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Capital gains tax explained

Simon Gray provides an overview of capital gains tax and how recent changes may impact on GPs.

Capital gains tax will most frequently be applicable to GP partners who own a share in the surgery premises
Capital gains tax will most frequently be applicable to GP partners who own a share in the surgery premises

What is capital gains tax (CGT)?
CGT is a tax on the sale of certain assets, known as ‘chargeable assets’. Not all assets are subject to CGT, for example gains on motor vehicles are generally exempt, as is the gain you make when you sell your main residence.

A capital gain is calculated by subtracting the purchase price of the asset from the sales proceeds. From this you can then deduct costs of both purchase and sale (i.e. legal fees), which has the effect of reducing the gain. Each individual can also deduct an ‘annual allowance’ which for 2011/12 is £10,600. The resulting figure is then subject to CGT.

There are currently three rates of CGT:

1. 18% if the individual is a basic rate taxpayer and the gain when added to taxable income keeps the taxpayer in the basic rate band.

2. 28% for higher rate taxpayers or when gains arising push the taxpayer into the higher rate band.

3. A special 10% rate of CGT known as ‘Entrepreneurs Relief’, which is applicable if certain conditions apply (see below).

Recent changes
For many years the rate of CGT very much depended on how long you held the asset at the point of sale. Broadly, the longer you owned the asset the less CGT you paid when it was eventually sold. All such rules were abolished in 2007 and instead a new flat rate was introduced regardless of length of ownership. More recently, several flat rates have been introduced resulting in the three that we have now.

Entrepreneurs relief (ER)
With ER resulting in a low rate of CGT of only 10%, obviously this is the rate that all taxpayers with capital gains would prefer to have to pay, however it only applies in limited circumstances.

Generally, it applies when a business as a whole is sold, or when a partner retires, rather than when individual assets within a continuing business are sold. When ER does apply, each individual has a ‘lifetime ER limit’ which the government has recently increased to £10 million, which will be especially attractive to serial entrepreneurs and those who make frequent sales of chargeable assets.

This means that once you have paid 10% CGT on more than £10m worth of capital gains you have to resort back to the two default CGT rates of either 18% or 28%, depending on your other income.

GPs and CGT
Goodwill is subject to CGT; however for most GPs this won’t be relevant, unless some or all of their non-NHS contract activities are held in a separate entity to that of the main NHS contract.

CGT will most frequently be applicable to partners who own a share in the surgery premises. The important thing to remember is that in order for the 10% CGT rate to apply (instead of the 18% or 28% rate) the building must be sold in conjunction with the partner retiring from the partnership.

Thankfully, the rules are somewhat flexible in that a retiring partner will normally have up to three years from the date of leaving the practice to sell his share in the surgery and still only be taxed at 10%. For continuing partners who dispose of fractional shares in surgery premises to incoming partners, ER won’t apply.

  • Simon Gray is a tax partner with specialist medical accountants Henton & Co LLP. www.hentons.com

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