Capital gains tax - Chargeable persons and entities

Learning Outcomes

After studying this article, you will be able to identify who is liable to capital gains tax (CGT) in the UK, distinguish between chargeable persons and entities, and apply the correct rules to individuals, partnerships, trustees, and companies. You will also be able to define key terms, recognise common exam pitfalls, and answer SQE1-style questions on CGT liability.

SQE1 Syllabus

For SQE1, you are required to understand the scope of capital gains tax, including who is liable, the relevant entities, and the practical implications for different business structures. In your revision, focus on:

• Identifying chargeable persons and entities for CGT purposes
• The CGT treatment of individuals, partnerships, trustees, and companies
• The distinction between CGT and corporation tax on chargeable gains
• The relevance of residence and domicile for CGT liability
• The practical application of CGT rules to exam scenarios

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following is a chargeable person for UK capital gains tax?
   1. A UK-resident individual
   2. A UK-resident company
   3. A partnership as an entity
   4. A trustee of a UK-resident trust

2. True or false? Companies pay capital gains tax on their chargeable gains.

3. How is capital gains tax liability determined for members of a partnership?

4. What is the effect of residence status on an individual’s liability to UK capital gains tax?

Introduction

Capital gains tax (CGT) is a tax on the profit made when certain assets are disposed of for more than their acquisition cost. For SQE1, it is essential to know who is liable to CGT, how liability is determined for different types of persons and entities, and the distinction between CGT and corporation tax on chargeable gains. This article explains the rules for individuals, partnerships, trustees, and companies, and highlights the key terms and exam points you need to know.

Chargeable Persons and Entities

CGT applies only to certain persons and entities. Understanding who is liable is the first step in any CGT question.

Individuals

Individuals are the most common chargeable persons for CGT. A UK-resident individual is liable to CGT on worldwide gains. Non-residents may be liable to CGT on UK land and property, and in some cases on other UK assets.

Key Term: chargeable person
A person or entity liable to capital gains tax on the disposal of chargeable assets. Includes individuals, partners, trustees, and personal representatives.

Key Term: residence
The status determining whether an individual is taxed on worldwide gains or only on UK assets. UK residents are taxed on worldwide gains; non-residents are taxed on certain UK assets.

Partnerships and LLPs

A partnership is not a separate chargeable person for CGT. Instead, each partner is assessed individually on their share of any gains made by the partnership.

Key Term: partnership (for CGT)
For CGT, a partnership is transparent. Each partner is taxed on their share of the partnership’s gains, not the partnership as an entity.

Key Term: limited liability partnership (LLP)
An LLP is treated as a partnership for CGT purposes. Each member is taxed individually on their share of gains.

Trustees and Personal Representatives

Trustees are chargeable persons for CGT on gains made by the trust. Personal representatives are liable for CGT on disposals made during the administration of a deceased person’s estate.

Key Term: trustee
A person or persons holding property on behalf of others. Trustees are liable to CGT on gains made by the trust.

Key Term: personal representative
A person administering a deceased’s estate. Liable to CGT on disposals made during the administration period.

Companies

Companies do not pay CGT. Instead, they pay corporation tax on chargeable gains.

Key Term: corporation tax on chargeable gains
Companies are subject to corporation tax, not CGT, on gains made from the disposal of chargeable assets.

Non-Resident Persons

Non-residents are generally not liable to UK CGT except in relation to UK land and property, and certain other UK assets. Special rules apply.

Key Term: non-resident
A person not resident in the UK for tax purposes. May be liable to CGT on UK land and property, but not on worldwide gains.

Practical Application: How Liability Arises

CGT liability arises when a chargeable person disposes of a chargeable asset and makes a gain. The rules differ depending on the type of person or entity.

Individuals (Practical Application)

A UK-resident individual is taxed on all gains, wherever the asset is situated. A non-resident is taxed only on UK land and property, and certain other UK assets.

Partnerships and LLPs (Practical Application)

Each partner or member is taxed on their share of the gain, as if they had disposed of their share of the asset directly.

Trustees and Personal Representatives (Practical Application)

Trustees are taxed on gains made by the trust, subject to special rates and allowances. Personal representatives are taxed on gains made during the administration period.

Companies (Practical Application)

Companies pay corporation tax on chargeable gains. The calculation is similar to CGT, but different rates and reliefs apply.

Worked Example 1.1

A UK-resident partnership sells an investment property for a gain of £30,000. There are three equal partners. Who is liable for the tax, and how is it calculated?

Answer: Each partner is taxed individually on £10,000 (one-third of the gain). The partnership itself is not taxed as an entity.

Worked Example 1.2

A UK-resident company sells shares in another company and makes a gain. Is the company liable to CGT or corporation tax?

Answer: The company is liable to corporation tax on the chargeable gain, not CGT.

Exam Warning

For SQE1, do not confuse the treatment of companies and individuals. Companies pay corporation tax on chargeable gains, not CGT. Partnerships are transparent for CGT—each partner is taxed individually.

Residence and Domicile

Residence status is critical for determining CGT liability. Domicile may also be relevant, especially for non-domiciled individuals claiming the remittance basis.

Worked Example 1.3

Sophie is UK-resident and domiciled. She sells a French holiday home for a gain. Is she liable to UK CGT?

Answer: Yes. As a UK-resident, Sophie is liable to UK CGT on worldwide gains, including the French property.

Summary Table: Chargeable Persons and Entities

Key Point Checklist

This article has covered the following key knowledge points:

• The definition of chargeable persons and entities for UK capital gains tax
• Individuals are liable to CGT on worldwide gains if UK-resident
• Partnerships and LLPs are transparent for CGT; partners are taxed individually
• Trustees and personal representatives are chargeable persons for CGT on trust or estate gains
• Companies pay corporation tax on chargeable gains, not CGT
• Residence status determines the scope of CGT liability for individuals
• Non-residents are generally only liable to CGT on UK land and property

Key Terms and Concepts

• chargeable person
• residence
• partnership (for CGT)
• limited liability partnership (LLP)
• trustee
• personal representative
• corporation tax on chargeable gains
• non-resident