Capital Gains Tax is a tax that you might need to pay on the gain (the profit) that you make when you dispose of an asset. Disposing of an asset can mean that you sell it, but it can also mean giving it away, or swapping it.
It’s one of the rare taxes that can apply to both private individuals and to businesses, although the rules are slightly different depending on which category you fall into.
Despite being a fairly common tax, most of us won’t come across it on a day-to-day basis. This, along with the various rates and exemptions which might apply, can make it a very complex subject indeed.
In this post we look at the twin issues of chattels and wasting assets, and how Capital Gains Tax (CGT) is charged against gains.
We’ll look at:
What is a chattel for Capital Gains Tax?
The Capital Gains Tax allowance
What is a wasting asset?
Using wasting assets in business
Capital Gains Tax exemptions
What is a chattel for Capital Gains Tax?
When you look at Capital Gains Tax, you’re very likely to come across the term ‘chattel’.
HMRC use the term ‘chattel’ to indicate a tangible, moveable asset.
A house, for example, isn’t a chattel as you can’t (normally) move it. The intellectual property value of a brand isn’t a chattel as it is intangible. HMRC gives the following as a list of example chattels but please do read on as there are some important points here:
Items of household furniture
Paintings, antiques, items of crockery and china, plates, and silverware
Motor cars, lorries, motorcycles
Items of plant and machinery not permanently fixed to a building
Another wrinkle is where you buy something that is moveable, then attach it permanently to a building, at which point it becomes immovable!
Paying Capital Gains Tax on the disposal of chattels
If the ‘disposal proceeds’ (the amount that you get from disposing of the chattel) are more than £6,000, then you may need to pay Capital Gains Tax.
If you buy a mirror for £1,000, and:
Sell it for £4,500, you won’t need to include it on your tax return, because the proceeds are less than £6,000.
Sell it for £6,500 then you will need to declare it for Capital Gains Tax, because the proceeds are more than £6,000.
It’s important to note that Capital Gains Tax is a tax on the profit and not on the proceeds of the sale. Looking at that second example, the proceeds are £6,500, so you must pay CGT, but you’ll only pay tax on the gain (the profit).
The gain is what’s left over after you deduct the purchase cost, selling costs, and anything you spent to increase its value whilst owning it.
For example, imagine you buy an item costing £10,000 at an auction. They charge you a premium on the sale. You make some repairs costing £4,000, and then sell it for £25,000 through an online website which charges you £2,500 commission on the sale. Your calculation would look something like this:
Purchase the item
Auction buyers’ premium
Restoration and repairs
Commission on sale
Net Taxable gain Sales proceeds, minus what you need to pay for it, minus your costs.
The Capital Gains Tax allowance for 2022/23 is £12,300 for individuals, and £6,150 for trusts.
If the total of all your gains is less than £12,300 in a year, you won’t actually need to report them or pay Capital Gains Tax.
What is a chattel set?
Now, if you combine similar items and dispose of them as a set, that £6,000 limit applies to the set rather than to the individual items.
HMRC use the example of a chess set to describe what might count as a chattel group. You buy individual pieces and a board separately, but when they become a set, they increase in value.
Even if you go on to sell the items separately to different people, they still form part of a set. As such, you must consider the total amount you get from selling all of the pieces.
You sell each piece for £1,000. This alone is less than the £6,000 limit, and ordinarily you wouldn’t need to report on them for CGT. But, because each piece forms part of a set, you must add these individual sales together.
The total amount that you make from selling each piece separately adds up to £32,000. That’s over the £6,000 limit, so you’ll need to report on this for Capital Gains Tax. The total amount is also above the CGT allowance, so you’ll pay CGT on the portion of the gain which is more than the allowance.
Disposing of assets rather than selling
We use the example of a sale, but you can also substitute the word ’transfer’ here. If you transfer ownership or gift an item to someone then the same principle of paying Capital Gains Tax will apply. Because there’s no sale price, you’ll use the market rate of the item to work out the gain.
What if multiple people own an asset?
If more than one person owns the asset, then the proceeds are split by their particular shares.
For example, three members of a family buy a painting between them for £5,000, and sell it for £15,000. The gain would normally be £10,000 and therefore over the limit, but because it’s owned equally by 3 people, the proceeds are divided equally between them. Each individual gains £3,333 from the sale, and as a result they’re under the limit.
What is a wasting asset?
Chattels (also known as assets) fall into two categories: wasting, and non-wasting assets.
A wasting asset has a predictable life of less than 50 years, based on its intended use.
The usual form is that over the period of time, the asset becomes less valuable until the point that it becomes almost valueless or only has scrap value. An example here might be a boat that has a high value when you buy it, but which becomes less desirable as you use it over the years, and as a result it’s less valuable.
Intended use is also an important concept. You may buy a motorcycle with the intention of riding it to and from work. In this instance, it would have an estimated life of less than 50 years based on its intended use.
But if you buy the motorcycle in its crate direct from the factory, intending to keep it for more than 50 years as an investment, then that is another matter entirely.
The key to ‘intended use’ as far as Capital Gains Tax is concerned, is what you intend to do with the asset, not what the usual purpose of it is.
Why are wasting assets important for Capital Gains Tax?
Wasting assets are exempt from Capital Gains Tax, as long as they are not used for business purposes.
If, as a private individual, you loan an asset to a business that then uses it as plant or machinery, then any gains made on the sale must be declared on your personal tax return.
A tax that should be simple ends up being complex
As with most aspects of the UK tax system, the seemingly simple concept of paying tax on the increase in value of an asset ends up being very complex indeed.
Rather than tackling HMRC’s tax manuals, get help! You can’t take chances with taxation because the best-case scenario means you could end up paying too much tax, but in the worst case you may end up paying penalties and interest.
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About The Author
I'm an experienced and fully AAT and ACCA qualified accountant, who is enthusiastic about helping business owners succeed. I also love cooking and needlepoint (at different times!). Learn more about Beth.