Capital Gains Tax Relief: Reducing CGT Liability

Reducing your liability to capital gains tax (CGT) requires careful planning and clever use of the capital gains tax relief provisions.

Below we look at some of the main forms of tax relief against CGT and how you can maximise their use so as to minimise your tax bill.

What is capital gains tax?

Capital gains tax is the tax charged on the profit, or gain, made when you sell, gift, transfer, exchange or otherwise dispose of a ‘chargeable asset’.

For individuals, a chargeable asset can include a property that is not your main residence, such as a holiday home or a buy-to-let property. It can also include valuable personal possessions, as well as stocks and shares that are not held in tax-free savings accounts.

For sole traders or partnerships, chargeable assets can include business premises or other business assets, including copyright and registered trademarks, or even goodwill.

To what extent am I liable to capital gains tax?

When calculating you liability to capital gains tax, you will need to add together your total gains in any given tax year over and above the annual exempt amount.

Individuals, sole traders and partnerships are entitled to an annual allowance of £11,700 (2018/19). Any gains falling below this threshold are entirely tax-free.

You must then take any chargeable net gains and add these to your annual income. In the event that your gains and income, taken together, fall below the basic rate threshold for income tax, you will pay capital gains tax at the standard rate. Any excess will be charged at the higher rate.

For basic rate taxpayers the applicable CGT rate is 20% for chargeable gains made on residential property, and 10% on all other gains. For the higher rate taxpayer the rates are 28% and 18% respectively.

Are any assets exempt from capital gains tax?

You do not have to pay tax on all capital gains, where some assets are wholly exempt. These include the following:

  • Wasting assets – the primary example here is private cars, where these have a predictable life of 50 years or less. Other items with a limited lifespan include plant and machinery used in a business.
  • Personal possessions worth less than £6,000 – here you are looking at the disposal value rather than the extent of any gain. As such, if the sale proceeds or market value of the asset in question is below £6,000, this will be CGT exempt.
  • Stocks and shares held in ISAs and PEPs – if you own stocks and shares but these are held in a tax-free savings account, no liability to capital gains tax will arise.
  • Winnings – any win from betting, lotteries or games with prizes are not chargeable gains.
  • Inherited assets – typically, when someone dies there is no capital gains tax charge, although the estate may be subject to inheritance tax. That said, a CGT liability can arise if, and when, you sell or dispose of the asset.

What are the main forms of capital gains tax relief?

In the event that your chargeable gains exceed the annual tax-free allowance, you can still reduce or defer your CGT liability by making use of any available capital gains tax reliefs.

The following are examples of some of the main forms of capital gains tax relief:

Principal private residence relief

Typically, all or part of the gain on the disposal of a dwelling house that has been your main or only residence at some point will be exempt from capital gains tax under private residence relief.

You will be eligible for partial relief for the period of time that you were in occupation, with no minimum requirement on how long the property was deemed your main or only residence. You will also be entitled to relief for the final 18 months of your period of ownership.

Letting relief

If you own property which has at some point been your main residence, and which you have also let out as a residential property, you may also be eligible for letting relief.

Letting relief will allow you to claim either the lower of the amount of private residence relief, the sum of £40,000, or the amount of the gain arising by reason of the letting.

Business asset rollover relief

If you are a sole trader or partnership, you may be able to delay or ‘roll-over’ paying capital gains tax if you sell or dispose of any business asset(s) and use all or part of the proceeds to buy a replacement.

Any liability to capital gains on the original asset only becomes payable when the new asset is sold. However, to qualify you must buy the new asset(s) within 3 years of selling or disposing of the old one(s).

Entrepreneurs’ relief

In broad terms, entrepreneurs’ relief provides for an effective rate of 10% on gains made from qualifying assets when selling all or part of your business.

To qualify for relief, you must be a sole trader or business partner, and have owned your business for at least one year before the date you sell it. You must also dispose of your business assets within 3 years.

Additionally, there is a lifetime cap of £10 million.

Gift holdover relief

Where a business asset is sold or gifted at an under-value, gift holdover relief provides the original owner and recipient the opportunity to jointly defer the gain arising during the period of previous ownership.

This instead becomes payable by the new owner at the point of future disposal.

Gift holdover relief can also to apply to other types of assets.

In what other ways can I reduce my CGT liability?

In addition to capital gains tax relief, there are a number of other ways that you can reduce or defer your CGT liability. These include the following:

  • Use your tax-free allowance against the gains that would be charged at the highest rates, for example, where you would be liable to pay 28% on residential property.
  • Offset any losses from previous years against any gains made in subsequent years. Note that only capital losses, and not allowances, can be carried forward to another tax year.
  • Defer the sale or disposal of an asset where your tax-free allowance has been exceeded for that year or, alternatively, where immediate disposal of the asset would otherwise expose you to capital gains tax in the higher bracket.
  • For those of you who are married or in a civil partnership, you are free to transfer assets to each other without any CGT being charged, effectively doubling the annual allowance that can be used. However, the transfer to your spouse or partner must be a genuine outright gift.

Key takeaway for capital gains tax relief

Through advance planning and careful application, you can take advantage of the available capital gains tax reliefs and exemptions, or by making use of the best available rates. In this way you may be able to significantly reduce your liability to CGT, or defer it to a later date.

However, you will need to regularly review your tax affairs to ensure that you remain up-to-date with any changes to the rules, and apply them in the most tax efficient manner for you and/or your business at any given time.

Legal disclaimer

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law and should not be treated as such.

Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.

Before acting on any of the information contained herein, expert legal or other advice should be sought.

Capital Gains Tax FAQs

If you sell a valuable asset at a profit, such as a buy-to-let property or even your business, this will trigger a potential liability to pay capital gains tax (CGT).

Below we answer some frequently asked questions about capital gains tax to help you understand more about how CGT works and whether this affects you.

What is capital gains tax?

Capital gains tax is the tax you pay on any profits, or gains, arising from the sale or disposal of an asset.

If you specifically purchase an item purely with the intention of making a profit from its’ sale, this will be treated as trade for which you will be liable to pay income tax rather than capital gains tax.

The distinction here can be important because of the allowances or rates upon which you pay each different type of tax. In most cases, paying capital gains tax can be far less costly than paying income tax.

Who pays capital gains tax?

CGT is payable by individuals, sole traders, partnerships, as well as trusts, although the gains made from most trust property are treated slightly differently.

If you are a company, you will not pay any capital gains tax, although this is not an exemption for companies from any tax liability whatsoever. Rather, a company will instead pay what’s known as corporation tax on any gains made.

Does my residence status matter?

If you are a UK tax resident, you will be liable to pay capital gains tax on all worldwide gains, not just those arising in the UK. However, special rules apply for UK residents who are not domiciled in the UK, otherwise referred at as non-doms.

A non-dom, having elected to use the remittance basis of taxation, will only pay capital gains tax on any chargeable gains brought, or remitted, to the UK.

If you are a non-UK resident, you will only pay gains arising from the sale or disposal of residential property in the UK, although these rules may soon extend to commercial real estate.

Further, for those of you who return to the UK after a period of temporary non-residence of less than five years, you may still be liable to capital gains tax for that period of absence.

When does a liability to CGT arise?

