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Let's get technical: chattels and capital gains tax
Nick Craggs explains what a chattel is and how to calculate capital gains tax on the sale of chattels
Few AAT students will have heard of the word ‘chattel’ until they reach the Personal Tax unit. It isn’t a word you would usually find in the lexicon of the average AAT student. Unless, that is, they live in Bridlington, on the east coast of Yorkshire. The harbour is the location for a sign – which I am sure is the only place you will see the word chattel outside of a taxation text book – which explains that visitors can’t “exhibit, place or maintain any chattel” without the Bridlington Harbour Commissioners’ sanction.
I would be interested to see if any PQ readers have seen ‘chattel’ out in the wild, so to speak (well, not really).
Anyway, what is a chattel? A chattel is defined as a tangible, moveable item – which isn’t very descriptive. Basically, it is anything you can touch other than land and property.
Any gain on a chattel, which is calculated as the proceeds when it is sold, less the cost when it was originally bought, is usually taxed under capital gains tax, using the normal rules of proceeds from sale less cost of purchase.
Chattels exempt from CGT .
However, certain chattels are exempt from capital gains tax; these are mainly cars and wasting chattels. Cars are exempt as they are normally sold for less than they cost, and it stops those who otherwise would not normally do so from completing a tax return just because they have changed their car. Or, if you are cynical, from creating losses they could use against gains! Note that there is no distinction made between classic cars and any other types of car. Wasting chattels are chattels that are not expected to last 50 years; usual examples are racehorses and greyhounds (and arguably some of the boats in Bridlington harbour!).
The rest are subject to the chattel rules, which are based around the magic number of £6,000. There are four different scenarios, which are dependent on whether the proceeds of the disposal and the original cost of the chattel are above or below £6,000. The first and easiest scenario is where the proceeds of the disposal and the original cost of the chattel are below £6,000. In this case, the disposal is exempt. This saves a lot of people having to submit a tax return for making a small gain that would probably be covered by the amount of capital gains they can make tax free each year anyway.
The second scenario is if the proceeds of the disposal and the original cost are both above £6,000. If so, the gain is calculated as normal, which is the proceeds less the original cost.
So, for example, if your great Aunty Mable sold a sideboard for £20,000 which cost her £7,000, her gain would be £13,000. This is simply the proceeds less the original cost.
If you sell an item for less than it originally cost you make a capital loss. However, if the chattel was originally purchased for more than £6,000 and the disposal proceeds are less than the £6,000, then this triggers the third set of rules. Here the proceeds are deemed to be £6,000, no matter what you actually sold the asset for. This will reduce the amount of your loss.
For example, you bought a signed Gareth Gates photo for £9,000. However, since you bought it the value of the photo has fallen, and you sold it for £3,000. The loss for capital gains purposes is not £6,000, it is the deemed proceeds of £6,000 less the original cost of £9,000, resulting in a loss of £3,000.
The final and most complicated scenario is where the proceeds are above £6,000 but the original cost is below £6,000. In this scenario, we may need to restrict the gain. The gain cannot exceed 5/3 of the proceeds less £6,000. If using the normal gains computation, the gain is higher than the restriction, then it is the amount of the restriction which will be taxed.
Saul sold his 1959 Les Paul Standard replica guitar for £10,000; he originally purchased this for £2,000. The gain using the normal computation will be £8,000. However, we need to check to see if the gain is restricted. The restriction will be calculated as 5/3 x (£8,000 – £6,000), which is £3,333. Saul’s gain will therefore be restricted and the chargeable gain will be £3,333 as this is lower than £8,000.
However, if Saul sold his Gibson Flying V guitar, which originally cost him £2,000, for £15,000, the unrestricted gain will be £13,000. He will still need to check to see if he needs to restrict the gain. The restriction will be 5/3 x (£15,000 – £6,000), which is £15,000. This is greater than the gain, so the chargeable gain will be the £13,000 normal gain.
Why don’t you have a go at calculating the gains on the disposals of the following chattels?
• A piano bought for £4,000 and sold for £8,000.
• A signed Kylie LP bought for £4,000 and sold for £14,000.
• An antique mirror bought for £3,000 and sold for £5,000.
• A dinner table bought for £12,000 and sold for £4,000.
You can see me work out the answers at: http://www.firstintuition.co.uk/category/aat/
• Nick Craggs, AAT Distance Learning Manager, First Intuition
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