United Kingdom- Note on Taxation Under the Head Capital Gains and Inheritance Tax

Contents
Introduction.......................................................................................................................................2
Objective of Note............................................................................................................................2
Analysis..............................................................................................................................................2
Adam Smith- Four Cannon of Taxation...................................................................................2
Capital Gain Taxes..........................................................................................................................3
Inheritance Taxes...........................................................................................................................3
Discussion on CGT and IHT..........................................................................................................3
How to minimise inheritance tax...............................................................................................4
Conclusion.........................................................................................................................................4
References........................................................................................................................................5

United Kingdom- Note on Taxation under the Head Capital Gains and Inheritance
Tax
Introduction
United Kingdom tax codes is one of the largest tax codes in the word
encompassing various taxes like property tax, capital gain tax, income tax,
inheritance tax, Value Added Tax etc. The taxation system in UK is progressive
i.e. it is assumed that higher earning individual shall pay higher tax to the
government. The tax year in UK starts from 06th April and ends on 05th April.
Objective of Note
The current note seeks to analyse the two tax regimes of UK especially
inheritance tax and capital gain tax from the purview of Adam Smith four cannon
of taxation and discuss about the fairness of tax regime.
Analysis
For becoming a tax resident in UK, one needs to satisfy any of the following three
criteria:
(a) Live in United Kingdom for most of the year;
(b) Buy a house in United Kingdom;
(c) Work in United Kingdom.
Since, Sylvia Dimitri, a foreign property investor is going to relocate her primary
residence to UK, the conditions stated above shall be satisfied and she shall be
declared as tax resident of UK. (Expatica, 2019)
Adam Smith- Four Cannon of Taxation
The four cannons of taxation as propagated by Mr. Smith in his book Wealth of
Nations (1776) has been propagated as under:
(a) Canon of Equality: Under the said cannon, Mr. Smith meant that every tax
resident/ subject of the country shall contribute towards the support of the
government as nearly as possible to the proportion of their abilities. There
are two interpretation to the term equality:
(i) Equal taxes being borne by all which is gross unjust as everyone cannot
bear the burden;
(ii) Equality means just implying that broadest shoulder must bear the
heaviest burden.
(b) Canon of Certainty: The tax burden on each tax individual shall be certain
and not arbitrary. Under the said principle, Mr. Smith meant that the time of
payment, amount to be paid must me clear for a contributor. Further, the
canon also states for clarity in regard to method of payment of the due
taxes;
(c) Canon of Convenience: The third canon states that the way and timing of
levy of tax shall be in such a manner that it shall be convenient for one to
pay it. For instance, collection of land revenue after the harvest is a sheer

example of convenience as farmers would have money that time to disburse
the tax.
(d) Canon of Economy: The fourth canon of taxation implies that the cost of
collection of tax should be as economical as possible. Thus, the cost on
collection of taxation shall not be such high to subdue the tax collected.
Thus, he meant wise tax collection.
Other canons encompass canon of productivity, canon of elasticity, canon of
simplicity, canon of variety and canon of flexibility.
Capital Gain Taxes
In terms of Taxation of Chargeable Gains Act, 1992, gains earned by an
individual/company which is domiciled in United Kingdom shall form part of his/
her taxable profits regardless of the location of the property. Under the said
regime, the liability of taxation arises when the property is disposed of and the
Capital Gain Tax event crystallises. Further, the incidence of taxation shall arise
on the person disposing the asset (subject to relative exception). (Wilson, 2019).
Further, for non-resident only UK based asset is taxed.
The method of computation of capital gain under the regime includes reduction
of cost from the sale price including any cost incurred in buying and selling the
asset. Further, an individual is given a tax-free personal allowance up to Sterling
12,500 on the capital gain as computed above. (Deloitte Touche Tohmatsu
Limited, 2019)
Inheritance Taxes
Under the UK taxation regime, Inheritance tax is levied on transfer of asset on
death, certain gifts made within the period of seven years of death and some
lifetime transfer of assets. Inheritance tax is levied on transfer of property in
excess of Sterling 325,000 at the rate of 40% (20% for certain lifetime transfers).
The incidence of tax under the regime generally arise on the transfer within the
period as stipulated above. Also, the tax liability is generally in the hands of
recipient of such asset. For Non-UK domiciled individual, only UK property is
subject to inheritance tax.
Further, transfer between spouse is exempt from tax.
Discussion on CGT and IHT
Capital Gain Tax promote equality among investors as it is tax on the profit part
when an assets are sold. For instance, people who are making gain of 1 million
pound a year will pay generally more tax as compared to individuals who are
making gain of only 15000 pound per year, Further, CGT is also considered to be
reducing inequality of wealth as the tax structure is progressive tax system. This
tax is also considered as fair due to its involvement of various exempt assets, it
includes things such as car and personal possessions which is worth up to 6000