Any potential liability to capital gains tax will arise when you sell or otherwise dispose of a chargeable asset.

You usually dispose of an asset when you stop owning it. This can include giving it away, transferring it or exchanging it for something else.

For CGT purposes, a disposal also includes a part-disposal, for example, you may have disposed of a part share in a house you inherited, or you may have sold half your collection of jewellery.

Does a liability arise when someone dies?

Typically, when you inherit an asset, inheritance tax is paid by the estate of the person who has died. You will only be liable to any capital gains tax in the event that you subsequently dispose of the asset(s) left to you.

Broadly speaking, the taxable gain will be calculated on the basis of the difference between the market value of the asset at the date it was inherited, and the disposal proceeds, deducting any CGT tax-free allowance for that tax year.

What is a chargeable asset?

A chargeable asset includes the following:

  • property that is not your main residence, for example, a holiday home or buy-to-let property
  • personal possessions worth more than £6,000, for example, jewellery, antiques and artwork
  • stocks and shares, other than those you hold in tax-free investments savings accounts such as an ISA or PEP
  • business assets and premises
  • copyright or registered trademarks
  • goodwill, ie; the good name or reputation of your business.

Certain assets are exempt from tax, such as private cars. These are classed as wasting assets, with a predictable life of 50 years or less. Other items, including those with a limited lifespan, are also exempt.

How do I calculate any chargeable gain?

You are only liable to capital gains tax on the increase in value, or gain, that you make on a chargeable asset, not the overall amount of money you receive having sold or otherwise disposed of that asset.

To calculate any chargeable gain, typically you would deduct the purchase price from the selling price. However, if the asset was a gift, you will need to work out its market value at the time it was given to you.

Equally, if you give away or transfer an asset, the market value can be used to determine the disposal proceeds, and therefore the extent of any actual gain.

At what rate do I pay capital gains tax?

The rate at which you pay capital gains tax will depend on the type of asset sold or disposed of, and the level of your income during the year in which the sale or disposal is made.

There are different rates for basic rate and higher rate taxpayers. Different rates also apply depending on whether the asset comprises residential property or other chargeable assets.

For 2018/19 capital gains tax on residential property is payable at either the standard rate of 18% or the higher rate of 28%. The rate for other chargeable assets is 10% and 20% respectively.

How do I calculate my CGT liability?

All gains made on chargeable assets during any given tax year will need to be added together to give your overall net gains for that year, having deducted your tax-free allowance, as well as any allowable costs.

You will need to add these net gains to your total taxable income to determine the appropriate rate of tax, the standard or higher rate.

If your taxable income and chargeable gains added together are less than current basic rate income threshold of £34,500 (2018/19), you will pay tax at the standard CGT rate.

Where the two figures combined are above the basic rate threshold, you pay the standard rate on any gains up to the threshold, and the higher rate on the rest.

Am I entitled to a tax-free allowance?

You are only liable to pay capital gains tax if your overall gains for the year are in excess of your tax-free allowance. This is known as your ‘Annual Exempt Amount’ (AEA).

The AEA is currently set at £11,700 on any gains accrued on or after 6 April 2018 (for 2018/19).

The allowance for executors or personal representatives of a deceased’s estate is also set at £11,700, and similarly for trustees of disabled people. The allowance for other trustees is £5,850.

The net effect of this capital gains tax allowance is that you will not be liable to pay tax on any profit if all your gains in one year fall below this threshold.

Note that you can use your tax-free allowance against the gains that would be charged at the highest rates, for example, where you would be liable to pay 28% on residential property.

How do I declare any chargeable gain?

You will need to declare all chargeable gains by way of a self-assessment tax return, to be submitted to HMRC.

However, you only need to include in your tax return any gain on the disposal of an asset where the disposal proceeds were more than £6,000 and the asset is not exempt from capital gains tax.

Capital Gains Tax: Key Takeaway

The rules relating to capital gains tax can be complex. Although these FAQs provide answers to some of the most basic questions about CGT, professional advice should always be sought from a tax specialist.

Legal disclaimer

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law and should not be treated as such.

Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.

Before acting on any of the information contained herein, expert legal or other advice should be sought.

Can you Claim Capital Allowances?

Investing in your business can be extremely expensive. However, the relief afforded by capital allowances can significantly help to increase your cash flow.

That said, it is not uncommon for businesses to underestimate the proportion of their expenditure that qualifies for capital allowances. This means you may be paying too much tax.

Below we look what type of expenditure qualifies for capital allowances and who can benefit.

What are capital allowances?

Capital allowances are a form of tax relief for businesses. These allowances allow you to deduct some or all of the value of qualifying expenditure from your profits before you pay tax.

Capital expenditure on plant and machinery is the most common type of investment giving rise to relief by way of capital allowances. This can include things like computers and office equipment, tools and specialist machinery, and motor vehicles, although special rules apply to cars.

Plant and machinery also generally covers all fixed assets used in a business, although you can’t claim capital allowances on actual buildings and land. You can, however, claim for integral features such as lifts and escalators, space and water heating systems, as well as electrical and lighting systems.

However, the potential for tax relief is even broader than this. Capital allowances can apply to a wide range of expenditure, where businesses across the UK are failing to take full advantage of the available relief.

What type of expenditure qualifies for capital allowances?

In addition to plant and machinery, qualifying capital expenditure can include things like research and development, patents and know-how.

The investment made by businesses in, for example, research and development, can often be significant. Moreover, where this qualifies as expenditure under the capital allowances rules, the tax relief can make a real difference.

Note, that to qualify for capital allowances you must normally own, rather than be leasing, the asset as a result of incurring the expenditure.

However, for costs that do not qualify under the rules, you can very often claim for these in a different way. This will include your day-to-day running costs or items that you buy and sell in the course of your trade.

If you are a sole trader or partner you will need to claim these costs as tax-deductible business expenses, or deduct this expenditure from your profits as a business cost if you are a limited company.

Who can claim capital allowances?

To claim capital allowances you must be a ‘qualifying person’. This must be an individual, a partnership of which all the members are individuals, or a company, that has not inly incurred the qualifying expenditure but is carrying on a ‘qualifying activity’.

A qualifying activity can include trades, professions or vocations, property or special leasing businesses, as well as employments and offices.

As with qualifying expenditure, the range of qualifying activities is very wide. It broadly covers all taxable activities other than passive investment.

What are enhanced capital allowances?

Under the Enhanced Capital Allowances (ECA) scheme, businesses can benefit from tax breaks when investing in eligible energy-saving equipment and technologies.

This includes energy-saving plant and machinery, low or zero emission cars and goods vehicles, natural gas and hydrogen refuelling infrastructure, and water conservation plant and machinery in construction projects.

In the case of energy efficient investments, you can deduct 100% of the cost of a qualifying ECA item from your pre-tax profits. This provides significantly increased savings over other types of capital allowances because of the environmentally beneficial nature of the asset.

The net effect of is that you can write off the entire cost of purchasing an energy or water efficient product against your taxable income in a single tax year.

However, a new government proposal due to come into effect in April 2020, is likely to see an end to enhanced capital allowances for energy and water efficient plant and machinery. The time to invest is therefore now.

How do I qualify for enhanced capital allowances?

