10. Capital Gains Tax

Question 1

Four categories of ‘chargeable person’

Answer 1

1. individuals (in person capacity or as sole traders)
2. PRs when they dispose of assets
3. partners, when partners dispose of a chargeable asset. Each is charged separately for their proportion of the gain.
4. trustees, on the disposal of a chargeable asset from a trust fund

Question 2

Definition of a chargeable asset

Answer 2

all forms of property, including debts, options and incorporeal property (legal right in property).

Question 3

What is NOT included as a chargeable asset?

Answer 3

Sterling

Question 4

Tax rates for residential property (not main address)

Answer 4

If the chargeable asset is residential property which is not the taxpayer’s main residence, the gains are subject to a surcharge of 8% for basic rate taxpayers and 4% for higher rate taxpayers
- any gains which are below the basic rate threshold are taxed at 18% (ie the normal rate of 10% plus the 8% surcharge) and any gains which exceed the basic rate threshold are taxed at 24%, not 20%.

Question 5

Capital Gains Tax Rates

Answer 5

0-37 700: 10%
37 001+: 20%

Question 6

If gains qualify for business asset disposal relief, what rate will they be taxed at (if at all)?

Answer 6

Any gains qualifying for business asset disposal relief are taxed at 10%, regardless of taxpayer’s income

• If a business has gains qualifying for asset disposal relief and other gains that do not qualify: business asset disposal relief gains (taxed at 10%) will be added to income first, so other gains treated as top slice of income (and more likely to be taxed at 20% and 24% on residential property)

Question 7

Tax rate for trustees and PRs

Answer 7

Gains made by trustees and PRs are all taxed at 20%, or, for residential property, 24%.

Question 8

Is disposing of part of an asset still chargeable to CGT?

Answer 8

Yes

Question 9

Step 2: Calculating the Gain

Basic Formula

Answer 9

Consideration for sale (or asset’s market value if asset is given away) less initial expenditure and subsequent expenditure

Question 10

Relief on replacement of business assets: Definition and Requirements

Answer 10

1. This relief enables sole traders and partners to sell certain assets (‘qualifying business assets’) without paying CGT, provided the proceeds of sale are invested in other qualifying business assets. (charge of CGT postponed)
2. If disposed of by partner or individual shareholder, must have been an asset in use in the relevant business

Question 11

Relief on replacement of business assets: when does a shareholder with a QBA qualify for this?

Answer 11

Either
1. Shareholder owns the asset used in the company’s trade
2. Shareholder’s shares are such that the company is their ‘personal company’ (def. follows)

Question 12

Relief on replacement of business assets: time limits for application

Answer 12

The taxpayer must acquire the replacement asset within one year before or three years after the disposal of the original asset, unless HMRC allows the taxpayer an extended time period to claim.

Question 13

Tax rate for residential property

Answer 13

General Rule: If the chargeable asset is residential property which is not the taxpayer’s main residence, the gains are subject to a surcharge of 8% for basic rate taxpayers and 4% for higher rate taxpayers
- gains below basic rate: 18%
- gains exceeding basic rateL 24%

Question 14

Tax rate for business asset disposal relief

Answer 14

General Rule: Any gains qualifying for business asset disposal relief are taxed at 10%, regardless of taxpayer’s income
- If a business has gains qualifying for asset disposal relief and other gains that do not qualify: business asset disposal relief gains (taxed at 10%) will be added to income first, so other gains treated as top slice of income (and more likely to be taxed at 20% and 24% on residential property)

Question 15

Tax rates for trustees / PRs

Answer 15

Gains made by trustees and PRs are all taxed at 20%, or, for residential property, 24%.

Question 16

If an asset is gifted, not sold, now will the value be determined by HMRC for the purposes of CGT?

Answer 16

If a gift is made, sale price cannot be used so HMRC uses market value of asset at time of the gift (not consideration received)

Question 17

Is disposing of part of an asset chargeable to CGT?

Answer 17

Yes

Question 18

When someone dies, how are the gains they made throughout their lives taxed

Answer 18

General Rule: When someone dies, there is no disposal (so no charge to CGT), PRs deemed to acquire deceased’s assets at the market value at the date of death (probate value)

• So gains accrued during life are never charged to tax but inheritance tax must be payable

Question 19

Calculating the Gain: Process

Answer 19

1. Start with consideration for sale and subtract any of the following incurred by taxpayer
   a. initial expenditure
   b. subsequent expenditure
   c. incidental costs of disposal
   d. indexation

Question 20

Initial expenditure DEF

Answer 20

• cost price of asset (or market value / probate value)
• any incidental costs of acquisition (conveyancing fees, legal fees, stamp duty)
• any expenditure wholly and exclusively incurred in providing the asset (eg. cost of building)

Question 21

Subsequent expenditure

Answer 21

Expenditure wholly and exclusively incurred in establishing, preserving or defending title to asset (eg. legal fees to resolve dispute regarding title to property) - or enhancing its value (but cost of normal maintenance, repairs and insurance NOT deductible)

Question 22

Incidental costs of disposal

Answer 22

including legal fees of sale and estate agent’s fees or commission

Question 23

Indexation

Answer 23

1982 indexation allowance removes inflationary gains from CGT calculation, for assets owned for any period between 31 March 1982 and 5 April 1998 (removed from April 2008)
- To calculate, apply to initial and subsequent expenditure the percentage increase in the Retail Prices Index from the date the expenditure was incurred to the date of disposal of the asset

Question 24

Relief on replacement of business assets (rollover relief)

Answer 24

This relief enables sole traders and partners to sell certain assets (‘qualifying business assets’) without paying CGT, provided the proceeds of sale are invested in other qualifying business assets. The seller will have to pay tax eventually, but the charge to CGT is postponed until the seller disposes of the new asset(s).

Question 25

Rollover relief on incorporation of a business

Answer 25

Postpones payment of CGT when an individual sells their interest in an unincorporated business to a company
- CGT payable when individual disposes of the shares

Question 26

Hold-over relief on gifts

Answer 26

Allows an individual to make a gift of certain types of business asset or sell them at undervalue without paying CGT. If the donee disposes of asset, they are charged tax on their own gain and donor’s gain

Question 27

Business asset disposal relief: Qualifying business disposal for a sole trader / partnership

Question 28

Tangible moveable property

Question 29

Private Residence Relief

Question 30

Damages for personal injury

Question 32

QBA definition

Answer 32

Land, buildings and goodwill and others used in trade of business (rather than held as investment). Plant and machinery are QBA but sale usually results in a loss so this is not relevant.

Question 33

Who must the QBA be owned by to take advantage of rollover relief

Answer 33

1. sole trader
2. partnership
3. individual partner
4. individual shareholder
5. shareholder owns shares in personal company

MUST BE USED IN COURSE OF BUSINESS

Question 34

Time limit for applying rollover relief

Answer 34

The taxpayer must acquire the replacement asset within one year before or three years after the disposal of the original asset, unless HMRC allows the taxpayer an extended time period to claim.

Question 35

Conditions for rollover relief on incorporation to apply

Answer 35

1. Business must be transferred as a ‘going concern’ (carried on as same business by different owner)
2. Consideration must all be in shares issued by the company (if only a certain %, only that % can be rolled over)
3. Business must be transferred with all of its assets ignoring cash (if taxpayer trains any assets like premises, relief does not apply)

Question 36

How is rollover relief on incorporating a business applied?

Answer 36

• The gain is rolled over by notionally deducting it from the cost of acquisition of the new shares
• HMRC automatically applies it unless taxpayer opts out
• Annual exemption lost if they apply rollover relief on incorporation