CGT is a popular topic in the AF1 exam. It has cropped up on a number of occasions and it’s always worth going through some essential CGT in AF1.
Definition of a chattel
The legal definition of a chattel has recently been changed to cover tangible movable property in general, other than:
- Property used solely or mainly for business purposes, where capital allowances have been, or could have been, claimed
- Property held solely as an investment.
It would therefore include:
- Items of household furniture
- Paintings, antiques, items of crockery and china, plate and silverware
- Lorries and motor cycles
- Items of plant and machinery not permanently fixed to a building.
Be careful with certain assets which may appear to be taxable chattels but which are otherwise covered under CGT exemptions. These include:
- Wasting assets (chattels with a predictable life of 50 years or less), unless used in a business
- Private motor cars
- Coins which are sterling currency.
Disposal of single chattels
There is no taxable gain if the proceeds do not exceed £6,000; joint owners each have a £6,000 limit. Where the proceeds exceed £6,000 but are not more than £15,000, use the steps shown below:
- Antique chair; proceeds of sale = £11,250
- Original cost = £2,000
- Incidental costs of sale = £350
- Gain = £8,900
Now calculate the maximum chargeable gain:
= Excess proceeds over £6,000 (£11,250 – £6,000) = £5,250
= Multiply this by 5/3 (£5,250 x 5/3) = £8,750
This is the maximum chargeable gain. Compare this with the actual gain (£8,900), and use the lower figure, which is £8,750.
If the proceeds are more than £15,000, calculate the chargeable gain in the normal way.
Gifts of Chattels
In accordance with normal principles, a gift is treated as a disposal at open market value at the date of the gift. The donor should be advised to obtain relevant valuations.
Sets of Chattels
A set is a number of chattels that are:
- Similar and complementary to each other, and
- Worth more together than separately
Disposal of assets in a set are treated as separate disposals unless they are sold to the same person or persons who are connected. In these situations, the £6,000 limit applies to all of the set collectively and not to each item individually.
Even if the disposal proceeds of chattels exceeds the £6,000 exemption level, there may not be any tax to pay because the gain, together with all other gains, may be covered wholly or partially by the CGT annual exemption (£11,100 for 2015-16).
In the normal way, investment in chattels is not usually subject to income tax. However, a sequence of gains on disposal may lead to the conclusion that they are being held for trading purposes rather than investment.