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R03 August 2020 > 3 - Capital Gains Tax > Flashcards

3 - Capital Gains Tax Flashcards

1
Q

Is the date of disposal the same as the date the seller receives payment?

A

No, it is when the contract for sale becomes binding on the seller/buyer, money might exchange hands some time after

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2
Q

In what circumstance might an inter-spouse transfer not be exempt from CGT?

A

When the spouses have not lived together during the tax year

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3
Q

How is property treated in terms of shares between spouses?

A

It is always treated jointly in equal shares unless it is held as tenants in common under unequal shares

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4
Q

When can a disposal not at arms length occur?

A

Any disposal with a close connection. The market value is used instead of the actual proceeds. This applies to gifts and sales.

Disposals between unconnected parties can also use market value rather than sale price

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5
Q

What is deferred consideration?

A

When a sale takes place and some of the funds are payable unconditionally on later dates.

If the amount is ascertainable, it must be included in the disposal proceeds. if it is then not received the CGT is recalculated

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6
Q

What might the HMRC agree to if the deferred consideration is more than 18 months after the disposal?

A

They will usually agree to take payments in instalments

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7
Q

What is contingent consideration?

A

Where a sale is made and further payments are subject to certain conditions being satisfied

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8
Q

How does the valuation for CGT and IHT differ?

A

CGT it is the asset that is valued

IHT - it is the loss to the estate that is valued

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9
Q

On death, would the CGT and IHT calculation be different or the same?

A

The same value would be used for CGT that had been used for IHT

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10
Q

What are the indicators or badges of trade that would help decide whether a person is trading and therefore a transaction is a trading transaction or a disposal?

A

The subject matter of the transaction. Where the asset does not yield an ongoing income or give personal enjoyment to its owner

The period of ownership - sale soon after aquisition is an indication of trading

Frequency of similar transactions - repeated of the same subject matter

Work carried out on a property - to make it more marketable or steps taken to find purchasers

Circumstances responsible for the realisation

Motive

Organisation of the activity

Financing of the transaction - i.e. money borrowed to buy and repaid when sold

Method of acquisition - an inheritance or gift is less likely to be trading

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11
Q

What is the exempt amount for Chattels in disposal?

A

£6,000 per person

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12
Q

When a chattel is disposed of, what is the maximum charge?

A

Cannot exceed five-thirds of the excess over £6,000

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13
Q

What might be a wasting asset (tangible movable property) and how are they treated for CGT?

A

An asset such as a boat, if it has a life expectancy of less than 50 years, it is exempt

Note - this does not apply to plant machinery used in business where capital allowances have been claimed. Cars are always exempt regardless of business use.

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14
Q

What are some other examples of exempt disposals?

A

Principle residence
Private motor vehicles
NS and I savings certificates and premium bonds
Government and most corporate bonds
Decorations of valour
Foreign currency for personal use and bank accounts
Debts repaid to the original creditor
Gambling winnings
Compensation for damages
ISA and CTF
VCT’s
Shares under EIS or SEIS
Shares with a value up to £50,000 acquired by an employee under a shareholder agreement pre 1st Dec 2016. (after 16th March 2016 exempt gains are subject to a lifetime limit of £100,000)
Woodlands
Cashbacks by providers of goods and services
Disposals to a charity, housing association, certain national institutions and museums
Assets of national interest
Shares held in a share incentive plan

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15
Q

If a property has not been the main residence throughout ownership, how will the gain be calculated?

A

Total Gain x Period of occupation/total period of ownership

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16
Q

What are the periods of absence that can be ignored when identifying periods of property occupation?

A

Up to a year before moving in once acquired (HMRC may agree to extend by a year)
Any period before 1st April 1982
Up to three years if both preceded and followed by residence and during which no other residence was exempt
The last 9 months of ownership, provided it was used as a main residence for some of the time
Any periods of up to 4 years in total where employment prevented residence if preceded and followed by no other exempt residence
Any periods of absence working abroad, preceded and followed by residence
Any period of live in accommodation where there is no intention to return

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17
Q

What are the rules surrounding election of a main residence?

A

Must be made within 2 years of acquisition of the second residence
Can be changed but not back dated more than two years
HMRC can decide based on the facts which should be treated as the main residence
Married couples or civil partners can only claim for one property at a time
Property owners can make the election if they lived in it at some point while they owned it

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18
Q

What are the exemptions for letting relief?

A

The owner must be in shared occupancy
The gain on the let is exempt up to £40,000
Each owner is entitled, so a joint owner can claim £80,000 of the gain attributable to the gain

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19
Q

What are some of the other extensions to residence relief?

A

The main residence can include land up to half a hectare
Can apply to property sold by a deceased person’s representative if: the property has been occupied by beneficiaries both and before and after death
The beneficiaries are entitled to the whole or substantially all of the sale either absolutely or for lie
Where part of the house is used for business, the exemption does not apply to that part, however there are no restrictions of where that part of the house might be

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20
Q

How would a property gain be calculated?

