Capital Gains Manual

CG14300 - Computation: interaction with other taxes: income tax

This page may need to be updated following changes made at Budget 2024.  These changes can only be made after the Finance Bill 2024 has passed into law. 

In general, when the disposal of an asset at a profit or gain gives rise to a tax liability,income tax has priority over Capital Gains Tax (“CGT”). 

Sums chargeable as income 

Under s37, any part of the consideration for disposal of an asset which has either been charged to tax as income, or taken into account in computing income, should be excluded from the consideration for the disposal of the asset in computing the chargeable gain or allowable loss. This exclusion does not apply to: 

• premiums chargeable as property income, see CG70900+ 

• consideration which has been taken into account for capital allowance purposes, see CG15400+. 

• situations where the income in question is not treated as the income of the person making the disposal. Typically this is a case of a settlor interested trust where the income is taxed on the settlor. If, in this situation, the settlor is assessable to both income tax and CGT then relief may be available under s32 TMA70. 

Exclusion of expenditure 

Under s39, any sum which has been deducted in computing income or profits, or would have been so deducted if there had been sufficient income or profits, is not allowable as a deduction for CGT purposes. Special rules apply to expenditure which has qualified for capital allowances or renewals allowances, see CG15410. 

S39(2)is clear that no expenditure of a revenue nature is allowable. It expressly prohibits the allowance of any sum which would have been deducted in computing the profits of a trade, if the asset in question had been a fixed asset in use for the purposes of the trade, see Emmerson v Computer Time International Ltd (in liquidation) 50TC628. 

Example 1 

Mr R buys a picture for £100,000. He pays £5,000 to have it restored and reframed. At a cost of £10,000 he equips a room with controlled temperature and humidity for the preservation of the picture and has it fitted with suitable security devices. If Mr R then disposes of the picture, in computing the chargeable gain or allowable loss on the disposal: 

• the cost of restoring and reframing the picture is allowable expenditure 

• the cost of equipping the room (although capital expenditure incurred solely for the purpose of preserving the picture) is not allowable expenditure because it is not incurred on the picture – it was incurred on the building (which is part of a different asset) 

• the cost of heating and lighting the room is revenue expenditure and consequently not allowable (notwithstanding that it is in connection with the ownership of the picture). 

Example 2 

In 2018, Miss S buys a cottage which is not her main residence and incurs £20,000 in making good dilapidations. In 2020, she has the cottage rewired at a cost of £3,000 and has it redecorated throughout at a cost of £1,900. In 2022, she adds a garage at a cost of £4,000 and, in 2024, sells the whole asset. 

In the computation of the chargeable gain or allowable loss on disposal, the allowable expenses are: 

• the cost of acquisition 

• costs incidental to disposal 

• £20,000 spent in making good dilapidations 

• the £4,000 cost of the garage. 

The cost of rewiring and decorating is not allowable, because if the cottage had been a fixed asset used for the purposes of a trade, this would not have been capital expenditure. 

Income or profits not chargeable to Income Tax 

S52(2) and s52(3) set out that for CGT purposes, sums taken into account as receipts or as expenditure for income tax purposes include sums which would be so taken into account but for the fact that any profits or gains of a trade, profession, employment or vocation are not chargeable to income tax, or that losses are not allowable for those purposes. 

Income or profits charged or chargeable to tax include income or profits taxed or taxable by deduction at source, even if tax is not in fact deducted on payment. 

Payments on retirement or removal from office or employment – The £30,000 threshold 

Where a lump sum payment is chargeable to tax under employment income by virtue of s401 ITEPA03, see EIM13000+, the £30,000 threshold, which is not charged to employment income, is regarded as ‘money .... taken into account as a receipt in computing income’within s37(1) . It is therefore not chargeable to CGT as a gain arising from the disposal of a right under a contract of service. 

Transactions in land 

The following rules apply for transactions in land from 5 July 2016. Please see BIM60300for advice on the transactions in land rules on or before 4 July 2016.  

Where an agreement for the sale of 

• land, or 

• an interest in land, or 

• property deriving its value from land, for example shares in a property owning company 

provides for additional consideration to be received on the happening of some future event, it is necessary to consider whether the transaction creates a liability under the transactions in land rules, see BIM60510. 

Generally, where the transactions in land rules apply, any ‘gains’ are chargeable to profits as trading income. 

There is an exemption for any gains which are attributable to the period before the intention to develop is formed, see s517L ITA07 or s356OL CTA10, whilst the land functioned as a capital asset, see BIM60650. 

 

In such cases, you must establish the ‘first intention date’.The ‘first intention date’ is the date at which it was first intended that the land would be developed or sold for the purpose of subsequent development.The date is a matter of fact which should be established and, if possible, agreed with the customer. 

