualifying Enterprise Investment Scheme shares. It is also possible to defer some gains, for example rollover relief where business assets are sold and the proceeds reinvested into new business assets. This type of relief does not give an immediate 0% tax rate but it does delay the payment date of the tax liability.
  2. 10% - this can apply to gains arising for a basic rate taxpayer or where Entrepreneurs Relief (ER) or Investors Relief is due. ER can apply to gains on the disposal of the whole or part of your business or disposals of assets used in your business. Investors Relief applies to disposals of certain qualifying shares in unlisted companies.
  3. 18% - this applies to gains on the disposal of residential property for a basic rate taxpayer.
  4. 20% - this applies to gains for a higher rate taxpayer, except where the disposal is of residential property.
  5. 28% - this applies to gains on residential properties for a higher rate taxpayer.

As can be seen, the highest rates of tax apply to residential property. These have been introduced from April 2016 alongside the recent changes announced which restrict relief for interest paid on mortgages used to acquire buy to let properties (effective from April 2017) and the new higher rates of Stamp Duty Land Tax (see the separate article on the additional 3% charge).

It would be easy to assume that the new rates of capital gains tax on residential property only apply to houses. Unfortunately this isn’t the case. The definition of residential property is wide and includes a building that is suitable for use as a dwelling or is in the process of being coverted or adapted for use as a dwelling. This might include a barn with permitted development rights where work has started on the conversion but then a decision is made to sell before the conversion is complete. Residential property also includes gardens and grounds and “contracts for off-plan purchase” (land consisting of, or including, a building or part thereof that is constructed or adapted as a dwelling). Where there has been a change to the asset, perhaps starting out as a barn and then being constructed for residential use, there is a form of apportionment of the gain meaning only part of the gain is charged at the higher residential rates.

Where farmers have diversified and have invested in buy to let properties or are perhaps considering developing redundant farm buildings for residential use it is important to factor in the penal tax charges that arise on residential property. If you are considering disposing of assets it is important to seek tax advice ahead of the sale and, wherever possible any disposal should be structured to qualify for ER.

To find out what services we offer, visit our Agriculture and Bloodstock page. Alternatively, if you would like any further information on the issues raised above, please contact us using our contact page. 

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Nicola Anderson

Partner, Private Clients
I am a Partner in the Private Client Tax team specialising in income tax, capital gains and inheritance tax planning. I work with a variety of clients, including business owners and managers, farmers, non-resident and non domiciled individuals, high net worth individuals and Trusts.Spending time with my clients to understand their aims and objectives is critical to giving the practical and clear advice they value.

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