A

Determine the disposal proceeds
Deduct the acquisition cost
Deduct sale and purchase costs and any enhancement costs
Set off any allowable capital losses, allocating them against gains by setting them against gains at the highest rate first
Deduct the annual exempt amount
Calculate the tax at the appropriate rate

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21
Q

What is the acquisition cost used?

A

Bought on a commercial basis - the purchase price
Gift or otherwise - value at the time of acquisition unless holdover relief claimed, then broadly the donors acquisition cost
If the taxpayer created the asset - any capital expenditure incurred can be deducted

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22
Q

Can losses be carried forward if there are insufficient gains in the current tax year?

A

Yes, until all of the loss is absorbed

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23
Q

What is the time limit on claiming losses

A

Within four years of the end of the tax year in which they were made

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24
Q

Can losses be carried back?

A

Only if the loss arises in which the tax payer has died, further losses can be carried back to previous tax years up to three years

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25
Q

What are clogged losses?

A

Losses on transactions with connected parties on the same transaction, same party

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26
Q

When would a loss need to be reported to HMRC?

A

The disposal proceeds of the asset are more than four times the annual exempt amount
The taxpayer wishes to set the loss off against chargeable gains
Both of the above

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27
Q

If an asset was acquired before 1st April 1982, what deductions can’t be made?

A

Incidental costs of acquisition or enhancement expenditure

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28
Q

What is the formula for part disposal

A

Proceeds of the part disposed/proceeds of the part disposed + market value of part retained x original cost

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29
Q

What is the lifetime limit for qualifying gains under business asset disposal relief & at what rate?

A

£1 million charged at 10%

Set against any outstanding basic rate band before non-qualifying gains

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30
Q

How long does an asset have to be owned for to qualify for business asset disposal relief?

A

Two years

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31
Q

What is business asset relief available for?

A

Disposal of part or whole of a business run by a sole trader
Applies to chargeable gains arising of assets used in the purpose of the business (excluding gains from investments)
Disposal of shares in a trading company where an individual meets a 5% shareholder test and is an employee or director of a company

32
Q

When would business asset disposal relief be available when the 5% qualifying criteria is not met?

A

If as a result of a company raising funds for commercial purposes by issuing new shares - the individual is able to crystallise a gain immediately before the shareholding is diluted

33
Q

What are associated disposals?

A

Disposal of assets owned by an individual but used by their personal trading company or a partnership in which they are a partner and which take place at the same time as the sale of the partnership/company

34
Q

If a company held more than 20% is non-trading assets, what might be the implications when attempting to claim relief?

A

It may fail to qualify

35
Q

When would associated disposal be restricted?

A

If the individual charges rent to the business for the asset

Where an individual or partner transfers their business to a related close company and is also not available to any goodwill transferred

36
Q

What is the rate for Investors relief?

A

10% up to £10 million lifetime limit

37
Q

What are the main aims of Investors relief?

A

Attract new capital into companies

38
Q

What are the guidelines for Investors relief?

A

Shares must newly issued when attracting new capital, being acquired on subscription for new consideration
Shares must be issued by the company after 16th March 2016
Shares must be held for a continuous period of three years on or after 6th April 2016
The investor must not be an employee or a director while owing the shares (excl un-remunerated directors)

39
Q

What is holdover relief?

A

Holding over the gain on disposals of certain assets by way of a gift

40
Q

What are the main categories that qualify for holdover relief?

A

Transfers chargeable to IHT and disposals of trading assets including certain private company shares, gifts into most types of trusts

41
Q

Is any CGT payable at the time if holdover relief is claimed?

A

No, but the acquisition cost to the donee is reduced by the amount of relief. This increases the gain for the donee on subsequent disposal

42
Q

Who would need to claim the relief - the donor or the donee?

A

Both need to claim

43
Q

What happens in the donee, who is resident in the UK at the time of the gift, then ceases to be resident within 6 years?

A

The gain crystallises and tax may be payable by the donee. If they fail to pay, the donor becomes liable.

44
Q

What is the definition of a trading asset?

A

An asset used in the trade of the donor or by the donee’s personal company
Shares or securities of trading companies (provided they are not quoted on a recognised exchange or the donor holds at least 5% of the trading rights)

45
Q

Is holdover relief available for transfers of assets into a trust in which a settlor has an interest?

A

No

They cannot have provided any property for the trust
The settlor still has an interest is they or their spouse can benefit from trust property or can benefit in the future
Holdover relief can be clawed back is the settlor obtains and interest or will benefit in future

46
Q

How long is the clawback period for holdover relief?

A

Six years form the transfer until the end of year assessment

47
Q

What is the eligibility criteria for Business rollover relief?

A

Business must be trading
Assets sold must have been used for trading purposes
The sale price must be reinvested in new assets
The new assets must be bought in a period starting one year before and ending 3 years after disposal

48
Q

Describe rollover relief for an incorporation of a business

A

Relief is given by deducting the gain from the issue price of the shares

The relief defers the chargeable gain until the shares are disposed of by reducing the base cost of the shares by the amount of the gain
All assets (except cash) must be transferred to the new company as a going concern
Part relief can be given
The relief is given without claim, however it is possinle to opt out

49
Q

What is the criteria for rollover relief on EIS shares?

