You inherited some valuable items several years ago and you want to raise some cash by selling them. Despite recent falls in value they are worth more than when you acquired them. How can you manage the sales to reduce the capital gains tax bill?
Capital gains
Capital gains tax (CGT) isn’t a big money maker for HMRC. On average it brings in around £7bn p.a. Despite this relatively low tax take, CGT rules are long and surprisingly tricky in places. One area that often causes confusion is gains and losses made from the sale of tangible, moveable assets, usually referred to as chattels.
Exempt items
Chattels are any physical item such as machinery, jewellery or even a bottle of wine. Because most chattels usually devalue, they are worth less when you sell or transfer them than when you acquired them. To prevent everyone claiming a capital loss each time they sell, say, a sofa on eBay, CGT rules exempt transactions for assets which have an expected life of 50 years or less. Note. All machinery is deemed to have an expected life of less than 50 years.
Tip. You can sell an antique clock, watch or any other item which has mechanical workings for more than you paid for it and the gain, no matter how large, is exempt from CGT. The downside is that no relief for losses can be claimed.
Trap. Gains made from the sale of machinery used in your business are not covered by the CGT exemption.
Long lasting chattels
The most common non-exempt chattels are antiques, art and jewellery. Potentially a gain made from selling a bottle of vintage wine etc. can fall into this category, but deciding if it has an expected lifespan of less than 50 years (from the date you acquire it, not from when it was bottled) can be tricky. Where the value of the item you sell or transfer is £6,000 or less, a special rule means the gain is exempt. Plus, where the value of the chattel is between £6,000 and £15,000, the special rule reduces any taxable gain. A different rule applies if you make a loss.
Losses
Capital losses on chattels are often misunderstood, and so sometimes overlooked because their calculation doesn’t follow the same pattern as that for capital gains. If you sell a chattel for less than £6,000 and make a loss, you simply substitute £6,000 in place of the amount you received for it.
Example. Sarah inherited a painting from her father which was valued at £8,000 for probate purposes. Several years later she sells it for £4,500. The loss for tax purposes is therefore restricted to £2,000 (£8,000 less £6,000) and is not £3,500 (£8,000 – £4,500).
Tip 1. There is no restriction on capital losses made from the sale of a chattel where the amount you sell it for is more than £6,000.
Tip 2. Losses must be knocked off gains made in the same tax year when working out the taxable amount. Therefore, it can be more tax efficient to sell assets with gains in one year and those with losses in a later one.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.