To qualify for enhanced capital allowances you must have incurred the relevant expenditure on a qualifying item, you must own rather than be leasing the item, and at least have it installed ready for use.

Only new plant and machinery are eligible for enhanced capital allowances, where used or second-hand plant and machinery do not qualify.

You will be able to claim ECA relief only if you invest in a listed product meeting the energy-saving or water conservation criteria specified by the Carbon Trust at the time of purchase.

What is the annual investment allowance?

The annual investment allowance provides 100% relief for qualifying expenditure. This means that up to this limit you can deduct the full cost of any capital expenditure from your profits before tax.

It is only where you spend more than the annual limit that you will need to rely on the additional relief provided by capital allowances. However, you can claim enhanced capital allowances in addition to your annual investment allowance, whereby they don’t count towards your limit.

From January 2019, the annual investment allowance for businesses has increased significantly from £200,000 to £1 million.

However, this increase is only a temporary 2-year measure aimed at helping businesses to invest and grow in the current political and economic climate. As such, if you are looking to invest in your business, now is the time to do it.

How do I calculate any capital allowances?

In circumstances where you have exceeded your annual investment allowance, or the item doesn’t qualify under the rules, the writing down allowance can be applied instead.

This allows you to gradually set expenditure against tax in subsequent accounting periods, although the amount of the deduction depends on the item. You are able to do this at any time provided you still own the qualifying item, although it offers much less attractive rates.

The main rate is currently set at 18%, and the special rate at 8% per year.

How do I claim capital allowances?

If you are a sole trader or partnership you will need to claim any capital allowances using your self-assessment or partnership tax return.

For your annual investment allowance and any enhanced capital allowances you must claim in the same tax year that you made the capital investment.

You can claim enhanced capital allowances in addition to your annual investment allowance, whereby they don’t count towards your limit.

If you use the cash basis rather than the traditional accounting method to calculate your trading profit, with the exception of cars, all other expenditure must be claimed as tax-deductible expenses rather than as capital allowances.

Key takeaway for capital allowances

Capital allowances are a relatively easy way for a business to make significant tax savings and improve its cash flow through accelerated tax relief.

By understanding what constitutes qualifying expenditure and what this means in terms of tax savings can make a real difference to your business.

Moreover, the recent introduction of the £1 million annual investment allowance means that many businesses will benefit more than ever before from the tax advantages that come with capital allowances.

Beware, therefore, not to miss the narrow window of opportunity to invest in your business and benefit from the new increased annual investment allowance.

Legal disclaimer

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law and should not be treated as such.

Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.

Before acting on any of the information contained herein, expert legal or other advice should be sought.

Are you eligible for HMRC self employed capital allowances?

If you are a sole trader or partnership running your own business you may be able to reduce your tax bill by taking advantage of any capital allowances.

Below we examine the basic principles relating to HMRC self employed capital allowances and how these can help to minimise any tax liability.

What are HMRC self employed capital allowances?

The capital investment you make in any equipment needed to do your job or run your business will often qualify for tax relief. While capital allowances can also be claimed for things like research and development, by far the most commonly used category is plant and machinery.

These items are known as ‘capital assets’ and are taxed differently to other tax-deductible expenses. HMRC self employed capital allowances allow you to deduct some or all of the value of these assets from your profits before you pay tax.

This covers assets that you buy and use in your business, but does not extend to items that you buy and sell in the normal course of trade.

You can claim for the cost of things that do not constitute business assets as ‘allowable expenses’, for example, the day-to-day running costs of your business or even the finance costs for purchasing any capital assets.

Do I qualify for HMRC self employed capital allowances?

To qualify for HMRC self employed capital allowances you must satisfy the following criteria:

  • be carrying on a qualifying activity, and
  • incur qualifying expenditure, ie; capital expenditure on plant or machinery wholly or partly for the purposes of the qualifying activity.

A qualifying activity could include any of the following:

  • a trade, profession or vocation
  • an ordinary UK or overseas property business
  • a UK or EEA furnished holiday lettings business
  • an employment or office
  • a special leasing business
  • the management of an investment company
  • a concern in mines, quarry or canals.

The range of qualifying activities is very wide. It broadly covers all taxable activities other than passive investment.

The range of assets that qualify as plant and machinery is also very wide. It generally covers all fixed assets used in the business other than intangible assets, although you can’t claim capital allowances on actual buildings and land.

You can, however, claim for integral features such as lifts and escalators, space and water heating systems, as well as electrical and lighting systems. You can also claim for fixtures such as fitted kitchens and bathroom suites.

To qualify for HMRC self employed capital allowances you must normally own, rather than be leasing, the asset as a result of incurring the expenditure.

How much can I claim for HMRC self employed capital allowances?

In most cases you can deduct the full cost of any capital expenditure from your profits before tax using your annual investment allowance (AIA). This means that you will only need to claim any capital allowances if you spend more than the annual limit.

As from 1 January 2019 the limit has been temporarily increased from £200,000 to £1 million for a period of two years, providing significantly faster tax relief for your capital investments.

You can claim AIA on most plant and machinery up to the annual limit, although items you owned before you started using them in your business are specifically excluded. Cars are also excluded from the AIA.

The writing down allowance can be used if you have spent more than your annual investment allowance limit on capital assets, or if the item doesn’t qualify for AIA. This allows you to gradually set expenditure against tax in subsequent accounting periods, although the amount of the deduction depends on the item.

The main rate is currently set at 18%, and the special rate at 8% per year.

If you invest in energy efficient and environmentally beneficial plant or machinery you may qualify for what’s known as enhanced capital allowances. Currently this will entitle you to 100% relief on your expenditure in a single tax year, although these provisions are currently under review.

How do I make a claim for HMRC self employed capital allowances?

If you are a sole trader or partnership running your own business you will need to claim any capital allowances using your self-assessment or partnership tax return and submit this to HMRC.

For your annual investment allowance and any enhanced capital allowances you must claim in the same tax year that you purchased the asset.

If you buy an asset that qualifies for the 100% first year allowance for a qualifying energy efficient item, you can deduct the full cost from your profits before tax. You can claim first year allowances in addition to your annual investment allowance, whereby they don’t count towards your AIA limit.

Provided you still own the asset, you can claim the writing down allowance over subsequent years.

Can I claim HMRC self employed capital allowances on the cash basis?

The method of accounting you use for your business will affect your eligibility to claim HMRC self employed capital allowances.

Many businesses use traditional accounting where you record income and expenses by the date you invoiced or were billed. However, if you run a small business, cash basis accounting may suit you better than traditional accounting.

This is a much simpler way of accounting whereby you only need to declare money when it comes in and out of your business, and you only pay income tax on money you actually receive during your accounting period.

If you use cash basis accounting and buy a car for your business, you can claim for this under HMRC self employed capital allowances. However, all other items you buy for your business must be claimed as allowable expenses in the normal way.

In order to take advantage of any available capital allowances for any expenditure on plant or machinery to use in your business, you would need to adopt the traditional accounting basis.

Are HMRC self employed capital allowances available for all cars?

Cars that you buy to use in your business are considered a form of capital asset that you can claim tax relief on, although special rules apply here.

There are three different allowances you can claim when you buy a car for business purposes. The year the car was bought, and whether it is new or second hand can also have a bearing on the allowances you can claim.

