1.4 Taxation part 2

Question 1

What is subject to Capital Gains Tax on disposal?

Answer 1

Personal property worth more than £6000

Property or land that is not an individuals main home

Individuals main home if it has been let out, used for business or is very large

Sales of shares not held in an ISA

Business assets such as land, buildings, machinery or registered trademarks

Question 2

What is the capital gains allowance?

Answer 2

Also referred to as the annual exempt amount this is the level of gains that can be made in the tax year before CGT becomes payable. This currently stands at £12,300 or £6150 for trusts.

Question 3

Define disposal in relation to Capital Gain Tax

Answer 3

Disposal is usually in the form of the sale of an asset. It can also be the transferring of ownership, gifting or the receipt of compensation for its loss or destruction.

Question 4

What is ‘bed and breakfasting’?

Answer 4

This refers to the sale and then rebuying of a holding to realise a smaller gain which could be claimed within that tax year. Loophole was closed in 1998 and now sales and repurchases of shar3 and unit trusts within 30 days are treated as if the transactions have not taken place.

Question 5

What assets are exempt from

capital Gains Tax?

Answer 5

Main private residence (subject to private residence relief)

Property as the result of death

Ordinary motor vehicles

Personal belongings valued at £6k or less

Items gifted to nation of historical or scientific interest

Foreign currency for personal expenditure

Gilts & qualifying corporate bonds

NS&I products

Winnings from premium bonds or the lottery

ISAs

Gains on life assurance policies disposed of by original owners

Question 6

What happens if a loss is made on disposal of an asset?

Answer 6

The loss can be offset against gains made elsewhere. Firstly, against gains made in the year the loss occurred and then carried forward to future years.

It cannot be carried back to previous years nor can it offset gains below the annual exempt amount.

Question 7

How is CGT calculated?

Answer 7

Costs of purchase / selling can be deducted from price

Costs of improvements (not maintenance or repair) can be treated as part of purchase price

Gains made prior to 1982 are valued at actual purchase price

Ie. Amount of gain - annual exempt amount - offset losses / tax reliefs = taxable gain

Taxable gain + taxable income = rate band

Question 8

What are the CGT rate bands?

Answer 8

Basic - 10%
Other - 20%
8% supplement if gain results from sale of property not subject to private residence relief

Question 9

When is CGT due to be paid?

Answer 9

Payable my January 31st following the tax year the gains were made

Question 10

What is private residence relief?

Answer 10

This exempts an individual from CGT when selling their main residential property. If someone has multiple properties they must nominate one property as their private residence In order to claim this. There are rules that apply to this with reference to use of the property for business purposes or the size of the garden to which full relief can be claimed. Partial relief can be claimed if the property has ever been your main residence and for the last 9 months prior to sale.

Question 11

What is entrepreneurs relief?

Now known as Business Asset Disposal Relief

Answer 11

A lower rate of 10% that is applied to a life time limit of £10m cumulative gains from the disposal of trading businesses and shares in trading companies.

Must generally own at least 5% of the share capital

Question 12

What is roll-over relief?

Answer 12

Roll-over relief may be claimed if business assets that are disposed of are replaced by other business assets. CGT is deferred until final disposal. Replacement asset must be purchased within period of -1 to +3 years of sale of original. Relief can be claimed up to the lower of either gain made or amount reinvested.

Question 13

What is hold-over relief?

Answer 13

This relief is available when a gift of a capital asset is made to another person. The gain is postponed (or held-over) until the recipient disposes of the asset.

Examples include business assets, shares and securities, agricultural property that would attract relief from IHT, assets on which there is an immediate charge to IHT

Question 14

What is Inheritance Tax?

Answer 14

A tax levied on the estate of a deceased person following the death. Tax is charged on the amount exceeding the nil-rate band at the time of death.

Question 15

What is the Nil-Rate band for IHT?

