Meg Saksida highlights potential factors to consider in determining whether a disposal has been made for capital gains tax purposes.
Despite capital gains tax (CGT) being incurred as a result of a chargeable ‘disposal’, the word disposal is not defined in the legislation.
In cases where an important word is not defined, HMRC gives the word its ordinary or natural meaning. To dispose of something in day-to-day life means to no longer have possession of that item.
Common types of disposals
(a) Sale
The most common ‘disposal’ for CGT purposes is a sale. It may be an outright sale of an asset. For example, a taxpayer might sell an antique desk; or they might sell only a part of an asset, such as half of a portfolio of shares.
Where a part disposal has been made, there are strict rules as to how the cost of the asset is split, to ensure the correct gain is calculated.
(b) A destruction or loss
The disposal might also be the loss, destruction, dissipation or extinction of an asset. If the asset is a chargeable asset for which a gain would have been chargeable, the loss on this asset is generally allowable. If the asset was lost or otherwise earned no consideration for the disposal, the whole loss would be allowable.
If the asset was insured and insurance proceeds were received, these would be included as the consideration for the disposal in the CGT calculation. If the asset was only damaged rather than being completely destroyed, any sum received in selling the damaged remains would increase this consideration.
For example, a painting insured for £10,000 was destroyed in a fire. If the frame, however, was still intact and was subsequently sold for £500, the proceeds for the asset would total £10,500, being the insurance proceeds and the £500 received for the frame.
(c) Transfers into a settlement
Where property becomes settled into a trust, a disposal of that property has occurred. This happens even if the trust is settlor-interested, such that the donor is effectively giving to themselves.
It was this point that was tested in a recent case Bhikhi v HMRC [2020] UKFTT 243 (TC).
Bhikhi v HMRC
The taxpayer sold a property to a company owned by a relative (who took out a mortgage to purchase it), but the taxpayer continued to receive the rental income from it and paid the mortgage interest with this income. No CGT was declared on the transfer to the company as the taxpayer believed that because only the legal title had been transferred (i.e., he had kept the beneficial interest), an implied or bare trust had been created.
The First-tier Tribunal found that even if there was an implied or bare trust, a chargeable disposal would still have been made, as transfers to a trust are chargeable disposals. However, they found no evidence of any trust. The evidence found was that the property had been disposed through a bona fide contract through which legal title had properly passed to the company of the relative and had hence been correctly registered in that company’s name. A chargeable disposal had indeed been made, for which CGT was due.
Practical tip
A disposal is generally chargeable where the taxpayer no longer has any legal title to the asset, even if it is disposed to family members or a settlement and even if that trust is settlor-interested. Even though transactions with family members are usually made on an informal basis, it is important when relying on these for taxation purposes to set them out with formal documentation.
