Business Law and Practice - Capital Gains Tax

Question 1

When is CGT payable?

Answer 1

• When a chargeable person makes a chargeable disposals of a chargeable asset
• Payable on gain made when an individual, trustee or a partnership disposes of a capital asset
• Companies do not pay CGT but if they make a gain on a capital asset that profit is relevant to the corporation tax they pay
• A tax on profits (sale price - acquisition price)
• In the case of gifts we use the fair market value of the item when the gift was given - fair market value will be given to you in a question

Question 2

Effect of Residence

Answer 2

UK residents chargeable to CGT regardless of location of asset when sold

Non-UK residents do not usually pay any CGT regardless of location of asset

Exception: non-UK resident is chargeable to CGT if they dispose of interest in land situated in the UK

Question 3

Exempted Assets

Answer 3

Cash, shares held in ISA and gilts

Wasting chattels (tangible moveable property with a life of less than 50 years, e.g. a racehorse, cars, boats, watches, machines not used in business)

Non-wasting chattels if worth less than £6,000 (e.g. jewellery, antiques)

Question 4

Exempted Disposals

Answer 4

Transfer of property on death (although inheritance tax may be payable)

Transfer of shares between spouses (spouse deemed to have taken the asset at your acquisition cost not present market value - known as base cost)

Gifts to charity (charity takes the asset at the donor’s base cost)

Question 5

When must CGT be paid?

Answer 5

Payable on 31st January following the end of the tax year when the disposals occured

For land and buildings in the UK CGT must be paid within 60 days of completion of transaction

Question 6

Calculating Gains

Answer 6

Disposal of proceeds - Costs of acquisition = Capital gain or loss

Disposal proceeds: proceeds of sale but if asset is gifted or transaction is with a connected person then the proceeds are deemed to be the asset’s market value on the day of gift

• Allowable costs are deducted from proceeds of disposal

Question 7

Principal Private Residence Relief

Answer 7

Someone selling home won’t pay CGT on any or part of gain made

Multiply the gain on disposal of a person’s principal private residence by PRR fraction:

• Time of owner’s occupation divided by length of ownership

There are some periods of absence which can be considered periods of deemed occupation:

1. Last nine months of ownership will always count as deemed occupation regardless of whether owner was present in property, so long as property was owner’s main residence at some point before the sale
2. Periods of absence falling between periods of actual occupation will be deemed periods of occupation in the following situations: a) absence for any reason (up to three years); b) any period of time working overseas; c) time working elsewhere in UK (up to 4 years)

More than one of the above can be used at once

Question 8

Business Asset Disposal Relief

Answer 8

Taxpayer pays 10% CGT on qualifying gains

Business asset owned for a least 2 years and:

1. All or part of a trading business carried on as a sole trader or partnership;
2. Shares in trading company provided the individual owns at least 5% of ordinary voting shares of the company and an officer or employee of company for 2 years prior to disposal; or
3. Assets owned/used by personal trading company or partnership 2 years prior to disposal

Question 9

Hold Over (Gift) Relief

Answer 9

Gifts to individuals:

• Assets used in trade/profession carried by transferor or their personal company (one where they own at least 5% of ordinary voting shares)
• Shares in unquoted trading company
• Shares in transferor’s company
• Assets qualyfing for agriculatural property relief

Defers donor’s gain to donee - when donee disposes of asset they are charged on their own CGT but also on the donor’s deferred gain

Question 10

Roll Over Relief (or Replacement of Business Asset Replacement Relief)

Answer 10

Business owner who sells building then buys replacement premises can roll sale profit into new premises and reduce acquisition cost of new premises by gain realised

If you buy a new asset up to a year before you dispose of asset or up to three years after you dispose of asset relief is available

Both assets must be qualifying for relief to be available (most common are land and buildings and plant and machinery)

Only relief that applies to companies as well as non-corporate businesses

Question 11

Incorporation Relief

Answer 11

Applies when individual transfers business/partnership interest to company

Defers basis in company by reducing the owner’s acquisition cost of company shares by gain realised

Question 12

Enterprise Investment Scheme Re-investment Relief (EIS Relief)

Answer 12

Encourages investment in small companies by allowing CGT deference on gain made by investing that gain in small company (an EIS qualifying company)

Applies to any capital gain on any asset

Investment in EIS shares must happen in the year before the gain the individual is seeking to defer or up to three years after

Question 13

Calculation of CGT

Answer 13

Annual exempt amount (tax free amount): £12,300 [and has been for a while so remember this]

• Any reliefs applied before annual exemption (except for business asset disposal relief which applies a 10% tax rate after we have deducted annual exemption first)
• Companies don’t get an annual exemption

Rate variables:

• Individual’s taxable income: if an individual has any of their basic rate band remaining after taxing their income gains that fall within that remaining band are taxed at 10% otherwise they are taxed at 20% [for gains on residental property the rates become 18% and 28% respectively]

Taxpayer can choose to offset their annual exemption against residential property gains in priority to other gains - helpful in avoiding the higher tax rates on the gains of residental property

• **Disposed asset’s nature **

Question 14

Capital Losses

Answer 14

Can only be used to offset capital gains

Permissible to offset capital losses against residential property gains in priority to other gains to save more CGT

Capital loss timing rules:

1. Loss must be set off against any same year gain
2. Excess losses are automatically carried forward to offset future gains

Capital losses carried forward can be deducted after annual exemption - whereas capital losses in the same year must be off-set before anual exemption

Question 15

Transfers on Death

Answer 15

Transfer of property on death exempt from CGT for the deceased

Person who takes the property takes it at market value at the date of death (‘probate value’) - they may pay CGT if the property has realised a gain when they dispose of it