Answer 15

The amount on which no IHT is due (the rate is 0%). Currently stands at £325k per person

Question 16

Explain the transfer of the Nil-Rate band?

Answer 16

Transfers of unused nil-rate bands can be awarded to surviving spouses and civil partners. Transfers are made as a % rather than an amount.

Question 17

What is the residence nil-rate band?

Answer 17

An additional nil-rate applied if part of the estate includes a residence that is being left to a direct descendant (property does not need to be the main residence). Any unused balance (as a %) can be carried forward to the surviving spouse or civil partner. Currently £175k

This tapers down when the value of the estate exceeds £2m at a rate of £1 for every £2 excess

Question 18

What is a potential exempt transfer (PET)?

Answer 18

These are gifts that have been made from a persons estate during their lifetime. Not subject to tax at the time
Of transfer and become fully exempt if the donor survives for 7 years. If they die within 7 years and the value of the estate (including gifts) exceeds the nil-rate band then IHT is due. The tax payable tapers down over the final 4 years.

Question 19

In what order is IHT and the nil-rate band applied?

Answer 19

1) gifts are offset against the general nil rate band first
2) the residence nil rate band and any ‘brought forward’ allowance is set against the estate
3) any remaining or transferable general nil rate band set against remainder of the estate.

Question 20

What is a Chargeable Lifetime Transfer?

Answer 20

Some lifetime gifts (such as those to companies, organisations or trusts) are not potentially exempt transfers but are due immediate tax at a reduced rate of 20% if the exceed the nil-rate band. If die within 7 years any excess IHT due will need to be paid accordingly. Chargeable lifetime transfers are cumulative over the 7 years when assessing nil rate band

Question 21

What gifts / transfers are exempt from IHT?

Answer 21

Transfers between spouses and civil partners

Small gifts up to £250 per recipient each tax year

Donations to charity, political parties or the nation

Wedding gifts up to £1000 (£5000 if from parents and £2500 from grandparents)

Gifts made on regular basis that do not effect donors standard of living

Up to £3000 per year for gifts not covered by other exemptions. Can be carried forward for 1 tax year only.

Question 22

What are the current rates for IHT above the nil rate bands?

Answer 22

40%

Question 23

What is Value Added Tax (VAT)?

Answer 23

VAT is an indirect tax levied at the point of sale on goods and services. Some services are exempt and some attract a VAT rate of 0%.

Businesses must register for VAT if turnover exceeds the minimum threshold. Registration is a choice for those under the threshold. Advantage is that business expenses can be reclaimed. Disadvantage is VAT increased charge to customers and administration charges may apply.

Question 24

What is the difference between stamp duty and stamp duty reserve tax?

Answer 24

Stamp duty is the tax imposed on the documents that transfer financial assets. Payable at a rate of your 0.5% on sales over £1000 and rounded up to the nearest £5.

Stamp duty reserve tax is charged on transfers completed electronically through CREST (an electronic settlement and registration system) at a rate of 0.5% rounded to the nearest penny.

Question 25

What is stamp duty land tax?

Answer 25

This is paid by the purchaser of a property at the current rates (residential bands or 15% flat rate for corporate bodies).

3% supplement applies if it is the purchase of a second property.

Relief is offered to first time
Buyers exempting them on first £300k if property is worth less than £500k

Question 26

What is corporation tax?

Answer 26

Paid by limited companies on their profits. Companies resident in the UK pay on worldwide profits, companies resident elsewhere pay on just Uk profits.

Profits up to £1.5m - pay 9 months after end of relevant accounting period

Profits over £1.5m - quarterly instalments beginning approx. Halfway through accounting period

Question 27

What does the phrase ‘withholding tax’ mean?

Answer 27

Refers to any tax that is levied at source before income is received. Eg. Employees income tax is a withholding tax.

Normally understood to apply to tax levied in a particular country by those non resident in that country. Ensures income does not leave the country without being taxed. Reciprocal tax treaties ensure the same in over 100 countries.