In relation to Capital Gain Tax, what amounts to the disposal of an asset

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In UK tax system, Capital Gain Tax (CGT) is one of the tax consideration for both individual and business. For businesses, Capital Gains Tax is charged as part of your general corporation tax liabilities. Essentially, you will incur CGT when you cease to own any asset. This does not necessarily mean that the asset must be sold. This is especially important for those who are planning on either selling or transferring their own business in order to pay for their retirement, as in these circumstances any gains that you make on this transfer are likely to be subject to Capital Gains Tax. As an individual or a business, Capital Gains Tax is incurred only when two parties agree on an unconditional contract for the transfer of an asset. In these cases, the sale is considered to have taken place as soon as the contract has been agreed, and any gains made by the original owner of the asset will be subject to CGT from that moment. However, if the transfer is made as a result of a conditional contract, the sale is judged to have taken place only when the condition has been fulfilled. Thus, CGT is also incurred only at this point. (The Tax Guide, 2010)


In 1965, CGT was first introduced in UK. It was consolidated in the Capital Gain Tax Act 1979 (CGTA 1979) followed by the Taxation of Chargeable Act 1992 (TCGA 1992) (Lee, 2009, p.467). CGT taxed on profits/capital gains made on the disposal of assets by individuals, personal representatives (of deceased persons) and trustees which is untaxed by income tax or corporate tax for companies.

There is however no general rule against double taxation that prevents the same sum from being subjected to two different taxes and in Bye v Coren (1986) Scott J (whose judgement was upheld in the Court of Appeal) held that "whether it is so subject is a matter of construction of the stature or statues which have imposed the taxes". TCGA 1992 s 37 will provide relief in most cases since it stated that once an income tax assessment has become final in respect of a sum of money the same person cannot be subject to a CGT assessment on that same sum. There is, of course, nothing to prevent the Revenue from raising alternative assessment (eg to income tax and CGT) on the same sum of money (Bye v Coren, above and Irc v Wilkinson (1992))

Since introduced in 1965, the scope of CGT has fluctuated and in 1971, charge on death was removed. In general, only gains which have arisen since March 1982 are taxed. In addition, for years up to 2007-08 allowance is made for inflation up to April 1998. Taper relief applies from 1998-99 to 2007-08 and the proportion of gain chargeable in those years is in accordance with table A.7. Up to 2007-08 chargeable gains, after reliefs, are taxed at rates equivalent to the individual's marginal income tax rate as if they were an additional amount of taxable income (taxable savings income from 1999-2000). There are separate tax rates for personal representatives and trustees. There are certain exemptions and reliefs, which are listed in tables 1.5, B.1 and B.2.

7. The main changes which were the stepping stones on the way into the existing CGT system were:

- in 1982 an indexation allowance was introduced. This allowance is the difference between the cost incurred and the same costs indexed by the Retail Prices Index;

in 1988, the cost of assets held at 31 March 1982 was 'rebased' to their market value at that date to ensure that gains accruing before then were not charged to tax. In that year, the rate of capital gains tax was aligned with the rates for income tax. Capital gains were thereafter, in broad terms and after deducting any allowances and reliefs available, taxed as if they were the top slice of an individual's income.

CGT has undergone a series of reforms over the past two decades. In 1982, an indexation allowance was introduced, to reflect the increase in the price of assets over time due to inflation. The relief applied only to gains made from April 1982. In 1988, the cost of assets held at 31 March 1982 were rebased to their market value as at 31 March 1982, such that gains accruing before then were no longer charged to tax. CGT rates were also aligned with income tax rates and capital gains were treated as the top slice of an individual's income.

In 1998, indexation was withdrawn for the period after April 1998 and replaced with taper relief, whereby gains are tapered according to the number of complete years an asset is held after 5 April 1998. A more generous taper applies to business assets than non-business assets. Business asset taper rates have been modified twice since their introduction in 1998, with the length of the taper falling from ten years, first to four years, and then to two years. The definition of business assets has also been widened three times.