A

The investment must be made within the 12 months before and three years after the disposal
The original gain is deferred until the EIS shares are disposed
Investment may qualify for 30% income tax relief in addition to other reliefs available
It can still qualify for business disposal relief will the ultimate disposal is made

50
Q

What is the difference between investing in EIS shares and SEIS shares?

A

SEIS relief the gain is exempt up to 50% rather than deferred.
The other 50% is reinvested gains is chargeable for CGT
Relief is restricted to £100K of gains each tax year

51
Q

What is the order in which gains are calcuated on shares?

A
  1. Acquisitions on the same day
  2. Acquisitions within the following 30 days
  3. Acquisitions within the share pool
52
Q

How many days must a sale and repurchase of shares be separated by and why to be effective for tax purposes?

A

30 days

To prevent bed and breakfasting

53
Q

How is a bonus issue of shares treated?

A

As if were acquired on the same day as the original holding as there are no acquisition costs

54
Q

How are shares acquired via a script (stock) dividend treated?

A

As a new acquisition

55
Q

If an individual has made a chargeable gain but has not received a tax return to complete, what should they do?

A

Tell the HMRC within six months of the end of the tax year of disposal

56
Q

If a disposal is made towards the end of the tax year, why might it be beneficial to hold advising the HMRC until after the tax year end?

A

As it will defer the payment date for a full year

57
Q

For a UK property disposal, when should a payment be made in repsect of GCT due?

A

Within 30 days of completion of the disposal

58
Q

If a trust has only one trustee that is resident in the Uk, are they liable for GCT?

A

Yes

59
Q

Why might a settlor have a personal liability for CGT on creation of a discretionary trust?

A

As the creation is treated as a disposal of assets by the settlor even if they remain as a trustee or have an interest as a beneficiary

60
Q

When can gains on the creation of a trust be held-over?

A

If the trust was set up after 22nd March 2006

The trust is not settlor-interested - i.e. where the settlor, spouse or minor of the settlor can benefit

61
Q

What relief could be used for trust gains before 5th April 2008?

A

indexation allowance and taper relief

62
Q

If assets from a trust are transferred to a relevant property trust on or after 22nd March 2006, what might it be possible for the settlor to claim?

A

Holdover relief

63
Q

Can holdover relief be claimed for transfers in and out of discretionary trusts, regardless of the date and type of asset?

A

Yes

64
Q

What is the level of CGT exemption for trusts and why might it be reduced?

A

Half the individual exemption - £12,300/2 = £6150

Where more than one trust is held, the exemption is split between the trusts

65
Q

What is the level of exemption for a trust for the disabled?

A

£12,300

66
Q

How are bare trusts treated in terms of CGT?

A

Gains as treated as those of the beneficiary

67
Q

If a bare trust disposes of assets by selling or transferring them to a beneficiary, is there CGT payable?

A

No, as the beneficiary is already absolutely entitled

68
Q

How are gains treated that are set up for vulnerable beneficiaries?

A

10% for investment gains
18% for property gains
20%/20% if the gains take the beneficiary into a higher rate of tax

69
Q

When a life tenant within a interest in possession trust dies, how are they dealt with for CGT?

A

The assets within the trust are revalued at the market value at the date of death, meaning there is no CGT charge on the trustees for any increase in value between acquisition and death, so escape CGT completely.
(except where holdover relief was claimed by the settlor on transferring assets in, the hold over gains would be chargeable to CGT)

70
Q

Which other trusts are treated in the same way as a life tenant with an interest in possession trust?

A

Immediate post death trusts
Trusts for bereaved minors
The death before 18 of a beneficiary of a 18-25 trust
Trusts for vulnerable and disabled trusts

71
Q

For accumulation and maintenance trusts, how are they treated on reaching a specific age (as set by the trust) when the beneficiary becomes entitled to the assets?

A

The trustees are regarded as making a disposal at market value
The trustees may be able to hold over any gain, depending on what is done with the assets
No hold over is available in the beneficiary had a prior right to the income

72
Q

In what circumstances can a settlor transfer over chargeable asset so capital can be held over & what is the exclusion?

A

If the assets are being transferred into a discretionary trust
This does not apply if the receiving trust is a settlor interested trust

73
Q

If the trustees allow a beneficiary to occupy a property belonging to the trust as their main residence, what might the trustees be able to claim?

A

Principle Private Residence exemption from CGT on a later sale of the property

74
Q

Under the Taxation of Chargeable Gains Act 1992, how was PPR extended?

A

To gains accruing to trustees on the disposal of settled property
During ownership, the residence must be a dwelling house occupied as the only main residence of a person entitled to occupy it under the terms of the settlement

75
Q

Is PPR available where holdover relief has been claimed on the transfer of the property to the trust

A

No it is not allowable

76
Q

If the settlor retains an interest in the trust, how are gains calculated?

A

20% unless the asset is residential property that is not the PPR of the beneficiary, then 28% is charged

R03 August 2020 (12 decks)

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