CAPITAL GAINS TAX AND CHATTELS
Anastasia Tennant of Christie’s examines the main features of the current CGT regime as it
applies to personal chattels
(taken from Issue No 16 – July 2001)
Tax is charged in respect of capital gains which accrue to a person on the disposal of assets. All forms of property, except sterling, are regarded as assets for these purposes unless specifically exempted. In this article, the capital gains tax treatment of disposals of tangible movable property, i.e. chattels, will be described and discussed with particular emphasis to the notable exemptions relating to certain chattels.. All statutory references are to the Taxation of Chargeable Gains Act 1992 unless otherwise noted.
There is a disposal of assets on the following occasions:
(a) on a sale,
(b) where a capital sum is derived from them notwithstanding that no asset is acquired by the person paying the capital sum (e.g. receipt of insurance monies on loss, damage, destruction of object unless proceeds applied in restoring the asset; consideration for the use or exploitation of assets),
(c) where there is a `deemed disposal` (e.g. a gift or advancement out of a trust).
There are 7 exempting provisions relating to tangible movable property as follows:-
1. The chattels’ exemption under s.262:
provides that a tangible movable asset is entirely exempt provided the disposal is for a consideration of £6,000 or less. Tangible movable property is not defined in the legislation but is described in the Revenue’s Capital Gains Manual at paragraphs CG76552 – 76554 as, basically, property which is not land and is not intangible i.e. a physical object which can be moved. The £6000 limit relates to the gross consideration, ignoring incidental expenses of disposal.
If Elizabeth purchased a china bowl in December 1988 for £2,000 and sold it in March 1992 for £6,000 the gain of £4,000 is exempt from CGT.
Where the proceeds realised on a disposal of a chattel are greater than £6,000 s.262(2) operates so as to limit any gain which may arise to so much of it as exceeds five-thirds of the difference between the consideration and £6,000, if this is less than the actual gain. This gives marginal relief which can apply to disposals for a consideration of up to £15,000 The sub-section therefore requires two calculations to be carried out, namely:-
(a) a calculation of the actual gain, and
(b) a calculation of the gain using the formula 5/3 x (gross proceeds – £6,000).
The chargeable gain is then taken to be the lower of (a) and (b) so the sub-section can operate to reduce an otherwise larger gain if (b) is in fact taken as the chargeable gain.
Harry sold a diamond ring for £10,000 in April 1998 incurring incidental costs of disposal of, say, £800. He had purchased the ring for £2,000 in June 1984.
Hammer Price 10,000
Less: disposal costs 800
acquisition cost 2,000
indexation @ 0.82 1,640 (4,440)
Indexed Gain £5,560
5/3 x (10,000 – 6,000) £6,666
The actual gain is less in comparison so there is no benefit in this case from marginal relief.
A loss which arises on the disposal of a chattel is wholly disallowed if both the proceeds and the deductible expenditure are less than £6,000. Otherwise a loss is fully allowable except in the case where the loss arises because the proceeds are less than £6,000. In such a case the loss is restricted by deeming the proceeds to be equal to £6,000.
Christopher buys a Greek icon in December 1989 for £8,000 believing it to date from the 17th Century and in June 2000 he discovers it is a later reproduction and sells it for £200.
Hammer Price 200
Deemed proceeds 6,000
Less cost (8,000)
Allowable loss (2,000)
Special rules apply when what is disposed of is not the asset but a right in or interest over it. For the basic £6,000 exemption to apply, the consideration received for the right or interest and the value of the remainder must not exceed £6,000. If it does, then a similar limitation as outlined above applies but the excess for this purpose is computed as follows:-
(Consideration received + value of remainder – £6,000) x consideration received
In the case of a part disposal of an asset, the total value of which is less than £6,000, the deemed consideration for loss relief is computed as follows:-
£6,000 x consideration received
Treatment of sets
s.262(4) is aimed at disposals of parts of a set, its purpose being to ensure that only a single £6,000 exemption is available per set. There is no precise definition of what constitutes ‘a set of articles’ in the statute and it is very much a question of fact to be decided in the light of the particular facts and circumstances of each case. The Revenue in its Booklet ‘Capital Gains Tax CGT 8 (1980) paragraph 80 gave the following guidance:
`Six matching antique chairs or a canteen of Georgian Silver cutlery prima facie constitute a set, and the asset to which the [£6,000] exemption would apply would be the six chairs taken together or the canteen of cutlery of unrelated articles would not constitute a ‘set’ merely because their owner had bought them at auction in one lot`.
