I was recently flicking through the extensive record collection that I have accumulated over the last 20 years when I started to feel quite pleased that some of the records that I purchased in the 1990s, (when vinyl was far less popular) are worth a great deal more today. I reminisced about the time that I visited a record shop in Edinburgh and purchased a Joy Division album for £5, a Thin Lizzy LP for £2 and an original Jimi Hendrix record for £40. A quick calculation in my head led me to realise that these three records alone are now worth well over £120, and rising.
Given that I now have over 650 records, I started to consider the capital gains tax (“CGT”) consequences of cashing in now. Personal effects (also known as chattels) are treated differently from other assets for the purposes of CGT.
I have set out the general rules below: –
- Where chattels are sold for less than £6,000, they are exempt from CGT altogether. Given my example above, it would appear that I am safe from the tax man for now. However, it might be a different story if I were to discover the Beatles’ “Please Please Me” first issue LP in boot sale for £1 tomorrow – I will keep on searching!
- Where chattels are sold for more than £6,000, they are subject to the “five-thirds rule”. This is perhaps best explained via an example (but in any event can be fairly complex and if in doubt, legal advice should be sought):
- If I purchase a Wil Malone album for £3,000 and sell it for £7,500, my gain will be subject to CGT because it is being sold for more than £6,000.
- My actual gain is £4,500 (i.e. £7,500 less £3,000)
- However, where I sell a chattel for more than £6,000, the chargeable gain is limited to five-thirds of the excess. (i.e. £7,500 less £6000 is £1,500, multiplied by 5/3 is £2,500)
- CGT is charged on the lower of the actual gain and the chargeable gain (i.e. £2,500 and not £4,500) so the lower figure should be entered onto my tax return.
- Where chattels are sold at a loss for less than £6,000, the allowable loss is restricted by treating the disposal proceeds as £6,000.
A couple of points of interest:
- when chattels are sold as a set they are treated as a single asset so there is no separate £6,000 exemption on each item.
- certain chattels such as cars and those with a lifespan of fewer than 50 years (wasting assets, including clocks, watches and machinery) are exempt.