The capital gain is broadly the difference between the disposal proceeds and the cost of acquiring the asset. Types of disposals include sales, gifts, exchanges or generally when the owner of an asset derives a capital sum from it.

Capital losses may be deducted from gains chargeable in the year in which the losses are incurred or, if these gains are insufficient, the unused losses may be carried forward to later tax years.

There are various reliefs and exemptions which may reduce the amount of CGT to be paid. For example, there is normally no CGT liability on the disposal of a person's main or only home. As with income tax, there is an annual exempt amount on which CGT does not have to be paid, which is £8,200 for individuals and personal representatives, and £4,100 for trusts in 2004-05. After all reliefs, allowances and exempt amounts have been deducted, the remaining gain is, in effect, subject to personal income tax and treated as the top slice of an individual's income. The rates of CGT are the same as the rates of tax on savings income (10 per cent, 20 per cent and 40 per cent). The CGT rate applicable to trusts and personal representatives is 40%. The vast majority of CGT is paid at 40 per cent.

A CGT liability arises when a chargeable person makes chargeable disposal of a chargeable asset (Melville, 2010, p.247).

A chargeable person is person who is resident or ordinarily resident and domiciled in the United Kingdom during all or part of a tax year; trustees, business partners and personal representative of a deceased person (TCGA 1992 s 2). CGT for husbands and wives, and same-sex civil partners are assessed independently. For CGT purposes, companies are not chargeable persons. But they are liable for corporation tax on their capital gains. Non-residents, registered charities and friendly societies, few approved associations are not subjected to CGT.

All assets are changeable assets except:

taxpayer's principal private residence


your main home - provided certain conditions are met

stocks and shares you hold in tax-free investment savings accounts, such as ISAs and PEPs

UK Government gilts (bonds)

personal belongings worth £6,000 or less when you sell them

betting, lottery or pools winnings

personal injury compensation

any foreign currency held for your own or your family's personal use outside the UK (eg if you've made a gain because of a change to the exchange rate)

Any form of property may be an asset for CGT purposes, including:

Shares, unit trust and other investments

Land, buildings and leases

Antiques, jewellery and other personal possessions

Business assets, such as machinery and goodwill.

Overseas assets

An asset which cannot be transferred by sale or gift may be within the tax charge. In O'Brien v Benson's Hosiery (Holdings) Ltd (1979), for instancem a director under a seven-year servicec contract paid his employer $50,000 to be released from his obligations. The employer was charged to CGTT on the basis that the contract, dispite being non-assignable, was an asset under s 21 (1) so that the release of those rights resulted in "a capital sum being received in return for the forfeiture or surrender of rights" (TCGA 1992 s 22 (1)(c).

In Marren v Ingles (1980) share in a private company were sold for $750 per share, payable at the time of the sale, plus a further sum if the company obtained a Stock Exchange quotation and the market value of the sahres at that time was in excess of $750 per share. Two years later a quotation was obtained and a further $2,825 per share was paid. The House of Lords held that the taxpayers were initially liable for CGT calculated on the original sale price of $750 per share plus the value of contingent right to receive a further sum (their Lordships did not attempt to put a value on it; was it nominal?). That right was a chose in action (a separate asset) which was disposed of for $2,825 per share two years later, leading to a further CGT liability.

A "right" maybe used in both a colloquial and a legal sense. In its wider colloquial sense a riight is not an asset for CGT purposes; it must be legally enforceeable and capable of being turned into money. In Kirby v EMI plc (1988) the Revenue initially argued that the right to engage in commercial activity was an asset fir CGT purposes with the result that if the taxpayers agreed to restrict their commercial activities in return for a capital payment, that sum would be brought into chargge to tax. This argument was rejected on the basiis that freedom to indulge in commercial activity was not a legal right constituting an asset for CGT purposes. On appeal, the Revenue produced an alternative argument that the taxpayers had derived a capital sum fromt he firm's goodwill and that therefore the payment in question was chargeable to CGT. In this argument it was successful.

