Chattels and Capital Gains Tax explained
Commonly, when dealing with estates that hold a significant number of valuable perosnal items (known as ‘chattels’), the inheritance tax liability should be assessed by having the chattels valued professionally. However, during the administration period of the estate, items can often be sold by the executors to raise funds (for example, to settle inheritance tax, or to distribute to the residuary beneficiaries). In this event, there can be changes to the value of some items and it is the responsibility of the executors to ensure that the correct capital gains tax (CGT) rules are applied to any gains and losses arising on sale and that the correct tax is reported to HMRC within the deadlines.
Summarised below is a high-level note of the chattel’s’ rules for CGT:
Chattels are personal goods other than “money, securities for money or property used solely for business purposes”. Examples of these items include paintings, jewellery, antiques and cars. For Capital gains tax (CGT) purposes they can be categorised as “wasting chattels” and “non-wasting chattels”.
Wasting chattel – has a useful life of no more than 50 years. Wasting chattels are exempt from capital gains tax. Examples include most cars and appliances. races.
Non-wasting chattel – is an item that has a life expectancy of more than 50 years and as such are chargeable to capital gains tax. Examples include fine art, antiques and jewellery.
Gains or losses are calculated by deducting the original cost of the item, plus any associated costs (such as costs related to the sale), from the sale proceeds.
There are special rules for calculating gains and losses on non-wasting chattels, depending on whether the proceeds are more, or less than, £6,000.
- Any chattels which are bought and sold for less than £6,000 are exempt from capital gains tax.
- Any chattels which are bought for more than £6,000, but sold for less than £6,000, will have the loss restricted. This is done by using ‘deemed proceeds’ of £6,000, rather than the actual proceeds.
- Any chattels which are bought for less than £6,000, but sold for more than £6,000, will have the gain restricted. The gain is restricted to the excess proceeds above £6,000, multiplied by 5/3. This is the ‘5/3 rule’. The chargeable gain will be the lower of the actual gain and the restricted gain.
- There are also special rules which apply when disposing of a ‘set’ of chattels, for example, matching ornaments, chess pieces, sets of books. These are usually worth more together as a set, than they are worth individually.
The £6,000 exemption applies to the set if the set is broken up and the pieces are sold individually to the same person or connected persons.
Our Succession and Tax team of experts can advise on both the inheritance tax position and the income tax and CGT position of an estate.
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