pounds. If these assets were taxed than the wealthy person would have been
less affected as compared to relatively less well off. Therefore, with all these
exemptions provided by the UK government the capital gains tax is considered
to be reasonable and appropriate.
Further, the CGT tax is in alignment with canon of taxation as one can easily
compute his CGT liability and there is a clarity under UK tax law when to pay
such taxes. So the tax payment of such taxes shall is in within the canon of
taxation.
Inheritance Tax is that it motivates contributions towards charitable institutions
as the donations towards charitable institutions are exempt from tax and this
also reduce the rate of tax paid. If the inheritance tax is abolished than the
motivation of contribution towards charitable organisation will fall. This tax
system has the additional benefit that this tax is in line with the equity principle
were in a person is taxed according to their ability to pay as such an introduction
by Adam Smith in the year 1776.If any estate is valued less than 325000 pound
it pays no tax .This inheritance form of tax reduce the inequality through the
redistribution of wealth and income. (UK Essays, 2019)
Further, the CGT tax is in alignment with canon of taxation as one can easily
compute his inheritance tax liability on the basis of bequest and clear guidelines
when to pay such taxes. So the tax payment of such taxes shall is in within the
canon of taxation.
How to minimise inheritance tax
Inheritance Tax is a tax on property, money and possessions of someone who is
died. No inheritance tax shall be charged if either the value of the estate is below
325000 pound and if everything is left above 325000 pounds to your spouse,
civil partner, charity or any community sports club.
If the home is passed on to children which includes adopted, step children and
any grandchildren the threshold limit for the same can be increased to pound
475000.
If the person is married or in civil partnership and the worth of estate is less than
the threshold limit than any unused threshold left can be added to the partner’s
threshold when one person die. The limit of the same threshold can be as much
as pound 950000.
Generally, the rate of tax is 40 percent which is generally charged above the
threshold. The above same can be explained with the help of an example.
If the worth of an estate is pound 600000 and the tax-free threshold is pound
325000.Than the inheritance tax shall be charged on pound 275000 @ 40%
(600000-325000).
The inheritance tax can also be paid at a lower rate of 36% if the person leaves
10% or more of the net value of assets to charity in their will.
Gifts given to other while one is alive may be taxed after one’s death. It also
depends on the time when such gift is passed on.

Business Relief also allows some assets to be passed on free of tax or with a
reduced rate of tax.
One of the easiest way to reduce the inheritance tax for Sylvia Dimitri is to make
regular gifts during her life time .There is an annual gift allowance of pound 250,
which can be given to as many people as one person want with triggering an
inheritance tax charge . One time annual gift can also be made of pound 3000
and one tax free wedding gifts of pound to ones children and pound 2500 to
ones grandchildren can also be given.
Sylvia Dimitri can also make a regular contributions from her excess
income .This contribution is like excess earning that are not used as an expense
for living purpose and would not cause a detriment to the standard of living if it
is given away. The same shall be proven to the department .
Slyvia Dimitri, a foreign property investor can give away more than the annual
limits mentioned above but the survival for at least another seven years for
inheritance tax to be exempt is necessary. (THE FINANCIAL TIMES LTD , 2019)
Further, she can also leave residential property to her descendant without levy of
taxes.
Conclusion
On detail perusal of the above, it may be seen that levy of taxes both inheritance
and capital gain tax is fair from the view point of the government as it provides
necessary revenue to the exchequer. However, when viewed from the point of
investor, levy of inheritance tax is not fair as transferring of assets to near and
dear ones without any sale consideration receipt is not fair. However, to negate
the unfairness necessary exemption and reliefs are given to make it fair and levy
tax on the rich section of the society who can afford to pay the same.
On the basis of above, it may be concluded that levy of both taxes is fair within
the canon of taxation.

References
Deloitte Touche Tohmatsu Limited, 2019. International Tax. [Online]
Available at: https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-
unitedkingdomhighlights-2019.pdf
[Accessed 12 February 2020].
Expatica, 2019. A complete guide to the UK tax system. [Online]
Available at: https://www.expatica.com/uk/finance/taxes/a-complete-guide-to-the-uk-tax-system-
758254/
[Accessed 12 February 2020].
THE FINANCIAL TIMES LTD , 2019. How to minimise UK inheritance tax. [Online]
Available at: https://www.ft.com/content/0c0aa3b8-ed66-11e2-8d7c-00144feabdc0
[Accessed 16 February 2020].
UK Essays, 2019. Capital Gains Tax And Inheritance Tax Economics Essay. [Online]
Available at: https://www.ukessays.com/essays/economics/capital-gains-tax-and-inheritance-tax-
economics-essay.php
[Accessed 12 February 2020].
Wilson, T., 2019. Capital gains tax allowances and rates. [Online]
Available at: https://www.which.co.uk/money/tax/capital-gains-tax/capital-gains-tax-allowances-
and-rates-a0muq0c65cd7
[Accessed 12 February 2020].