Wasting assets are important for working out Capital Gains Tax because they’re often exempt from being taxed as long as they’re not used for business purposes. In this article we’ll explain what wasting assets are in more detail, and how this might impact your business.

What does Capital Gains Tax mean?

Capital Gains Tax (CGT) is a tax you might need to pay if you make a profit (a ‘gain’) when you sell, gift, or transfer an asset which has increased in value.

Disposing of assets rather than selling

The word ‘disposal’ will come up a lot when you look at Capital Gains Tax. Disposing of an asset basically means you’re no longer the owner, so it could mean you gave it away, sold it, lost it, or were compensated for its loss another way.

This means you can trigger CGT just by transferring ownership or gifting an item to someone, rather than simply selling it.

Why assets are important for Capital Gains Tax

Assets are at the heart of Capital Gains Tax because they’re the trigger for what HMRC describe as ‘a taxable event’. The type of asset that you dispose of can affect what rate of Capital Gains Tax you need to use, and even whether or not it applies at all.

Not every type of asset is subject to Capital Gains Tax. For example, your main home that you live in is usually exempt, but selling a second property might not be.

What is a wasting asset?

Capital Gains Tax will sometimes organise assets into one of two categories: wasting, and non-wasting assets.

You’ll often see the term ‘wasting asset’ used alongside the word ‘chattels’. A chattel is a tangible, physical thing that you can see and move.

 
The expectation is that the wasting asset loses value over time, to the point where it’s pretty much worthless, or only has scrap value.

Wasting assets must also have a predictable life, but it isn’t always possible to put a definite timeframe on this, so you’re usually able to make a reasonable estimate. HMRC have special rules for estimating the useful life of wasting assets.

What intended use means for wasting assets

The ‘intended use’ of an asset is an important concept for Capital Gains Tax. The key here is what you intend to do with the asset, not what the usual purpose of it is.

For example, you buy a motorbike 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, so it would qualify as a wasting asset.

If you buy your motorbike directly from the factory, and keep it in the crate with the intention of keeping it for more than 50 years as an investment, then this changes things. You’re no longer intending to use the asset for its usual purpose because it’s an investment, so it’s no longer a ‘wasting asset’.

Why do I need to know if something is a wasting asset?

Wasting assets are (generally) 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.

 
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