In its Capital Gains Manual at paragraph CG76632 the Revenue indicates that it will only consider items to be a set if they are essentially similar and complimentary and their value taken together is greater than their total individual value.
The rules relating to sets whereby the Revenue can treat its separate components, whenever sold, as one item eligible to one £6,000 exemption, only apply when the set has been owned by one person at the same time, is disposed of by that person and is disposed of to the same person, to persons acting in concert or to connected persons. Provided these conditions are satisfied the Revenue may treat the separate assets as one asset and the disposal as a single disposal eligible for only one £6,000 limit. The burden of proof lies on the Revenue (see para. CG76634). Thus, if Mr Smith owns a set of six chairs which are separately lotted and each is sold to different buyers for £2,000, no capital gains tax can arise. If, however, three were sold to Mr Clark in 1999 for £4,000 and the remaining three were sold to Mr Clark’s wife in 2001, then the special rules would apply and the Revenue could treat the chairs as one asset and the consideration received is aggregated for the purpose of calculating the chargeable gain.
Just two articles or a pair cannot constitute a set for these purposes and this is accepted by the Revenue. So, if Mr Smith sells a pair of tables for £12,000 no capital gains tax would be in issue.
In the case of joint ownership, each owner is allowed the benefit of the full amount of the limit and the limit is applied to each owner’s share of the consideration separately.
A set of four pictures which is owned as to two by the husband and two by the wife sells for £24,000. Even if the two pairs are sold to the same person no capital gains tax should arise as four section 262 exemptions would apply.
A double s.262 exemption (i.e. £12,000) can be ensured if vendors hold chattels jointly and equally. Fairly elementary tax planning exercises in this area would involve e.g. the transfer of a half share in a picture owned by Mr Clark to Mrs Clark before a sale. Transfers between spouses who are living together are treated as made on a no gain no loss basis so no capital gains tax would arise. Any adjustment to the ownership of a chattel before a sale must be done by deed and, to avoid attack by the Revenue as an anti-avoidance device, there should be a clear time interval between the two transactions, the transfer preferably being completed in the tax year before the sale; no arrangements should be made to effect the ultimate sale until after the transfer, and the gift to Mrs Clark should be unconditional. Mrs Clark should receive her share of the proceeds of sale, the auctioneers being instructed to pay these either into a joint account of the spouses or, preferably, into a bank account maintained in her sole name.
A collection is not a set. A library of books, for example, would be a collection of books although groups or volumes within it, for example an edition of the complete works of Dickens, may be true sets. A collection of first editions would not constitute a ‘set’ for these purposes, not having been produced as one from the outset.
The s.262 exemption does not apply in relation to:-
a disposal of commodities of any description by a person dealing on a terminal market, or
a disposal of currency of any description.
Sterling currency is not an asset for CGT purposes and includes sovereigns dated 1837 onwards. Demonetised coins are not currency and are eligible for the £6,000 chattels’ exemption.
2 Wasting Assets
s.45 provides that tangible, movable assets which are `wasting assets` are exempt from capital gains tax whatever the consideration received provided, very broadly, that they have not been used in a business.
A wasting asset is defined in s.44 as one with a predictable life not exceeding 50 years and `life` means useful life, having regard to the purpose for which the asset was acquired or provided by the person making the disposal. Ascertaining the predicable life of an asset is a matter of fact and it must be considered at the time of the disposal of the asset i.e. when the need for a capital gains tax calculation arises. The Act gives some guidance in answering this question of fact and directs the querist to look at the position as it was when the asset was originally acquired by the person making the disposal and to ignore any knowledge acquired through the advantage of hindsight. For example almost all wines and spirits will have a predicable life of 50 years or less from the time they are acquired by the vendor if not covered by the s.262 exemption.