The value of the land at the ‘first intention date’ should be established by reference to the Valuation Office Agency (for land in England, Wales or Scotland) or the Land & Property Services Northern Ireland (for land in Northern Ireland) or Shares & Assets Valuation (for land located elsewhere).The process for obtaining valuations and guidance on what to do if the customer does not accept a valuation is set out at CG74000C. 

Where the amount of consideration paid on the initial sale is less than the market value determined for the ‘first intention date’, the consideration that should be brought into account for the disposal should be the market value as determined on the ‘first intention date’.In these cases, there is no need to determine the value of the right to deferred consideration. 

Example 3 

Mr S sells a piece of land to a developer in September 2020.He had previously farmed the land and the original cost of the land was £100,000. 

He receives £1 million on completion of the contract and the right to a further sum dependent on the profits made when the developer sells the land after redevelopment (this amount is unascertainable deferred consideration). 

Following redevelopment, Mr S receives a further £1.5m in April 2024.It is accepted that the transaction in land provisions apply and that the ‘first intention date’ was the date of contract in September 2020. 

The Valuation Office Agency states that the value of the land in September 2020 was £1.4 million.This figure is accepted by Mr S as being the value of the land when the intention to develop it was first formed. 

The amount chargeable to CGT on the disposal in September 2020 is: 

= Consideration (market value at September 2020) - Original cost 

= £1.4 million - £100,000 

= £1.3 million 

The total amount of consideration received (£2.5 million) less the amount of consideration exempted as taken into account for the purposes of chargeable gains (£1.4 million) will be treated as trading income within the transactions in land rules.This amount is excluded from the computation of chargeable gains by virtue of s37(1). 

Sale of income for lump sum 

A capital sum received by an individual in respect of the sale or relinquishment of income to be derived from his or her personal activities may fall to be treated as earned income chargeable under s777 ITA07 onwards, see BIM100370+. Where this applies, the capital sum is not also to be charged to CGT. 

The individual relinquishing the income from his or her personal activities remains chargeable in respect of the capital sum even if that sum is receivable by some other person. In such cases, provided the tax charged has been paid, the person receiving the capital sum is to be treated as having been charged to that tax and, therefore, is not to be charged to CGT in respect of the capital sum. 

Finance leases 

There are special capital gains rules concerning finance leases in Part 21 CTA10, see BLM70000+. The key aim of the provisions in Part 21 CTA10 is to tax as income the ‘interest’earnings of finance lessors which are shown as earnings in the commercial accounts. In certain circumstances these rules may operate to reduce the capital gains consideration. In addition they can modify the general rule in s37 dealing with the exclusion from capital gains consideration of sums chargeable as income.  

Alternative Finance arrangements 

An alternative finance arrangement can be used in place of a conventional loan or mortgage or to provide a return to a customer depositing money in a bank.Although the arrangements are constructed so as not to involve interest, returns under alternative finance arrangements may be treated for UK tax purposes as if they were interest, seeBIM45780+ and CFM44000+. 

Except where the consideration for a purchase or sale of an asset is to be taken to be an amount other than the actual consideration, the effective or alternative finance return is to be excluded for the purposes of TCGA92 from the consideration for the sale and purchase of the asset, see s151H – s151Y. 

Value Added Tax (“VAT”)Acquisitions 

Where the asset is acquired as an asset of a trade and the VATincurred on it is part of the trader’s deductible ‘input tax’, see BIM31520, the cost of the asset for capital gains purposes should be the cost exclusive of VAT. Otherwise, the cost of the asset for CGT purposes should be the cost inclusive of any VAT incurredon the purchase. 

In some circumstances, e.g. the Capital Goods Scheme, the VAT is adjusted during the period of ownership of the asset.Where this applies only the adjusted amount of VAT should be included in the cost of the asset for capital gainspurposes. 

VAT Disposals 

Where VAT is charged on the disposal of a chargeable asset, the gain is to be computed by reference to the proceeds of disposal exclusive of VAT. If VAT is suffered on the expenses of disposal and this is available for set-off in the vendor’s VAT account, the expense exclusive of VAT is to be deducted in computing the gain. If no set-off is available, the expense inclusive of VAT is to be allowed. 

Disguised interest 

Income tax is charged on the return produced from arrangements that give rise to an amount that is economically equivalent to interest without constituting interest in legal form,see SAIM2710+. 

It is possible that the arrangements may involve a disposal or disposals on which a chargeable gain may accrue.S37(2A) and s39(3A) make it clear that capital gains computations are unaffected by amountswhich are, or are taken into account in computing, disguised interest. 

Where Income Tax is charged on a disguised interest return, s381D ITTOIA05, see SAIM2790, protects against double taxation and permits a just and reasonable adjustment of any other tax, including CGT, charged in relation to that disguised interest.