Capital Gains Tax

 

A. Introductory Note

  1. This section presents data derived from assessments to capital gains tax for tax years to 1995-96 and from Self Assessment returns for 1996-97 onwards. The notes below describe:

- capital gains tax;

- the compilation of the statistics;

- the content of the tables.

B. Capital Gains Tax

  1. Capital gains tax (CGT) was first introduced in 1965 on capital gains made on the disposal of assets by individuals, personal representatives and trustees. Corporation tax is charged on the capital gains of companies (see section titled Corporate tax). The statistics in this section cover CGT only. Details on company gains and trends in the gains of individuals were published in Economic Trends: Capital Gains: Surveys of Tax Computations for Individuals and Companies by E Ko and S Whellams (October 1994). Two tables were published in this section of Inland Revenue Statistics 1997 and 2000 to update some of these analyses of company gains. A further update is given at the end of this section.

  2. CGT is charged on gains realised on the disposal of assets. For this purpose the disposal of an asset includes any occasion when the ownership of part or all of an asset is transferred from one person to another (except on death or between husband and wife). Types of disposal include sales, gifts, exchanges or generally when the owner of an asset derives a capital sum from it.

  3. The capital gain is the difference between the sale price and the cost of acquiring the asset. In some circumstances, the market value of the asset at the time of acquisition/disposal is used. Expenditure which has increased the asset's value may be deducted, as may the costs of acquisition/sale. There are various reliefs and exemptions which reduce the amount of CGT to be paid. For example, there is normally no CGT liability on the disposal of a person's only home.

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

  5. The current capital gains tax system generally only taxes gains which have arisen since March 1982, allowing relief for inflation up to April 1998. Taper relief applies from 1998-99 and the proportion of gain chargeable is in accordance with the Table TA.7. Chargeable gains, after reliefs, are taxed at rates equivalent to the individual's 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 the tables T1.5, TB.1 and TB.2 .

  6. 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. Initially, indexation was only given from either twelve months after the date of any expenditure or March 1982 whichever was the later. And to begin with, indexation could not create or add to a capital loss - it could only reduce capital gains;

- in 1985, changes removed the restrictions on indexation and allowed it to add to or create a loss. The 12 month rule was also abolished so that, for expenditure after March 1982, indexation ran from the date that expenditure was incurred. From 1985, it was also possible for the indexation allowance to be based on the market value of any earlier costs;

- in 1988, further changes to indexation were made. These involved full rebasing by reference to market value at 31 March 1982 to ensure that gains accruing before 1982 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;

- since November 1993, it has no longer been possible to use indexation to create or increase a capital loss. Indexation can only be used to reduce or extinguish a chargeable gain. But transitional relief allowed individuals and trustees to use up to £10,000 of indexation relief on losses realised and used in the period 30 November 1993 to 5 April 1995;

- in 1998 indexation was withdrawn for periods after April 1998. Instead chargeable gains are now tapered according to the length of time that the asset has been held after 5 April 1998. The taper is more generous for business assets than for non-business assets; the definition of the former and both taper rates are shown in table TA.7. Assets acquired before 17 March 1998 qualified for an addition of 1 "bonus" year to the period for which they are treated as held after 5 April 1998. The taper is applied to net gains that are chargeable after the deduction of any in year losses, or any losses carried forward from earlier tax years. The allocation of losses to gains is on the basis that produces the lowest tax charge. Also, the rate applicable to trusts was extended to include interest in possession trusts and personal representatives, previously chargeable at basic rate;

- in 1999, capital gains tax rates were partially aligned with the income tax rates on savings income, giving rates of 20 per cent and 40 per cent for individuals;

- in 2000, business asset taper rates were modified so that the taper matures after 4 years instead of 10 and the definition of business assets was made wider. Business assets acquired before 17 March 1998 no longer qualify for the bonus year in calculating the appropriate taper relief fraction to apply to gains. Also capital gains tax rates were fully aligned with the income tax rates on savings income to include the starting rate of 10 per cent;

- in 2001, the definition of business assets was further extended, with effect from April 2000, to employees disposing of shares in non-trading companies where they work so long as they do not have a material interest of more than 10% in the company. Also assets other than shares disposed of by trustees of a settlement that have been used for a trade by a partnership of which the trustees are a member will be eligible for business asset taper relief; and

- - in 2002, the business asset taper rates were modified so that the taper matures after 2 years rather than 4. Also, there were a number of simplification measures - further details of the changes can be found at www.inlandrevenue.gov.uk/cgt/cgtchanges.htm.