All items considered plant and machinery are treated as having a predictable life of less than 50 years and are therefore treated as wasting assets (s.44(i)(c)). `Machinery` is not defined in the Act so the Revenue give it its normal meaning. In their October 1994 Bulletin on page 166, the Revenue stated that this includes `any machine or its parts, mechanism or works. A machine is any apparatus which applies mechanical power`. The Revenue have over the years agreed that certain assets, where not used for a business, definitely fall into the category of machinery as follows:
Clocks and watches. (Revenue Interpretation RI 88)
Motor-vehicles which are not passenger cars (e.g. taxi cabs, racing cars, single seat sports cars, motor-cycles, scooters). (RI 88)
Railway locomotives. (RI 88)
Yachts and vessels propelled by engines. (RI 88)
Generally all types of gun. (Revenue Interpretation RI 214)
`Plant` can include works of art and antiques used in a house opening business and, notwithstanding that such assets may be used partly in a business, it appears they may qualify as wasting assets and thus be exempt in full from capital gains tax on a sale – this is considered in depth in the Summer 1994 Issue of Christie’s Bulletin for Professional Advisers, pages 4 – 6.
3. Passenger Vehicles
s.263 provides that a mechanically propelled road vehicle constructed or adapted for the carriage of passengers shall be wholly exempt and no chargeable gain or allowable loss shall accrue on its disposal. This exemption applies even if the vehicle was eligible for capital allowances. The definition extends to vintage cars likely to appreciate in value. In view of the provisions exempting wasting assets, this exemption is to a large extent otiose, its most frequent application being to antique cars.
4. Decorations for valour or gallant conduct
s.268 provides exemption for gains accruing on the disposal of a decoration awarded for valour or gallant conduct but only if the disposer acquired the decoration otherwise than for money or money’s worth. Persons buying or selling decorations at a profit cannot therefore benefit but in most cases they will be covered by the s.262 £6,000 exemption. This exemption is not therefore available to a purchaser but would be to his donees or heirs and, where the hammer price is likely to be over £6,000, this opens up avoidance possibilities.
5. Foreign currency for personal expenditure
s.269 provides that a gain arising on the disposal of currency of any description acquired for an individual’s or his dependant’s personal expenditure outside the UK (including the provision of maintenance of his residence outside the UK) is exempt.
6. Private Treaty Sales of Works of Art
s.258 provides that on a sale of a chattel in respect of which an inheritance tax or a s.258 undertaking has been, or could be, given to one of the bodies specified inSchedule 3 Inheritance Tax Act 1984 (for example, to the National Trust or a publicly funded national or provincial museum) no capital gains tax arises. The tax liability that would arise on a sale in the open market is brought into account in fixing the price paid by the Heritage body, the tax saving being shared between the taxpayer and the purchasing institution under the so-called `douceur` arrangement, the seller usually receiving an enhancement of the purchase price equivalent to 25% of the tax that would have been incurred on an open market sale.
To obtain the `douceur` treatment it is important to agree the calculation of the special price with the Capital Taxes Office before the transaction is completed and they should be asked to confirm that the transaction it tax free. Such treatment is not usually available when the chattel is sold at auction and the purchaser is one of the heritage bodies.
7. Relief on transfers of Works of Art
s.258(3) and (4) provides that when any assets which have been or could be designated under s.31 Inheritance Tax Act 1984 (i.e. which are pre-eminent) are disposed of by gift (including gift into settlement) or deemed to be disposed of by trustees on a person becoming absolutely entitled to settled property (other than on the death of the life tenant) then the person making the disposal and the person acquiring the asset are treated for capital gains tax purposes as making the transaction for a consideration giving rise to neither a gain nor a loss.
To obtain the exemption such person as the Board think appropriate in the circumstances of the case must enter into significant undertakings guaranteeing to retain the items concerned in the UK, to take suitable steps agreed with the Revenue for their preservation and maintenance, to provide public access to them and agree steps for publicising the undertakings and other information relating to the exemption.