Chargeable Disposal

Capital Gains Tax is a tax on the profit or gain you make when you sell or 'dispose of' an asset.

You usually dispose of an asset when you cease to own it - for example if you:

sell it

give it away as a gift

transfer it to someone else

exchange it for something else

receive compensation for it - eg you receive an insurance payout when an asset's been destroyed

These are some points to bear in mind:

if you are married or in a civil partnership and living together you can transfer assets to your husband, wife or civil partner without having to pay Capital Gains Tax

you can't give assets to your children or others or sell assets cheaply without having to consider Capital Gains Tax

if you make a loss you may be able to make a claim for that loss and deduct it from other gains, but only if the asset normally attracts Capital Gains Tax - for example you cannot set a loss on selling your car against gains from disposing of other assets

if someone dies and leaves their belongings to their beneficiaries, there is no Capital Gains Tax to pay at that time - however if an asset is later disposed of by a beneficiary, any Capital Gains Tax they may have to pay will be based on the difference between the market value at the time of death and the value at the time of disposal

Consideration for the disposal

In most of the cases, an asset's disposal value is the sales proceeds when sales is by way of bargain at arm's length. However, if the disposal is between husband and wife or same-sex civil partner, it will be treated as the disposal value equal to the cost of the asset, hence trigger no gain nor loss. (TCGA 1992 s58: a 'no gain/no loss' disposal).

In the event that the disposal is not at arm's length, and not made between married couples and civil partners, the consideration will be the market value of the asset when it was sold. These includes gifts, disposal between "connected persons", transfers of assets by a settlor into a settlement, company's shares distribution and disposal by people exempted from CGT. Although the market value rule could result to an advantage to the taxpayer by giving the recipient a high acquisition cost for any future disposal in a transaction where the disponer is not charged to CGT on gain (known as 'reverse Nairn Williamson' arrangements), it is prevented by TCGA 1992 s 17 (2), where there is an acquisition without a disposal and either no consideration is given for the asset, or the consideration is less than it's market value, the actual consideration given prevails (Lee, 2010, p.472-473).

The "connected persons" referring to the following four categories (TCGA 1992 s 286):

Individual - his/her spouse or civil partner, relatives and their spouses or civil partners. Marriage continues for these purposes until final divorce (Aspden v Hildesley (1982)).

Company - companies with common control and persons who has control over the company.

Partner - fellow partner and his spouse or civil partners and their relatives, except under bona fide commercial arrangements.

Trustee - settlor, person related to the settlor and any close company in which the trustee or any beneficiary under the settlement is a participator. He is not connected with a beneficiary as such and, once the settlor dies, ceases to be connected with the persons connected with the settlor.

When a disposal is made but the consideration would be paid by installment or is subject to a contingency, CGT is chargeable on the gain of the full consideration without any discount even thought the payment is not received in full at the point of disposal. Case law Capcount Trading v Evans (1993) and Loffland Bros North Sea Inc v Goodbrand (1998) explained how it applies (Lee, 2010, p. 474-475).

However, there might be cases where the deferred consideration is unable to value as a result of the dependency on some future contingency. In Marren v "Ingles (1980) part of the payment for the disposal of shares was to be calculated by reference to the price of the shares if and when the company obtained a Stock Exchange listing. The taxpayer's gain the the time of disposal of the shares could not be calculated by reference to such unqualifiable consideration. Accordingly he was treated as making two separate disposals. The first was the disposal of shares. The consideration for this was the payment that the taxpayer actually received plus the value of the right to receive the future deferred sum (a chose in action). The value of chose in action then formed the acquisition cost of that asset. Hence, once the deferred consideration become payable, the taxpayer was treated as making a second disposal, this time of the chose in action. He was, therefore, chargeable on the difference between the consideration received and whatever was the acquisition cost of that asset. No double taxation instead by installment.