Gains excluded from a Tax Return
Written by Ray Coman
A gain only needs to be reported on a Tax return where:
The gain is above than the annual exemption; or
The proceeds are greater than four times the annual exemption;
Consideration
A broader term for proceeds is consideration. Consideration is what is obtained for disposing of the asset:
- If it is sold, this means the money obtained in return;
- For something disposed of as a gift, it is market value;
- The compensation pay-out for something lost or stolen.
Disposals free from capital gains tax
Income as distinct from a gain
Gifts
Making a gift does not exempt a person from capital gains tax. For example, it is not possible to gift a buy-to-let to your children and escape capital gains tax. The value of the gift in the beneficiary’s hands is the current market value. Therefore, without this rule people would simply gift to intermediaries who would then sell for no tax.
Disposals free from capital gains tax
Certain types of gain do not need to be included on a Tax Return, regardless of the proceeds. This is because the gain is exempt from capital gains tax. The most common types include:
- A person’s home. i.e. the main residence;
- Any investment in an ISA or junior ISA (for children);
- Any investment in a pension;
- Lottery winning or any other gain from gambling;
- Spread betting is tax free and can be used to speculate, or even invest, on the currency and other financial markets. It is a requirement that the activity does not amount to a regular trade;
- Compensation for instance relating to personal injury; many financial compensation and mis-selling falls into this classification;
- A car, even a classic car;
- Chattels; which usually includes antiques up to a certain value;
- Any asset disposed of on death (inheritance tax applies if the total estate is above the nil rate band.)
- Gilt-edged securities; i.e. government bonds (often invested in because of their perceived safety);
- Foreign currency for personal use. Any gain on holiday money is unlikely to be above the annual exemption in any case;
- Gain in tax efficient shares, such as EIS, VCT, SEED and some employment related share schemes;
- Physical gold and silver, usually purchased as coins. The exemption applies because the precious metal units are regarded as British currency.
Recap
If a person has lived continually in the property that they own there is no tax. For the sale of small sums of shares, there is rarely any tax to consider. No tax on pensions or ISAs.
Income as distinct from a gain
Where there is a business of buying and selling, then the proceeds become income and are taxed separately. The badges of trade are used to distinguish between items held as investment or as a hobby and those bought and sold as part of a trading activity. Typically, if selling shares or antiques is a person’s job, the activity is taxed as a business and not as capital gains.
Losses
In tax terms, a loss occurs where the consideration is lower than the base cost. Typically, this means the asset is sold for less than it was bought for.
If the proceeds are below the reporting threshold (i.e. four times the annual allowance) the loss does not need to be reported on a Tax return. However, there could be a tax benefit to recording it. In that case the loss can be entered on a Return, but it does not have to be entered on a Return.
A capital loss can be used to deduct a future capital gain in the same tax year; or
Capital gains (after the annual exemption has been deducted) of a future tax year.
If a gain is exempt from tax then the vast majority of the time the loss is not allowable. For instance, loss of value in a pension can rarely gain any tax advantage.
Often a person will not have any capital gains tax to pay in their lifetime. Consider, therefore, the cost/ benefit of making any loss claim.
Tax planning
A common form of tax planning is to spread the disposal of shares across different tax years in order to maximise the use of allowances without exceeding the allowance for a given tax year. It is tax efficient to invest the proceeds into an ISA, a junior ISA or a pension, since income and gains from investments in a pension are tax free.
When faced with a capital gains tax liability, consider whether there are any assets that can be sold in the same year for a loss.
A business venture of a friend or family member, or other small business, could fail, but there are no plans by the founders to formally dissolve the business just yet. In that case it is possible to make a negligible value claim. This means that the shares are as good as worthless. The loss crystallises when the claim is made.
Transfers between spouses are tax free and therefore can be a mechanism for effectively using double the annual exemption.
Any constructive comments are welcomed below
