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

Answer 27

1. Business or part of it disposed as going concern OR
2. other assets disposed of after cessation of business (if they were used before the cessation)

Question 28

Tangible moveable property

Answer 28

Tangible moveable property may be a wasting asset

1. Wasting assets are exempt from CGT (predictable life of less than 50 years)
2. if a non-wasting asset (ie. antique, goes up in value) they are ONLY exempt if the consideration received is 6 000 or less

Question 29

Private Residence Relief

Answer 29

If Residence is used as dwelling and is the main residence of the tax payer for the period of ownership (last 9 months of ownership ignored) there is NO CGT

Question 30

Damages for personal injury

Answer 30

NO CGT

Question 31

QBA definition

Answer 31

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 32

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

Answer 32

1. sole trader
2. partnership
3. individual partner
4. individual shareholder in their personal company

MUST BE USED IN COURSE OF BUSINESS

Question 33

Time limit for applying rollover relief

Answer 33

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 34

Conditions for rollover relief on incorporation to apply

Answer 34

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 35

How is rollover relief on incorporating a business applied?

Answer 35

• 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

Question 36

A partner is disposal of a part of a whole of a business: Criteria for constituting a qualifying business asset for the purpose of business asset disposal CGT relief

Answer 36

1. throughout the period of two years ending with the date of disposal; or
2. throughout the period of two years ending with the cessation of the business, provided
   that the disposal is within three years after cessation of business.

Question 37

When may company shares qualify for business asset disposal relief:

Answer 37

1. company is a trading company
2. Company is disponer’s personal company (5% or more share capital with 5% or more voting rights) and either / or:
   i. the disponer must be beneficially entitled to at least 5% of the profits available
   for distribution to equity holders and at least 5% of the assets available on a
   winding up; or
   ii. the disponer would be beneficially entitled to at least 5% of the proceeds of sale if
   the whole of the ordinary share capital of the company were disposed of; and
3. disponer is an employee or officer of the company

THESE MUST BE SATISFIED FOR TWO YEARS
- ending on date of disposal or
- ending with date company ceases the trade
- and disposal must be within 3 years of this cessation

Question 38

Cap on business asset disposal relief

Answer 38

1M lifetime cap on qualifying gains
- any gains over 1M will not benefit

Question 39

Timeline for claiming business asset disposal relief: CGT

Answer 39

The taxpayer must claim business asset disposal relief on or before the first anniversary of the 31 January following the tax year in which the qualifying disposal was made. So for a
disposal made in 2024/ 25, the claim must be made by 31 January 2027.

Question 40

Disposals between spouses CGT implications

Answer 40

1. no CGT paid at time of disposal but this is postponed until the receiving spouse disposes (with original purchase price)
2. CGT Annual Exemption, if one spouse uses theirs, they can transfer asset to the other spouse to dispose of, using this spouse’s AE

Question 41

When might share buyback attract CGT rather than income tax

Answer 41

1. buyer is a trading company, shares not listed
2. purpose of buyback is to raise tax to pay IHT or be for benefit of company’s trade
   3 seller must have owned these shares for atleast 5 years
3. seller must be selling all of their shares or reducing their shareholding (by at least 25%) to a max of 30% of the company’s capital

Question 42

When is capital gains tax paid?

Answer 42

Capital gains tax is paid on all gains in the tax year. Generally it is payable on or before 31 January following the end of the tax year, or 30 days from the making of an assessment, if later

Question 43

Paying CGT on the sale of residential property: extra reporting requirements to HMRC

Answer 43

However, a taxpayer is required to submit a provisional calculation of any gains
made from the sale of a residential property and pay any tax due within 60 days following
completion of the sale.

Question 44

When is CGT payable by 10 annual instalments

Answer 44

1. disposal was a gift
2. qualifying asset is land, controlling shareholder in any company or any shareholding in unquoted company and
3. conditions for hold-over relief to apply must not be met

Question 45

Business assets for the purposes of Holdover reliefs on gifts

Answer 45

1. assets used in donor’s trade / their interest (if sole trader or partner)
2. shares in unlisted trading company
3. shares in personal trading company (even if listed)
4. assets owned by shareholder and used by their personal trading companyW

Question 46

Holdover relief on gifts: when will a gift of shares NOT apply as a business asset

Answer 46

1. If the shares are in a listed trading company
2. if the shares are in an unlisted company but the donee is a COMPANY

Question 47

Timeline for applying for holdover relief on gifts (CGT)

Answer 47

The donor AND donee must elect for the relief to apply within four years from
the end of the tax year of the disposal.

Question 48

Investors Relief CGT - individuals

Answer 48

Before 30 October 2024, Investors’ Relief lowered the rate of CGT on qualifying disposals to 10%, subject to a lifetime limit of £10 million of qualifying gains.

• The shares must be newly subscribed ordinary shares which were paid for wholly in cash.
• All of the shares and securities in the company issuing shares must be unlisted at the point shares are issued. Shares listed on the Alternative Investment Market (AIM) are regarded as unlisted.
• The company must be a trading company throughout the time from share issue to disposal.
• individual cannot receive value from company other than qualifying payments
• Shares acquired on or after 17 March 2016
• held for 3 years prior to disposal