3 - CGT Flashcards
CGT
What is the general calculation for CGT gain?
Proceeds from disposal
less original cost of acquisition
less any purchase costs, costs to sell or improvement costs.
CGT
When is a gain deemed to have occured?
Consider spouse transfer, transfer not at arms length, death
If you transfer ownership of an asset, or derive a capital sum from it.
Transfers between spouses are not subject to CGT.
Transfers not at arms length (i.e. paid for at the market value) you must use market value instead (eg a gift).
There is no CGT liability on death.
CGT
What is the impact if a disposal leads to an income tax charge?
The income tax charge on disposal would be considered a cost and therefore you deduct this from the proceeds when calculating the gain.
CGT
What to keep in mind if the transfer results in an IHT charge.
The valulations for IHT and CGT purposes are not necessarily the same.
If the disposal leads to IHT then holdover relief is usually available.
CGT
What if the asset disposal relates to your trade?
Trading income is separate to CGT, if the asset sale is part of your business (i.e. as self employed person) the profits are assessed as trading income (via income tax) not CGT.
“Indicators of trading” are facts suggesting it’s a trade rather than a personal asset sale, including period of ownership, quantity purchased, motive, financing of the transaction and frequency of transactions.
CGT
How does the annual exempt amount work?
The amount is in the tax tables. Deduct this amount (£11,300) from the gains you make in a given year before you pay tax.
You can use the £11,300 against your highest tax rate gain first (so if you sell a rented house and your business in the same year, use the £11,300 on the house to save 28% rather than the business to save 10%).
Be clear that you take this amount off the gains and THEN charge tax on the remainder.
DO NOT calculate tax on the gain and deduct £11,300 from the tax charge!
CGT
What assets are exempt from CGT?
- Principal private residence;
- Private motor vehicles (since their value goes down, not up!);
- National savings certificates & premium bonds;
- Government and corporate bonds (owned by individuals);
- Chattels (generally stuff worth less than £6k).
CGT - Private Residence
What happens if the house you sell wasn’t always your primary residence?
What if you let out part of your primary residence?
Impact of the intention of your purchase
If the property was only your principal residence for some of the time you owned it, you pay CGT on a proportion of the gain (# years not primary residence / # years owned).
Similar proportion method used if you let out part of your home. However there is an exemption on the let part of the home up to the lower of £40k and the gain on the principal residence part of the gain.
If the intention when buying the property was to make a gain on sale then you can’t claim exemptions.
CGT
How are assets acquired pre-1982 treated differently?
If the asset was acquired before 1982 you use the market value at 31/3/82 instead of the cost of purchase.
CGT
How do you calculate the gain if you dispose of part of an asset?
Proceeds of part disposal + original cost of acquisition
divided by
Proceeds of part disposal + Market value of part retained
CGT
How is CGT tax payable calculated?
[Note all rates are in the tax tables]
Deduct capital losses you have made in the same year (you can also carry forward unused losses to future years).
Deduct annual exempt amount.
Net gains that sit within your basic rate tax band (based on your taxable income for income tax) taxed at 10% (18% for non-PPR residential property).
Net gains over basic rate band taxed at 20% (28% for non-PPR residential property).
CGT - Entrepreneurs Relief
Which assets qualify?
Time limits, value limits
Assets used as part of a business (i.e. for self employed people), share of parnership or shares in a company (where you owned >5% and were an employee or director).
Only up to £10m of disposals in your lifetime qualify.
You need to have owned the assets (or shares/share in partnership) for at least one year.
CGT - Investors Relief
What is it?
Investors relief is an extension of entrepreneurs relief.
It has the same 10% rate, but a separate £10m lifetime limit (so you could get £10m of entrepreneurs and £10m of investors in your lifetime).
Applys to investments in unlisted trading companies (shares) where:
- the shares were newly issued to you;
- they were issued after 16/3/16; and
- they were held for at least 3 years (3 year period must start AFTER 6/4/16)
CGT - Holdover Relief
How does it work?
Key exception
When you make a gift usually you have to pay CGT based on the market value when you gave it away.
In some cases (when IHT is paid or for trading assets) you can “holdover” this gain, so you don’t pay any CGT now, but whoever receives the gift eventually will pay CGT based on your original purchase cost.
This is not allowed where assets are given to a trust where the settlor has an interest.
CGT - Business Rollover Relief
What is it?
If you sell some assets which are used in a business and buy other assets for the business, you can defer the gain until you dispose of the new assets.
