Tax on profits
Discussion
Suppose a partnership of market traders had an old watch bought for a nominal sum many years previously which they then managed to sell for say 6 million pounds. Would they have to pay tax on the profit in the year it was sold or might they be able to minimise it? For example treat it as a capital gain.
Alpinestars said:
If the watch was something which was bought as part of the traders' stock, to sell, any profit will be a trading profit and there is no way of "minimising" the profit.
However, the sale of a watch which is not stock, is exempt from tax (capital gains and income tax).
Why would it not be subject to capital gains? I though any asset bought and sold by an individual which makes a profit would be taxed onces its over the allowance? Thats a pure laymans understanding though However, the sale of a watch which is not stock, is exempt from tax (capital gains and income tax).
It depends on the circumstances of how the item was acquired.
As has been mentioned, if the item was purchased as part of the business' normal trading activity i.e. it was a business that bought and sold items such as watches, then any profit on the sale of the watch would be treated as normal trading profit and would therefore be subject to Income Tax and Class 4 NI (like any partnership profit would be).
If the watch was purchased by an individual and had nothing to do with the business - and had been bought with no intention for future sale - then it is more likely that the profit would be treated as a Capital Gain and be subject to Capital Gains Tax rules.
As has been mentioned, if the item was purchased as part of the business' normal trading activity i.e. it was a business that bought and sold items such as watches, then any profit on the sale of the watch would be treated as normal trading profit and would therefore be subject to Income Tax and Class 4 NI (like any partnership profit would be).
If the watch was purchased by an individual and had nothing to do with the business - and had been bought with no intention for future sale - then it is more likely that the profit would be treated as a Capital Gain and be subject to Capital Gains Tax rules.
98elise said:
Why would it not be subject to capital gains? I though any asset bought and sold by an individual which makes a profit would be taxed onces its over the allowance? Thats a pure laymans understanding though
Moveable tangible property like a watch is a chattel for capital gains purposes. If a chattel has a predictable life of less than 50 years, it is exempt from capital gains tax. Watches are treated as chattels by HMRC. It's the same rules that exempt profits on the sale of cars being subject to capital gains tax.
See Ss 44 and 45.
http://www.legislation.gov.uk/ukpga/1992/12/conten...
Edited by Alpinestars on Saturday 27th December 08:21
Alpinestars said:
98elise said:
Why would it not be subject to capital gains? I though any asset bought and sold by an individual which makes a profit would be taxed onces its over the allowance? Thats a pure laymans understanding though
Moveable tangible property like a watch is a chattel for capital gains purposes. If a chattel has a predictable life of less than 50 years, it is exempt from capital gains tax. Watches are treated as chattels by HMRC. It's the same rules that exempt profits on the sale of cars being subject to capital gains tax.
See Ss 44 and 45.
http://www.legislation.gov.uk/ukpga/1992/12/conten...
Edited by Alpinestars on Saturday 27th December 08:21
Eric Mc said:
The fundamental question has not been answered. Was the watch bought as normal trading stock for resale by the seller or was it a watch bought as a personal item or inherited?
'a partnership of market traders had an old watch bought for a nominal sum many years previously'Though whether they intended to resell or keep is anyone's guess; I suggest they will claim whichever version gives the least tax liability!
Simpo Two said:
Except that this watch is 'old' which I assume means more than 50 years since manufacture. You may argue that it was not predicted to last 50 years when made, but since it's now worth £6M, I expect someone will be taking very good care of it from now on!
As I said, HMRC treat watches as wasting chattels. Alpinestars said:
As I said, HMRC treat watches as wasting chattels.
Though you qualified it with 'If a chattel has a predictable life of less than 50 years'So we need to determine whether or not it has a predictable life of less than 50 years - and before that we need to decide whether that means 50 years from when it was made, or from when it was bought, or from now. Furthermore, a watch will last indefinitely - so we presume 50 years applies to its working (tick-tock) life and not its physical life.
Simpo Two said:
Though you qualified it with 'If a chattel has a predictable life of less than 50 years'
So we need to determine whether or not it has a predictable life of less than 50 years - and before that we need to decide whether that means 50 years from when it was made, or from when it was bought, or from now. Furthermore, a watch will last indefinitely - so we presume 50 years applies to its working (tick-tock) life and not its physical life.
I thought I said the general rule was 50 years, but that HMRC treat watches as wasting assets So we need to determine whether or not it has a predictable life of less than 50 years - and before that we need to decide whether that means 50 years from when it was made, or from when it was bought, or from now. Furthermore, a watch will last indefinitely - so we presume 50 years applies to its working (tick-tock) life and not its physical life.
. Have a look at the relevant tcga sections and this http://www.hmrc.gov.uk/manuals/cgmanual/CG76904.ht...
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