If the car has low carbon emissions you may be able to claim 100% of the cost under enhanced capital allowances, while special rate allowances of 8% apply to vehicles with high CO2 emissions. However, main rate allowances of 18% apply to most vehicles.

Key takeaway for HMRC self employed capital allowances

For most businesses, the investments you make in capital assets will fall well under the annual investment allowance.

That said, for tax relief on business vehicles, or for those of you who have made significant capital investments, the benefits of HMRC self employed capital allowances can still be worthwhile.

By understanding what constitutes qualifying expenditure and what this means to your business in terms of tax savings can make a real difference to your overall cash flow.

What are Enhanced Capital Allowances?

If you are a business that pays income or corporation tax, any capital expenditure on plant and machinery may qualify for tax relief by way of capital allowances. These allowances allow you to deduct some or all of the value of an item from your profits before you pay tax.

In the case of energy efficient purchases and investments the deductible rates can be significantly greater because of the environmentally beneficial nature of the asset. These are known as enhanced capital allowances (ECA).

The introduction of enhanced capital allowances

Enhanced capital allowances were first introduced at the turn of the century to encourage businesses to invest in energy and water efficient technologies and products.

This includes low-emission new cars, new vehicle electric charge points, new zero-emission goods vehicles, certain new energy-saving and water-efficient equipment, and certain new gas refuelling equipment.

By allowing a 100% first year tax relief on investment in ECA qualifying items, this provides a significantly increased tax saving over the alternative allowances available on these items.

The net effect of enhanced capital allowances is that you can potentially write off the entire cost of purchasing an energy or water efficient product against your taxable income in a single tax year.

In this way you can reduce investment costs and improve cash flow, whilst minimising the impact of your business on the environment.

The criteria for enhanced capital allowances

To qualify for enhanced capital allowances your business must own the plant or machinery, have installed it ready for use or be using it already in their trade and have incurred the expenditure.

Only new plant and machinery are eligible for enhanced capital allowances, where used or second-hand plant and machinery do not qualify.

The plant or machinery must also be a listed product, meeting the energy-saving or water conservation criteria specified by the Carbon Trust.

Qualifying ECA products & technologies

The government decides on the availability of enhanced capital allowances, with the qualifying technologies being published in the Energy Technology List (ETL) and the Water Technology List (WTL), typically on a yearly basis.

The ETL and WTL are government-managed lists of energy and water efficient plant and machinery that qualify for full tax relief. For a product to be on the ETL or WTL, it must meet specific energy-saving or water conservation criteria.

The list of energy efficient technologies and products which are currently eligible for enhanced capital allowances include the following:

  • Air to air energy recovery
  • Automatic monitoring and targeting equipment
  • Boiler equipment
  • Combined heat and power
  • Compressed air equipment
  • Heat pumps
  • Heating, ventilation and air conditioning equipment
  • High speed hand air dryers
  • Lighting
  • Motors and drives
  • Pipework insulation
  • Refrigeration equipment
  • Solar thermal systems
  • Uninterruptible power supplies
  • Warm air and radiant heaters
  • Waste heat to electricity conversion equipment.

The water efficient technologies include the following:

  • Cleaning in place equipment
  • Efficient showers
  • Efficient taps
  • Efficient toilets
  • Efficient washing machines
  • Flow Controllers
  • Leakage detection equipment
  • Meters and monitoring equipment
  • Rainwater harvesting equipment
  • Small scale slurry and sludge dewatering equipment
  • Vehicle wash water reclaim units
  • Water efficient industrial cleaning equipment
  • Water management equipment for mechanical seals.

These lists are due to be updated for 2019/20 to reflect further developments in eligible technologies.

You will be able to claim 100% first year capital allowance on a product if it’s on the ETL or WTL at the time of purchase. If it has been taken off the list, or is added at a later date, the ECA item will not qualify for relief.

Claiming enhanced capital allowances

Enhanced capital allowances are commonly referred to as a first year allowance, allowing you to deduct 100% of the cost of a qualifying ECA item from your pre-tax profits. This rate is significantly more generous than alternative available capital allowances.

You can also claim enhanced capital allowances in addition to your annual investment allowance (see below), whereby they don’t count towards your limit.

However, you are only able to claim the full 100% if you make the claim within the same tax year as the purchase for your qualifying item.

That said, if you don’t claim all the first year allowances you are entitled to, you can still claim part of the cost in the next accounting period using what’s known as ‘writing down allowances’. This is where you deduct a percentage of the value of an item from your profits each year.

You are able to do this at any time provided you still own the qualifying item, although it offers much less attractive rates.

To claim enhanced capital allowances, you will need to do so through your business’s income or corporation tax return, in the same way as any other capital allowance.

Profit & loss making companies

Enhanced capital allowances are a straightforward way for a business to improve its cash flow through accelerated tax relief.

If a profitable business pays corporation tax at 19% (for 2018/19), every £100,000 spent on qualifying items would reduce its taxable profits in the year of purchase by £19,000.

However, loss-making companies can also realise a tax benefit from their investment in qualifying technologies with what’s known as ‘payable ECAs’. Here a company can surrender any losses attributable to enhance capital allowances in return for a cash payment from the Government.

The amount payable to any company claiming payable ECAs will be expressed as 19% of the loss that is surrendered. So if a company surrenders a loss of £100,000, the payable ECA it will receive is £19,000.

These tax credits do, however, operate with an annual cap that equates to either £250,000, or the total of the company’s PAYE and National Insurance liabilities for the year in which the claim is made, whichever is greater.

An increase in the annual investment allowance

The good news is that enhanced capital allowances only become necessary in circumstances where any business investment exceeds the annual investment allowance (AIA).

This means that your business will still benefit from the AIA on any expenditure on plant and machinery up to a specified annual amount each year, whether this be on energy or water efficient technologies and products or otherwise.

It is only where businesses spend more than the annual limit that you will need to seek additional relief under the capital allowances and enhanced capital allowances regime.

For the last three years, since 1 January 2016, the AIA has been set at just £200,000. However, from 1 January 2019, businesses investing more than £200,000 in plant and machinery will now benefit from a temporary increase in its annual investment allowance up to £1 million.

This increased AIA limit is set to remain in place for a period of two years and will provide significantly faster tax relief for plant and machinery investments between £200,000 and £1 million, helping businesses to invest and grow.

Proposed new measures for ECAs

Given the significant increase in the AIA limit, it is perhaps of less concern that a new proposal, due to come into effect in April 2020, will see an end to enhanced capital allowances for energy and water efficient plant and machinery.

For many businesses the majority of the expenditure incurred on plant and machinery will still be eligible for full relief under the new £1 million annual investment allowance.

Key takeaway for enhanced capital allowances

Enhanced capital allowances can offer significant tax benefits for businesses heavily investing in qualifying plant and machinery. However, with the introduction of the increased annual investment allowance, many businesses may not need to rely on this type of tax relief.

Needless to say, it remains important for all businesses to seek to minimise their impact on the environment by investing in energy efficient or environmentally beneficial technologies and products, regardless of the tax advantages.

What are the Inheritance Tax rates?

