3 - Capital Gains Tax (E & F)

Question 1

What is meant by a net gain?

Answer 1

Gains after allowable expenses, losses and annual exempt amount

Question 2

What are the CGT rates for individuals?

Answer 2

If gain falls within basic rate tax band, 10%
If gain falls within higher rate tax band, 20%

Question 3

What is the annual exempt amount for a trust?

Answer 3

£3,000 most of the time

Question 4

What is the reduced tax rate for business asset disposal relief and what is the lifetime limit?

What is charged on gains in excess of the lifetime limit?

Answer 4

10%
Up to a lifetime limit of £1,000,000
20%

Question 5

How long must an asset have been owned for to qualify for business asset disposal relief?

Answer 5

2 years

Question 6

What level of shareholding does an employee or director need to have held, before business asset disposal relief becomes available?

Answer 6

5%

Question 7

If not an employee or director with a 5% shareholding in the business, who else is eligible to claim business asset disposal relief?

Answer 7

Sole trader, but only in respect of chargeable gains arising from the disposal of assets in use for the purpose of the business, not gains from investments.

Question 8

You may be able to pay less Capital Gains Tax when you sell (or ‘dispose of’) all or part of your business. What is the relief known as?

Answer 8

Business asset disposal relief

Question 9

What is an associated disposal for business relief allowance?

Answer 9

Associated disposals are disposals 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 or company.

Question 10

You may be able to claim Gift Hold-Over Relief if you give away business assets (including certain shares) or sell them for less than they’re worth to help the buyer.

Who pays the CGT?

Answer 10

You do not pay Capital Gains Tax when you give away the assets

The person you give them to pays Capital Gains tax (if any is due) when they sell (or ‘dispose of’) them

Question 11

Define a ‘trading asset’ for the purpose of CGT holdover relief.

Answer 11

1. An asset used in the trade of the donor or by the donor’s personal company
2. Shares and securities of trading companies, provided that:

… the shares or securities are not quoted on a recognised stock exchange; or

… the donor holds at least 5% of the voting rights in the company.

Question 12

Can CGT holdover relief be claimed for transfers to a trust where the settlor has an interest?

Answer 12

No

Question 13

CGT holdover relief that has been given on a transfer to a trust (where the settlor had no interest at the time of the transfer) may be clawed back if, in the clawback period, the settlor obtains an interest, or arrangements are put in place under which the settlor will later obtain an interest.

When does the clawback period start?

Answer 13

Immediately after the transfer and;

Ends six years after the end of the year of assessment in which the transfer takes place.

Question 14

Why would a donor claim CGT holdover relief?

Answer 14

So they can avoid paying tax on the capital gain when they gift them or sell them at a reduced rate to another party.

Question 15

Why is CGT holdover relief not available to claim when gifting to a spouse or charitable organisation?

Answer 15

Because they are already exempt from CGT

Question 16

CGT holdover relief is given only if donor and donee jointly claim it. What is the exception?

Answer 16

Where the transfer is to a trust, so only the donor makes the claim.

Question 17

Can you claim CGT holdover relief on gifts to individuals resident outside of the UK?

Answer 17

No

Question 18

What happens to the gain where a UK resident was gifted an asset and CGT holdover relief was claimed, ceased to remain a UK resident within 6 years?

Answer 18

If the donee ceases to be UK resident within six years, the gain crystallises and tax may be payable by the donee.

If the donee fails to pay, the donor becomes liable.

Question 19

CGT holdover relief is available for transfers of shares to a company. True of false?

Answer 19

False, it is not available.

Question 19

A gain does not escape CGT entirely by using a CGT holdover relief. What happens instead?

Answer 19

The gain is transferred to the donee and may become chargeable when the donee disposes of the asset. This is
done by reducing the acquisition cost to the donee by the amount of the held-over gain. Their gain now comprises their own gain from the date of acquisition and the
deferred gains from the gift.

Question 20

When can business rollover relief be claimed?

Answer 20

When businesses (companies and unincorporated), sell assets used in the business, to buy other new assets to use in the business

Question 21

When does a capital gain become realised after claiming business rollover relief?

Answer 21

At disposal of the new assets (although this can be deferred again if acquiring another new asset to replace this one)

Question 22

What 4 conditions must be met for a business to be able to claim business rollover relief?

Answer 22

1. Must be trading
2. Assets sold must have been used for trading purposes
3. Sales price must be used to acquire new assets, also for use in the trade
4. New asset must be bought within a period of 1 year before sale of first asset, and three years after

Question 23

What type of assets can you use business rollover relief for?

Answer 23

1. Land and buildings
2. Fixed plant and machinery
3. Ships and aircraft
4. Goodwill (for individuals)

Question 24

What is an unincorporated business?

Answer 24

Sole trader or partnership (i.e., not a limited company)

Question 25

How does rollover relief work on incorporation of a business?

Answer 25

When an unincorporated business (sole trader or partnership) is transferred to a limited company in exchange for new shares in that company.

When you incorporate a business, you generally transfer the assets of the trade to the business, which would be charged to CGT as if it were a market value disposal, under the connected party rules.

Question 26

Where a mixture of cash and shares are received for the assets when business rollover relief is in place, what is rolled over?

Answer 26

Only the proportion of the gain relating to the value of shares received is rolled over.

Question 27

Does business rollover relief have to be claimed?

Answer 27

If a transfer meets the conditions, the relief is given without claim. However, it is possible to opt out of the relief.

Question 28

To qualify for CGT relief when investing in EIS shares, in which period of time should the investment into the EIS be made?

Answer 28

In the period starting 12 months before and ending 3 years after the disposal subject to CGT.

Question 29

For how long is the gain on the original disposal deferred when claiming CGT relief upon investment into an EIS?

Answer 29

The gain on the original disposal is deferred (never exempt) until the disposal of the EIS shares. The original gain then becomes taxable but the new gains from the EIS investment do not.

Question 30

What CGT relief is available, in addition to income tax relief at 30%, for investment into EIS shares?

Answer 30

10, 18, 20 or 28% (depends on the type of asset disposed of)

Question 31

If the EIS shares are held until death having used the EIS relief, the original gain will always be taxed. True or false?

Answer 31

False, it will never be taxed

Question 32

What is the main way in that reinvestment into SEIS shares, differs to reinvestment into EIS shares, when it comes to CGT relief?

Answer 32

SEIS - 50% of original gain deferred, 50% chargeable to CGT
EIS - 100% of original gain deferred

Question 33

What is the maximum amount in gains available from a reinvestment into SEIS, for relief to be available each tax year?

Answer 33

£200,000

Question 34

Why might an individuals son refuse to agree on a CGT holdover relief claim, where he’s been given shares in his dad’s company for a lot less than they are worth?

Answer 34

Son will be liable to pay the CGT on both the original deferred (heldover) amount, and any new gains since then.