The rates of capital gains tax since 1977-78 are given in the table Table TA7, which also shows the amounts of the annual exemption available for each year from 1980-81 and rates of taper relief.

C. Capital Gains Tax Statistics

Individuals and Trustees

  1. Before 1987-88 capital gains tax assessments were recorded manually. A sample of these was selected as the basis for the statistics published in earlier volumes. Since 1987-88, nearly all assessments have been recorded on computer. The statistics for years to 1995-96 are derived from this computer database which covers assessments as well as amendments. These computer records were supplemented by a small number of assessments which were made manually. For 1996-97 onwards, the statistics are derived from computer records of all Self Assessment returns with a CGT liability

  2. Assessments are made for "years of disposal", i.e. years ending on 5th April in which capital gains are made. It may take several years for all assessments for a year to be made and even longer for all amendments to these original assessments

  3. Because of these time lags and because of known deficiencies in the flow of assessment data (particularly late amendments) to Analysis & Research, the figures in table 14.1 for years to 1995-96 have been scaled to be consistent with departmental accounting figures. Before the 1995 volume, assessment figures were published unscaled and readers were warned that the position as shown in published tables, especially in the latest years of disposals, was incomplete. From the 1995 volume onwards, published figures represent estimates of taxpayer numbers, chargeable gains and tax accruals for a complete year of disposal. No further revisions will be made to the assessment based figures. Estimates for 1996-97 onwards from Self Assessment returns in tables 14.1 to 14.3 have been scaled to the estimated Capital Gains Tax component of total Self Assessment tax liabilities and may be subject to future revision.

  4. Whilst the assessments show the tax and the amount of the capital gain on which tax has been charged, they provide little information about the type of assets on which gains were realised or how long they were held. Self Assessment returns should contain an itemised list of disposals, a description of each asset and other information, but not necessarily how long they were held. This extra information is needed for the capital gains tax forecasting model.

  5. Information on asset type of disposals is derived from an annual sample of capital gains schedules submitted with Self Assessment returns. Slightly less frequently than annually, detailed computations of chargeable gains are obtained from tax offices for a sub-sample of the cases in the annual sample. They are used in the tax forecasting model. These computations show the amounts of different types of assets sold, the period for which they were held, the cost of acquiring each asset, enhancement expenditure, its sale price and costs of disposal, the amount of indexation allowance and any other allowances or reliefs. This sample of computations is the basis of the estimates in tables 14.4 and 14.5.

  6. As the data relate to cases with a capital gains tax liability, the tables exclude cases where the aggregate gains, net of any reliefs, are below the annual exempt amount. They also exclude some capital gains tax fully offset by other tax adjustments.

  7. For years to 1997-98, "Gains" are the sum of chargeable gains from all disposals made by a taxpayer (i.e. net of indexation allowance and other reliefs), but before deducting the annual exempt amount, past capital losses or trading losses. This definition is used instead of "net chargeable gains" (i.e. after deducting the annual exemption, capital and trading losses) because the latter cannot readily be analysed at the disposal level. From 1998-99, "Gains" are net of reliefs available at the disposal level, after deduction of trading losses, past capital losses and taper relief, but before deducting the annual exempt amount, which still cannot be readily analysed at the disposal level. "Tax" relates to the tax liabilities for the year of disposal and not tax receipts.

D. Non - life companies

  1. A separate sample of companies is drawn and details of their computations of chargeable gains are obtained from tax records and used in a model to forecast company capital gains. Life assurance companies are excluded so the companies covered are referred to as non-life companies. Some 1,500 companies are selected based on information about gross capital gains and losses held by the Corporation Tax Enquiry, itself a stratified sample of 15,000 non-life companies drawn from corporation tax assessment records.

  2. The computations show the amounts of different types of assets sold, how long they were held, disposal value and acquisition cost, indexation allowance and any other allowances or reliefs.

  3. The sample is grossed by sampling fractions and non-response factors. Although companies in the sample may have capital gains and/or capital losses, the estimates in the tables relate to companies which have net chargeable gains for the Accounting Period in the year shown. Companies whose capital losses (including past losses used) exceed capital gains of the Accounting Period have no net chargeable gain and are excluded from the analysis.

E. Enquiries and Further Information

  1. Requests for any further analyses should be addressed to: David J Bailey, Analysis & Research, Inland Revenue, West Wing, Somerset House, The Strand, London WC2R 1LB. A telephone enquiry number for this section is given in the enquiry points section.