It is important to understand at least the basic rules relating to Inheritance Tax, not least what Inheritance Tax rates apply and when it becomes payable. In this way you can forward plan to help minimise any potential tax bill after you pass away, and maximise the value of your estate for your loved ones.

Your estate comprises any money, property and possessions once funeral expenses, administration costs, debts and liabilities have been paid.

Inheritance Tax rates for 2019/2020

Any inheritance tax liability will be assessed on the basis of the net value of your estate in accordance with the applicable Inheritance Tax rates at the time of death, after taking into account any available exemptions or property relief.

If you are married or in a civil partnership you are allowed to pass your money, possessions and property entirely tax-free to your spouse or civil partner.

Further, if the net value of your estate falls below the current nil-rate band (see below), it can be left to any of your loved ones entirely tax-free. In other words, you apply a 0% Inheritance Tax rate on anything below this threshold.

Where your estate exceeds the nil-rate band you will generally be liable to pay tax at 40% on anything over and above that threshold.

A reduced rate of 36% can apply where you gift at least 10% or more of the net value of your estate to charity, although the rules can be complicated here.

Inheritance Tax rates & the nil-rate band

For the year 2019/2020 you are entitled to an inheritance tax allowance of £325,000. This is known as the inheritance tax ‘nil-rate band’. The net effect is that you are able to leave up to £325,000 tax-free to your loved ones.

Moreover, this nil-rate band is transferable as between spouses. In other words, where any part of the nil-rate band remains unused where one spouse or civil partner passes away, this can be added to the nil-rate band of the other.

This can effectively double the amount the surviving partner can leave behind tax-free. Consequently, married couples and civil partners will be able to pass on up to £650,000 tax-free to their children or other relatives. Further, if residential property forms part of their estate this can be significantly higher (see below).

Inheritance Tax rates & the residence nil-rate band

As from April 2017 a new residence nil-rate band applies, such that for 2019/2020 the first £150,000 of the value of your home will be exempt from Inheritance Tax. By 2020/2021, this will increase to £175,000.

As such, by 2020, where residential property forms part of your estate, you can bequeath as much as £500,000 without your estate incurring any Inheritance Tax liability – a figure that is potentially doubled for couples.

For estates with a net value of more than £2million, there is a tapered withdrawal of the residence nil-rate band. Here the amount of available relief is reduced by £1 for every £2 of value by which the estate exceeds the tapered threshold.

To qualify for the new property allowance you must satisfy the following criteria:

  • immediately prior to your death your estate includes a qualifying residential interest.
  • this residential interest is closely inherited, ie; the property passes to a direct descendant. This includes children, grandchildren, great grandchildren, and any spouse or civil partner of these descendants.

You do not need to be living in the property at the time of your death. However, it must be a property that at some point during your life you have used as a residence. This, therefore, excludes buy-to-let or investment properties, unless you have previously resided in any such property.

In the event that you downsize, you may still benefit from some, or all, of the residence nil-rate band. The downsizing provisions provide that if both the downsized residence and other assets in the estate are inherited by direct descendants, the estate will still qualify for an additional amount of property relief.

This will be broadly equal to the lower of the amount of the residence nil-rate band and the value of the other assets inherited by the children, grandchildren or great grandchildren.

Inheritance Tax rates & taper relief on lifetime gifts

During your lifetime you are able to gift a certain amount of money tax-free. Currently there is an annual gift exemption of £3,000 worth of gifts each tax year without them being added to the value of your estate.

Some gifts do not count towards this annual exemption, ie; they are automatically tax-free. This includes gifts between spouses, small gifts made out of your normal income or gifts to charity.

Gifts falling outside these exemptions are known as ‘potentially exempt transfers’ (PETs). Broadly speaking, if a gift is made within seven years of death it may be subject to inheritance tax at a rate of 40%, albeit on a sliding scale depending on the timeframe. The amount of taper relief increases with the number of calendar years between the date of the gift and the date of death.

Applying this taper relief, the Inheritance Tax rates payable on a gift are 32% for gifts made between 3-4 years, 24% for gifts made between 4-5 years, 16% for gifts made between 5-6 years and 8% for gifts made between 6-7 years of the date of death.

After seven years, gifts will not be counted towards the value of your estate. Further, if the total value of the gifts does not exceed the nil-rate band, no tax is payable on the gift.

Inheritance tax rates & chargeable lifetime transfers

Most lifetime gifts are not immediately chargeable to inheritance tax, not unless the donor dies within seven years of making the gift.

However, there are certain classes of transfer that attract inheritance tax if they, together with any similar transfers made within the preceding seven years, exceed the nil rate band at the time the transfer is made. These are known as ‘chargeable lifetime transfers’.

In particular, where a trust is set up inter vivos, ie; during the settlor’s lifetime, rather than by Will, any transfer into the trust will be treated as a chargeable lifetime transfer attracting an immediate entry charge.

Any entry charges are calculated on the basis of the excess of the value of the transfer over and above the available nil-rate band. This is payable at the lifetime rate of 20%.

Unless specifically exempt, many trusts are also subject to what is known as the ‘relevant property tax regime’. This imposes a number of additional inheritance tax charges on all relevant property during the lifetime of the trust. As such, a liability to Inheritance Tax may also arise when a trust reaches a 10-year anniversary or where part or all of the trust fund is distributed to a beneficiary.

Broadly speaking, both 10-yearly periodic and exit charges are payable at a rate of 30% of the effective lifetime rate, ie; currently 6%, on the excess of the value of the trust fund over and above the nil-rate band.

Key takeaway for Inheritance Tax rates

Inheritance Tax rates can have significant financial implications for your loved ones after you die.

If you wish to minimise the amount of tax payable on your estate following your death you should consider how the Inheritance Tax rules can work in your favour.

That said, the rules can be complex so seeking professional advice is highly recommended.

What are the Latest Inheritance Tax Changes?

On 6th April 2017 significant inheritance tax changes were introduced, providing additional relief for married couples, civil partners and even individuals. As such, when we pass away, we can now leave more than ever tax-free to our loved ones.

Inheritance tax changes for residential property

As the law currently stands we are all entitled to an inheritance tax allowance of £325,000. This is known as the inheritance tax nil-rate band. When we die, anything over and above this amount is liable to inheritance tax, generally at a rate of 40%.

However, the net effect is that you are able to pass on up to £325,000 tax-free.

While the existing nil-rate band has been frozen until 2020-2021, recent inheritance tax changes mean that the amount you are able to pass on tax-free has increased significantly by way of a new residence nil-rate band.

Given the number of homeowners in the UK, this new property relief will be of real benefit to many of us, enabling us to reduce even further the inheritance tax burden for our children and grandchildren.

The new residence nil-rate band

The new inheritance tax changes are being gradually phased in. Since the introduction of the residence nil-rate band in 2017 the maximum amounts available are as follows:

• £100,000 (2017-18)
• £125,000 (2018-19)
• £150,000 (2019-20)
• £175,000 (2020-21)

By 2020, assuming the qualifying conditions are met, an individual will be able to pass on as much as £500,000 without their estate incurring any inheritance tax liability.

This is taking the standard nil-rate band of £325,000, together with the maximum residence nil-rate band of £175,00.

After 2021, the threshold is likely to increase annually in line with inflation.

