4. Capital Gains Tax

Question 1

What are two types of assets which are exempt from CGT?

Answer 1

1. Wasting chattels
2. Non-wasting assets worth less than £6,000

Question 2

If an individual transfers an asset to their spouse, at what value is the spouse deemed to have acquired the asset at?

Answer 2

At the same cost as the donor spouse

Question 3

What are the four reliefs available when calculating gains?

Answer 3

1. Private Residence Relief
2. Business Asset Disposal Relief
3. Hold Over (Gift) Relief
4. Business Assets Rollover Relief

Question 4

What are the conditions that must be satisfied to qualify for Business Asset Disposal Relief?

Answer 4

1. Business is trading
2. Owner of at least 5% ordinary voting shares and is an officer/employee
3. Owned at least two years immediately before disposal.
4. Not exceeded lifetime limit of £1 million

Question 5

What is Hold Over (Gift) Relief?

Answer 5

Where an individual disposes of a business asset by giving it away, but donor and recipient agree to defer any gain on to the recipient, who when they dispose of the asset, will be treated as acquiring the gift at the donor’s cost basis

Question 6

When is Business Assets Roll-Over relief available?

Answer 6

Where a sole trader or partner disposes of a qualifying business asset and reinvests the proceeds in other qualifying assets within one year before or three years after the initial disposal

Question 7

What is one key point to note about the different applicable tax rates for Business Asset Disposal Relief?

Answer 7

Irrelevant whether donor is a basic, higher or additional rate income taxpayer, the rate for CGT will be 10%.

Question 8

What is the only CGT relief available to companies as well?

Answer 8

Replacement of Business Assets Relief

Question 9

What are not deductible expenses for the purpose of CGT?

Answer 9

Excludes: repair/renewal/replacement/redecoration of items, even if they may make assets saleable, desirable, and valuable.

Question 10

What are deductible expenses for the purpose of CGT?

Answer 10

• Cost of asset(og buy price)
• Acquisition/disposal related costs (e.g. fees)
• Enhancement expenditure - cost of capital improvements that are reflect in asset’s
  subsequent sale price.

Question 11

What is the annual exemption for CGT?

Answer 11

£6,000 per year - only available to individuals (not corporations)
- Note- previous year’s cannot be rolled-over

Question 12

What is the private residence exemption?

Answer 12

Profits on sale will be exempt from CGT.
- only applies to primary residential property for entire duration of ownership, and not second homes or investment properties!

Question 13

What is the effect of business asset roll-over relief?

Answer 13

decreases CGT liability from 20% to 10% for qualifying disposals for up to £1 million (in one’s lifetime).

Question 14

Who cannot benefit from business asset disposal relief?

Answer 14

Not available to investors or non-trading businesses - ie. buying a home and letting out as investments ≠ qualify.

Question 15

At what rate are are basic rate taxpayers taxed on CG?

Answer 15

10%

Question 16

At what rate are are high and additional rate taxpayers taxed on CG?

Answer 16

20%

Question 17

What are three CGT deferral mechanisms, and when do these apply?

Answer 17

Apply to the disposal of a qualifying business asset.

Hold-over relief - defer CGT following disposal of asset by way of gift + both parties agree for it to apply.

Roll-over relief - replacement asset is bought and CGT is post-poned until replacement asset is sold.

Question 18

What are qualifying assets for the purposes of gift hold-over relief?

Answer 18

Disposal of assets used in donor’s trade

• If it is a company, then need to have at least 5% of voting rights in a company (known as your ‘personal company’) AND use the assets in your personal company.

Shares
1) Unlisted company shares
2) Personal company

Question 19

How many years does a donee have make use of the benefits afforded from gift hold-over relief?

Answer 19

must dispose of qualifying asset within 4 years from end of year transfer was made

Question 20

What business assets will not qualify for roll-over relief, but will for hold-over relief?

Answer 20

For roll-over relief, company shares are not qualifying business assets (but partnership
shares are!).

Question 21

What assets qualify for roll-over relief?

Answer 21

Applies to land and buildings and fixed plant and machinery.
* New asset need not necessarily be of the same type as the old one. Merely within the same list.

Question 22

What is the time limit to claim roll-over relief?

Answer 22

4 years from end of tax year where replacement asset was acquired.

Question 23

How are trustees and PRs taxed on CGs?

Answer 23

• taxed at a flat rate of 20%
• 28% on
  residential property.

Question 24

How is residential property taxed on CG?

Answer 24

Residential property (ie. vacation home) - 28% for high-band and 18% for basic-band taxpayer.

Question 25

When is CGT payable to HMRC?

Answer 25

• Payable by 31 January following the end of the tax year.
• If residential property, provisional calculation must be made and tax paid within 30 days of completion of sale.