Chattel be taxable… Capital Gains Tax on the Sale of Personal Items
The sale of personal possessions, whether that be at auction or done privately, can have tax implications which are often overlooked.
It is important to be aware of the capital gains tax (CGT) consequences of such transactions, and in particular the rules surrounding the sale of – what the legislation refers to as – ‘chattels’.
The term ‘chattel’ means ‘tangible moveable property’, and is used to describe assets which can be touched and moved. For tax purposes, a chattel will either be a ‘wasting’ or ‘non-wasting’ chattel.
Tax Exemption, CGT & Wasting Chattels
A wasting chattel is an asset with a predicted useful life of less than 50 years, and are exempt for CGT purposes. To name a few examples; racehorses; computers; or pieces of machinery are all considered ‘wasting’ chattels.
To classify an asset as a wasting one implies that the asset has a limited life, and thus depreciates in value over time.
In practice this may not always be the case. For example, HMRC regard both cars and watches as items of machinery – both of which may carry significant value in collectibles markets. This has made the classic car market a lucrative venture and an increasingly viable asset class for those – albeit wealthy – investors looking for alternative investments.
The only instance in which the sale of a wasting chattel would become chargeable to CGT is if the asset was used in a trade (such as plant and machinery) and capital allowances have been, or could have been, claimed.
Tax, CGT & Non-Wasting Chattels
A non-wasting chattel is an asset that will last for more than 50 years, and includes assets such as paintings, antiques and jewellery.
The sale of a non-wasting chattel does have CGT consequences, and the calculation of the capital gains must follow special rules depending on the proceeds/cost of the asset.
These can be summarised into four different methods:
- Firstly, there is the £6,000 rule. This rule states that where both the proceeds and cost of an asset do not exceed £6,000 – a resulting gain on the disposal of the asset is exempt for CGT purposes.
- If an asset is sold with sales proceeds of less than £6,000, but with a base cost greater than £6,000 – the resulting loss is restricted by deeming gross proceeds to be £6,000.
- If an asset is sold with sales proceeds in excess of £6,000, but with a base cost of less than £6,000 – we apply the 5/3rds rule. This application of this rule involves two computations.
The first computation calculates the gain in the normal way, i.e. proceeds less cost. We then do a second computation, this time calculating a gain using the 5/3rds formula as follows:
5/3 x (Gross proceeds – £6,000)
The lower of the two calculations will be the chargeable gain.
- If both the proceeds and cost of the asset exceed £6,000 – the chargeable gain is calculated in the normal way.
A capital gains tax charge will only arise to the extent an individual’s total gains for the tax year exceed the £11,700 annual exemption (for 2018/19).
If you would like advice on how the above may be applicable to you, then please contact us or read more about CGT below…