For those of you with estates with a net value of more than £2million there is a tapered withdrawal of the residence nil-rate band. Here the amount of available relief will be reduced by £1 for every £2 of value by which the estate exceeds the tapered threshold.

Qualifying for the residence nil-rate band

To qualify for the new residence nil-rate band your estate must include a qualifying residential interest immediately prior to your death.

You do not need to be living in the property at that time, but you do need to have used the property as a residence at some point during your lifetime.

Further, for the estate to benefit from the new inheritance tax changes, the qualifying property must also be inherited by a direct descendant, namely a child or grandchild, or their spouse or civil partner.

The new residence nil-rate band does not, however, benefit lineal ancestors such as parents or grandparents, nor siblings, nieces or nephews.

Calculating the residence nil-rate band

Inheritance tax is paid on your estate after you die. Your estate comprises any money, property and possessions once funeral expenses, administration costs, debts and liabilities have been paid.

Any inheritance tax liability will be assessed on the basis of the net value of your estate, having taking into account any available exemptions or property relief.

However, the residence nil-rate band is not an exemption or relief on residential property itself, rather it is set off against the entire estate of the deceased.

The amount of the residence nil-rate band due for an estate will be the lower of:

  • the value of the home, or the share that is passed to any direct descendants, or
  • the maximum additional threshold available for the estate when the person died.

The rules on downsizing before you die

As we get older, it is not uncommon for many of us to want to downsize the family home or even sell up. It may be that we can no longer cope with the upkeep of a larger property, or that we are unable to live unassisted and need to fund care fees.

Luckily, there are downsizing provisions included in the latest inheritance tax changes to help ensure that direct descendants will still benefit from some or all of the new residence nil-rate band where you have recently sold or downsized your home.

The rules provide that where a person dies after 5 April 2017 and has disposed of or downsized their residence on or after 8 July 2015, the downsizing provisions may apply.

In broad terms, the rules provide that if both the downsized residence and other assets in the estate are inherited by direct descendants, the estate will still qualify for an additional amount of property relief.

This will be broadly equal to the lower of the amount of the residence nil-rate band and the value of the other assets inherited by the children or grandchildren.

However, the rules can become quite complicated depending on whether you have sold your home and bought a smaller residence, or disposed of your residence without acquiring an alternative property.

Inheritance tax changes for married couples

If you are married or in a civil partnership you are allowed to pass your money, possessions and property to each other entirely tax-free.

Furthermore, the nil-rate band is transferable as between spouses. In other words, where one spouse or civil partner passes away and any part of the nil-rate band remains unused, this can be added to the allowance of the other.

Following recent inheritance tax changes this also includes the residence nil-rate band.

Consequently, by 2020, married couples and civil partners will be able to pass on up to £1 million tax-free to their children and grandchildren where a qualifying residential interest forms part of their estate.

Unfortunately, these rules do not currently apply to unmarried couples, although a potentially imminent government shake-up of the entire inheritance tax system may lead to further changes.

Inheritance tax changes for lifetime gifts

As it currently stands you can make tax-free gifts during your lifetime to your spouse or civil partner, or to charity, but there are strict rules preventing you from gifting large chunks of your estate to your direct descendants.

The annual gift exemption stands at just £3,000.

In broad terms, any gifts that you make within seven years of your death over and above the annual gift exemption may still be liable for inheritance tax, albeit on a sliding scale.

The amount of taper relief increases with the number of calendar years between the date of the gift and the date of death. This can be as little as 8% where the gift is made between 6-7 years, but as much as 32% where the gift is made between 3-4 years of the date of death.

That said, the rather complex rules relating to PETs are currently under review by the Independent Office of Tax Simplification, so further inheritance changes may again be imminent.

In particular, the annual gift exemption has stood at the same rate of £3,000 for over 30 years. Although it is widely anticipated that this may be increased, any further changes are yet to be announced.

Key takeaway for inheritance tax changes

The rules relating to the latest inheritance tax changes can be complex, not least those relating to the new residence nil-rate band and the downsizing provisions.

That said, these changes will potentially bring about a significant increase in tax benefits for your loved ones after you die and so, despite their complexity, they still provide welcome financial relief for many of us.

And with any luck, additional beneficial inheritance tax changes are soon to follow.

What is an Employee Share Scheme?

As an employee, you may have the opportunity to acquire shares in the company that employs you. This is known as an “Employee Share Scheme”.

Below we look at how Employee Share Schemes work and what tax advantages you will benefit from when you acquire, or dispose of, employment-related shares.

What is an Employee Share Scheme?

An Employee Share Scheme is where you are awarded shares in the company that you work for, or in a parent undertaking.

These types of scheme are predominantly used as a way of attracting and retaining staff, ensuring that employees have an incentive to promote the success of the company.

Employee Share Schemes are also a useful way for a company to raise funds, or to bolster the remuneration packages of key personnel when a business is still in its’ infancy.

What is an approved Employee Share Scheme?

Employee Share Schemes can be either approved or unapproved, where each scheme has its own rules, eligibility and tax treatment.

The government-approved schemes attract certain tax and national insurance benefits. As such, these schemes tend to be the most commonly used.

Government-approved schemes include the following:

  • Share Incentive Plans
  • Save As You Earn Schemes
  • Company Share Option Plans
  • Enterprise Management Incentives.

Approved schemes vary insofar as some permit employees to acquire shares outright, while others give you the option to acquire shares in the future. However, all approved schemes carry tax advantages.

If you are offered shares outside of one of these schemes, although these won’t have the same income and capital gains tax benefits, the flexibility of an unapproved scheme still has many benefits.

What is an Employee Share Scheme known as a “Share Incentive Plan”?

A Share Incentive Plan (SIP) is a government-approved scheme that allows qualifying UK employees to be granted free shares, and also allows them the opportunity to buy “partnership shares” up to a certain limit.

An employer can give each employee up to £3,600 of free shares in any tax year. Additionally, employees can buy partnership shares out of their salary, before tax deductions, of up to £1,800 or 10% of income, whichever is lower.

Your employer can give you up to two free matching shares for each partnership share you buy. You may also be able to buy more shares with the dividends you get from free, partnership or matching shares.

In the case of free and partnership shares, these will be free of income tax and National Insurance contributions where they have been kept in the plan for a period of five years. For dividend shares the period is three years.

Further, where you keep your employee shares in a SIP until you dispose of them, you will have no capital gains tax to pay in respect of their disposal.

If, however, you keep the shares after you take them out of the SIP and dispose of them at a later date when their value has increased, your cost for capital gains purposes will be their market value on the date the shares leave the plan.

What is an Employee Share Scheme known as a “Save As You Earn Scheme”?

Save As You Earn (SAYE) Schemes allow employees to save up to £500 per month and, at the end of either a three or five-year savings contract, use the accumulated savings to acquire shares at a fixed price.

You will not pay Income Tax or National Insurance on the difference between what you pay for the shares and what they are worth on the open market. Further, the interest and any bonus at the end of the scheme will be tax-free.

However, if you sell the shares you may be liable to some capital gains tax.

What is an employee share scheme known as a “Company Share Option Plan”?

A Company Share Option Plan (CSOP) provides an employee with the option to buy up to £30,000 worth of shares at a fixed price.