8. Tax returns
Under self-assessment a person (including a trustee of a settlement) chargeable to capital gains tax for a year of assessment who has not received a notice unders.8 Taxes Management Act 1970 requiring a return for that year of his total income and chargeable gains, must within 6 months after the end of the year in which the gain accrued (i.e. by 5th October) notify an officer of the Board that he is so chargeable (s.7 TMA 1970).
A person is not required to give notice under these provisions for capital gains tax purposes if he has no chargeable gains (or, in practice, no chargeable gains in excess of the annual exempt amount – see Revenue Booklet SAT2 1995, paragraph 2.93). Sales falling within any of the categories of exemption discussed above are stated in the relevant sections of TCGA 1992 as not being chargeable gains and accordingly need not be returned in the taxpayer’s annual return.
If a person has chargeable gains, has notified an officer under s.7, and/or has received a notice under s.8 TMA 1970 to make and deliver a return, the return must be made and delivered on or before 31st January next following the year of assessment. If the notice is given by the officer later than 31st October following the year of assessment then the return must be delivered within 3 months beginning with the date of the notice.
The due date for payment of capital gains tax is 31st January following the year of assessment. The one exception is where the person gave notice of chargeability under s.7 TMA 1970 within 6 months after the end of the year of assessment but was not given notice under s.8 or s.8A TMA 1970 until after 31st October following the year of assessment. In such a case the due date is the last day of the 3 months beginning with the date of the notice.
Post-transactions valuation checks and rulings
As part of its policy to help taxpayers to understand their rights and obligations, to get their tax affairs right and pay their tax on time under self-assessment, the Revenue has introduced various useful procedures, detailed in its booklet COP10 which is available from the Revenue’s web-site at www.inlandrevenue.gov.uk/ leaflets. Two procedures particularly relevant in the context of this article are as follows:
(a) Post-transaction Valuation Checks
In 1997 the Revenue introduced a procedure designed to provide taxpayers with the facility to agree any valuation required for capital gains tax purposes in advance of submission of their self assessment return and payment of the tax due to avoid the uncertainty of a later challenge to any value used in the computation. This should remove the possibility of an increase in the gain calculated, the tax due and interest and surcharges which might otherwise arise.
The procedure is free of charge and the taxpayer must supply full information about the transaction to which the valuation relates on Revenue form CG34, together with any relevant tax computations, to their Tax Office. The leaflet entitled CGT1 `CGT – an Introduction` explains the procedures taxpayers need to follow and the information and documents they must provide.
If the Revenue cannot agree the proposed valuation they will suggest an alternative. The Revenue, in its Capital Gains Manual at paragraph 16608, states that the intention is to deliver agreement to as many valuations as possible before the deadline for filing returns and that requests for a valuation check should be dealt with as quickly as possible. In leaflet CGT1 the Revenue indicates that it should be allowed a minimum of 56 days to agree a valuation or suggest an alternative. The date for filing the return cannot be deferred however. To be effective therefore the procedure must work within the time constraints imposed by the deadline for filing the self-assessment return, i.e. 31st January following the end of the year of assessment concerned.
As a result of representations made by the Technical Committee of the Association of Taxation Technicians the Revenue has recently undertaken a review of the effectiveness of this service and as a result proposes to revise its guidance `to emphasise more strongly that priority attention is to be given at all stages in the post-transaction process and that any specific time references are to be treated as maximums rather than minimums or norms.`
The costs involved in agreeing the valuation are not deductible in arriving at the gain.
(b) Post-transaction rulings
In addition, on a written request to one’s tax office, and free of charge, the Revenue will give a post-transaction ruling on the application of tax law to a specific transaction. which must be `unusual`. The application must be made after the transaction in question has completed but can be made even after a return has been filed.
Full details including the circumstances in which the Revenue will not give a ruling and the issues they will not rule on are given in the Revenue’s Code of Practice booklet COP10 at Appendix 2. This procedure could prove useful for example where an item is sold which may qualify as a wasting asset and the taxpayer wishes to place the matter beyond doubt.
Anastasia Tennant is an Assistant Director in the Heritage and Taxation Advisory Service at Christie’s.