NEWS - CAPITAL GAINS TAX - 08.06.2006

A free valuation service

What’s the problem?

Capital Gains. Capital Gains Tax (CGT) is charged on disposals of assets. A disposal is when you sell an asset or give it away. Tax may also be charged if the legislation specifically provides for a transaction to be treated as if it were a disposal. However, there is a special, and relatively high, threshold for an individual’s liability to CGT, in addition to and separate from the income tax threshold (with special provision for trusts). It is called the annual exempt amount and in 2005/6 it exempts gains of £8,500.

Tax returns. For individuals, the chargeable amount for a year of assessment, after taking account of losses and the annual exempt amount, is in effect added to income for tax purposes and charged to tax at the same rates as if it were the top slice of your income. So when completing your tax return it’s important to get the calculation of the gain right. So what help does the Taxman offer?

Our solution

Being proactive. You can agree the value of any disposal with the Taxman by submitting a Form CG34 to him (http://www.hmrc.gov.uk/cgt/cg34.htm). If you do, he has to come back to you with an answer (within 56 days is the published target). At least your position should be agreed before you send in your tax return. If you don’t go down the CG34 route then the Taxman has to open an enquiry.

Tip. To make sure you have used the right figures fill in Form CG34 and send it off to the Taxman for his agreement. When he replies you can complete the capital gains pages of your tax return safe in the knowledge that further tax, interest and penalties will not be demanded later.

The recent change

Negligible value. The tax legislation allows you to claim that the shares have become of negligible value (s.24 Taxes and Capital Gains Act 1992). Broadly, this means that they are worth less than 5% of the price you paid for them. The claim works as though you have sold the shares for £nil proceeds and immediately re-acquired them at no cost, thereby fixing the capital loss. You don’t actually have to sell the shares!

Historic problem. If an unquoted company is still in existence and you make a negligible value claim against it on your tax return you can end up with an enquiry and negotiations with the Shares Valuation Division. Which means hassle.

The change. You can now agree a negligible value with the Taxman by submitting a Form CG34 to him.

Trap. If you make losses and profits in the same year you have to set them off against each other, even if this means being unable to fully utilise your annual tax free exemption from CGT, either because the losses wipe out the profits entirely or reduce them below the tax-exempt limit - £8,800 for 2006/7.

Tip. If you expect to make capital gains in the current tax year, and this will be covered by your annual exemption, consider delaying your negligible value claim until a year when you need it. Bear in mind that if the shares do recover and are subsequently, sold a capital gain might arise at that stage, i.e. your base cost is zero after a negligible value claim.