Under this type of scheme, you will not pay income tax or National Insurance contributions on the difference between what you pay for the shares and their market value at the date of purchase.

However, once again, you may have to pay capital gains tax when you come to dispose of the shares.

What is an employee share scheme known as an “Enterprise Management Incentive”?

Employee share options can also be granted under an Enterprise Management Incentive (EMI) where you work for a company with assets of £30 million or less.

However, the company must not be undertaking any excluded activity, including banking, farming, property development, shipbuilding and legal services.

Under an EMI the maximum grant of share options to any individual employee over a three-year period is £250,000.

You will not have to pay income tax or National Insurance if you acquire the shares for at least the market value at the date the option is granted, otherwise you will be liable to pay tax and NI contributions on any difference between what you paid and what the shares were worth.

There may also be capital gains tax to pay in respect of the disposal of the shares.

Transferring shares to Individual Savings Accounts

If you get employee shares through a SIP or a SAYE scheme, you can transfer up to £20,000 of these into a stocks and shares Individual Savings Account (ISA).

If you transfer your shares into an ISA, no capital gains tax liability will arise on either the transfer or on the later disposal of these shares.

However, you only have 90 days in which to make the transfer from when you took out your SIP or SAYE shares.

What is an unapproved Employee Share Option Scheme?

With an unapproved Employee Share Option Scheme, employees are given options to acquire a number of shares at a future date at a pre-determined price.

The big disadvantage with unapproved schemes is that there is no tax benefit for the recipient, as there is under government-approved schemes.

As long as the option to buy shares has to be exercised within ten years of its’ grant, there will be no tax or national insurance liability when the option is granted. However, on the exercise of the option there will be an income tax liability on the difference between the market value of the shares at that date, and the price paid for them.

On the disposal of the shares, the capital gain is calculated by comparing the disposal proceeds to the market value of the shares when the options were exercised. That said, unapproved share option schemes still have their advantages.

These types of scheme can be much more straightforward than other schemes, not to mention flexible, for example, where the ability to exercise share options can be governed by performance targets.

The unapproved scheme can also be set up on a selective basis for certain individuals, and shaped to suit the needs of both the employer and employee.

Key takeaway for “What is an Employee Share Scheme?”

Approved Employee Share Schemes can offer significant tax advantages to employees, although understanding how the different schemes work can be key to maximising any benefits.

It is therefore always best to seek specialist financial advice when acquiring or disposing of employee shares.

Your legal adviser can talk you through any available relief where a liability to tax does arise, for example, selling employee shares in several tranches so that each year’s gain is within your annual CGT tax-free allowance.

Your adviser can also discuss all of the benefits of any unapproved scheme.

Legal disclaimer

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law and should not be treated as such.

Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.

Before acting on any of the information contained herein, expert legal or other advice should be sought.

What is Capital Allowance Tax Relief on Property?

Capital allowances can be an extremely valuable form of tax relief, allowing owners of commercial property to claim qualifying items of capital expenditure as a tax deduction.

That said, understanding how capital allowances work is key to securing the maximum possible tax savings for you and your business.

What is capital allowance tax relief?

If you are an individual, partnership or company, and you have spent capital investing in or improving commercial property, you may be eligible for capital allowance tax relief.

It is a form of tax relief that allows commercial property owners to claim back capital expenditure on qualifying items, including the unclaimed expenditure of previous owners.

What is capital allowance tax relief and who is eligible?

To qualify for capital allowance tax relief on property you must satisfy the following criteria:

  • be carrying on a qualifying activity, and
  • incur qualifying expenditure, ie; capital expenditure on plant or machinery wholly or partly for the purposes of the qualifying activity.

The range of qualifying activities is very wide and, broadly speaking, covers all taxable activities other than passive investment, including a trade, profession, vocation, office, employment or an ordinary property business.

It therefore does not matter in what capacity the commercial property is owned, for example, as a private individual or a limited company, or whether the property is owned as a stand-alone investment or in the course of your every day business.

Furthermore, this form of tax relief can apply to all types of commercial property including, but not limited to: restaurants, public houses, hotels, retail stores, petrol stations, dental surgeries, veterinary surgeries, medical centres, nursing homes, office blocks, car showrooms or student residences, to name but a few.

What is capital allowance tax relief qualifying expenditure?

As the law currently stands the actual acquisition cost of a commercial property will not, in itself, attract capital allowances.

However, for tax purposes it is possible to separate the cost of the land, bricks and mortar from the fixed plant and machinery that allow the building to function, and thus the element that qualifies for tax relief.

As such, where part of the cost relates to assets incorporated into a building, ie; its’ integral fixtures and features essential for a business to carry out its trade, you may be entitled to claim capital allowances.

Typically, this is where we see the most untapped potential for tax relief, where these fixtures and features were either inherent within the property at the time of acquisition or have been subsequently installed.

What is capital allowance for integral features?

Broadly speaking, the provision or replacement of an integral feature of a building or structure, wholly or partly for the purposes of carrying on a qualifying activity, will satisfy the capital allowance criteria.

In particular, each of the following is an integral feature of a building or structure:

  • an electrical system, including a lighting system
  • a cold water system
  • a space or water heating system, a powered system of ventilation, air cooling or air purification, and any floor or
  • ceiling comprised in such a system
  • a lift, an escalator or a moving walkway
  • external solar shading.

In contrast, there are many items that do not qualify for capital allowances, for example, items that are deemed part of the fabric of the building, such as windows, doors and fixed partitions.

There is no definitive list of what does, or does not constitute, an integral fixture or feature. It can therefore be very difficult to determine the extent of any qualifying expenditure, so professional advice should always be sought here.

What is capital allowance tax relief when buying or selling property?

At the point of acquisition or disposal of a commercial property, any unclaimed capital allowances can make a real difference to the value of any potential deal. In particular, they can be used as a bargaining tool to help facilitate the sale or purchase of a property.

From a vendor’s perspective, any unclaimed allowance is a benefit that could be offered to a potential buyer to make the deal much more attractive.

From a buyer’s perspective, knowing that a capital allowance claim can be made on transfer of ownership can significantly alter the net cost of the purchase, making a deal far more affordable.

Capital allowances, where available, should therefore form an integral part of any negotiation process when buying or selling commercial property.

That said, in many cases, a commercial property may change hands without either party being aware of the potential tax benefits that are at stake. Indeed, a very lucky buyer may inadvertently benefit from a capital allowance windfall.

What is capital allowance tax relief and the Annual Investment Allowance?

The Annual Investment Allowance was introduced over a decade ago and can be used to deduct the full value of qualifying capital expenditure in the year you incur the cost.

This allows you to deduct 100% of the cost of qualifying items in the year in which the expense was incurred.

The level at which this allowance is set has changed several times, most recently in January 2019 when it was substantially increased from £200,000 to £1 million.

That said, this significant increase is only for a temporary period of two years, so full advantage needs to be taken of this lucrative new measure right away.

What is capital allowance tax relief and the new Structures and Buildings Allowance?

The recent introduction of the Structures and Buildings (SBA) Allowance represents yet another significant change in the capital allowances system.

This new type of allowance is available for the construction of non-residential property, where the aim is to encourage investment in the construction of new structures and buildings, and the improvement of existing ones, intended for commercial use.

This government measure directly addresses a gap in the rules over previous years, where no relief has been available for most structures and buildings, even though capital allowances are available for plant and machinery that form integral features of buildings.

The SBA allowance will be allowed on eligible construction costs incurred on or after 29 October 2018, at an annual rate of 2% over a period of 50 years.

Note, the cost of constructing a dwelling, or to acquire the land itself, even if for commercial use, will not be eligible for relief.

Although residential dwellings are specifically excluded, where there is mixed use, for example, between commercial and residential units in a development, the available tax relief will be reduced by apportionment.

Assets such as plant and machinery are also not eligible for this new allowance, although these items continue to qualify for standard capital allowance tax relief and the increased cap under the Annual Investment Allowance.

Key takeaway for “What is capital allowance tax relief on property?”

Capital allowance tax relief on property is often overlooked and undervalued by commercial property owners.

By increasing cash flow and reducing your overall tax liability, this form of relief can make a real difference to the success of your business, or even the success of the sale of your business.

Moreover, with the recent introduction of new measures, you can take advantage of substantially improved capital allowances right now.

Legal disclaimer

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law and should not be treated as such.

Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.

Before acting on any of the information contained herein, expert legal or other advice should be sought.

Which Capital Gains Tax Rate Applies?

Understanding capital gains tax rates is crucial in determining your potential tax liability following the disposal of an asset. Below we consider different capital gains tax rates and how these apply.

What is capital gains tax?

Capital gains tax is a tax levied on the profit when you sell or dispose of an asset that has increased in value since the date of acquisition or purchase.

It is the gain you make on the chargeable asset that is taxed, not the overall amount of money you receive having disposed of that asset. Disposing of an asset can include selling, gifting or transferring a chargeable asset to someone else.

A ‘chargeable asset’ includes property that is not your main residence, for example, a holiday home, second home, a buy-to-let or investment property.

It can also include personal possessions worth more than £6,000, such as jewellery, antiques and artwork; shares, other than those held in a tax-free scheme or investment; as well as business assets.

Some assets are entirely tax-free, where you do not have to pay any capital gains tax whatsoever, for example, cars are specifically excluded as these are classed as ‘wasting assets’ with a predicted useful life of less than 50 years.

You are also not liable to capital gains tax if all your gains in one year fall below your tax-free allowance.

What is my tax-free allowance?

Capital gains tax is only payable on any overall gains that exceed your tax-free allowance. This is known as your ‘Annual Exempt Amount’ (AEA).

The AEA for capital gains tax for the year 2018/19 is £11,700. This applies to gains accrued on or after 6 April 2018. For the tax year 2019/20 your allowance will be £12,000, ie; for gains accrued on or after 6 April 2019.

The net effect is that there will be no capital gains to pay on any profit on the sale of chargeable assets falling below your tax-free allowance for that year.

The AEA is increased annually to keep pace with inflation in-line with rises in the Consumer Prices Index, rounded up to the nearest multiple of £100.

What are the current capital gains tax rates?

The capital gains tax rate that you will need to apply will depend on the total amount of your taxable income and whether you are a basic or higher rate tax payer.

For individuals, net gains are added to their total taxable income to determine the appropriate rate of tax. It is therefore important to ascertain your annual income before applying any capital gains rate.

For the years 2018 & 2019 the following capital gains tax rates apply:

  • 10% standard, or 20% higher rate, for individuals for chargeable assets not including a non-primary residence
  • 18% standard, or 28% higher rate, for individuals for a non-primary residence.

The standard rates apply only to the net gains which, when added to the individual’s total taxable income, do not exceed the basic rate band.

If you pay basic rate tax on your income, you will pay capital gains tax at the standard rate up to an amount of gain equal to your unused income tax basic rate band, and at the higher rate on any excess.

If you pay higher rate income tax, you will pay capital gains tax at the higher rate on the entirety of any profit acquired from a chargeable asset.

How do I calculate any capital gains tax?

To do a basic capital gains tax calculation, first work out your annual income for the year in which the gain was made. You will then need to deduct your tax-free personal allowance from your total income. For 2018/19 this is £11,850.

For a basic-rate taxpayer the maximum taxable income for the 2018/19 tax year that you can earn is £34,500. This is the higher-rate threshold (£46,350) minus the tax-free personal allowance (£11,850).

You will next need to work out your taxable capital gain by deducting the tax-free capital gains annual exemption of £11,700, as well as any allowable losses.

If your taxable income and taxable capital gain added together is less than £34,500, the basic capital gains tax rate applies. Where the two figures combined are above the higher tax threshold, you pay the basic-rate on the part up to the threshold, and the higher rate on the remainder.

Example

You bought a rental property for £150,000 and later sell it for £175,000, resulting in a profit of £25,000.

Having deducted your annual exempt amount of £11,700 (for 2018/19), you are liable to pay capital gains tax on the sum of £13,300.

If your total taxable income is £24,500, you will pay the basic capital gains tax rate of 18% on the first £10,000 of your taxable gain, and the higher rate of 28% on the remaining £3,300.

This equates to £1,800 + £924 = £2,724 capital gains tax liability.

When must I pay any capital gains tax?

You are only liable to pay capital gains tax, if after deducting any losses and applying any reliefs, your overall gains for the year are in excess of your personal tax-free allowance.

Any capital gains will need to be declared by way of a self-assessment tax return. You should also report any loss on the disposal of a residential asset, such as selling a second home or rental property for less than the purchase price.

Any capital gains tax payable will typically fall due by 31 January after the end of the tax year in which the disposal occurred. However, proposed revisions to the rules mean capital gains tax on residential property sales will be payable within 30 days following the completion of the disposal.

For UK residents the measure will have effect for disposals made on or after 6 April 2020. For non-UK residents the proposed changes have effect for disposals on or after 6 April 2019 and 6 April 2020.

What if I am non-UK domiciled?

You may be liable to pay capital gains tax even if your asset is located overseas. There are, however, special rules where you are a UK resident but not domiciled in the UK.

UK residents who have their permanent home outside the UK can pay tax on what’s known as a remittance basis. This means that they will only be liable to pay capital gains tax on any foreign gains that are brought to the UK.

However, if you are non-domiciled in the UK and have claimed the remittance basis of taxation on your foreign income and gains, you will lose your tax-free allowances.

What if I inherit an asset?

When you inherit an asset, typically inheritance tax is paid by the estate of the person who has died. You will only be liable to any capital gains tax in the event that you dispose of the asset(s) bequeathed to you.

Broadly speaking, the taxable gain will be calculated on the basis of the difference between the value of the asset at the date it was inherited and the proceeds of sale, deducting any personal allowance for that tax year.

Other capital gains tax rates

Trustees will need to apply a capital gains rate of 20% on chargeable assets other than residential property, and 28% on residential property.

The current annual exempt amount for trustees is £5,850 (2018/19).

Further, if you are a sole trader or business partner you may qualify for what’s known as entrepreneur’s relief. This means you will pay tax at 10% on all gains on qualifying assets. There is, however, a lifetime cap of £10 million.

Key takeaway for capital gains tax rates

Knowing which capital gains tax rate is applicable can be crucial in making tax efficient decisions on when to best dispose of an asset. Seeking professional advice from a tax specialist is always advisable.