Capital Gains Tax

Question 1

Calculating CGT

Answer 1

• Step 1 - Identify the chargeable disposal
• Step 2 - Calculate the gain or loss
• Step 3 - Consider reliefs
  Steps 1,2 and 3 must be applied to each disposal separately
• Step 4 - Aggregate gains and deduct annual exemption
• Step 5 - Apply correct rate of tax

Question 2

Step 1 - Identify the chargeable disposal - Requirements

Answer 2

3 requirements:
1) A chargeable person
2) A chargeable disposal
3) Of a chargeable asset

Question 3

Step 1 - Identify the chargeable disposal - Chargeable person

Answer 3

An individual NOT a company. 3 different categories of chargeable person:
- Individual disposing of personal asset
- Trustees disposing of trust assets
- A partner disposing of partnership assets

Question 4

Step 1 - Identify the chargeable disposal - A chargeable disposal

Answer 4

Selling something in exchange for cash or another asset. Gifts - if it is a gift then they’re still taxed for the gain the taxpayer is deemed to have made on the disposal by using the market value of the asset at the time the gift was made instead of consideration received.
Disposal of part of an asset = sale of part of a field

Question 5

Step 1 - Identify the chargeable disposal - Of a chargeable asset

Answer 5

• Tangible = land, property, antiques, jewellery
• Intangible = shares, the goodwill in a business, assets created by the person, debts

Question 6

Step 1 - Identify the chargeable disposal - Of a chargeable asset - Exclusions

Answer 6

• Wasting assets - when you get rid of things when you are downsizing
• Assets with a value of less than £6000
• Money
• Motor vehicles

Question 7

Step 2 - Calculate the gain or loss - Calculation

Answer 7

Proceeds/market value of the asset - Allowable deductions = Gain or loss

Question 8

Step 2 - Calculate the gain or loss - Deduct the incidental costs of disposal

Answer 8

Deduct the incidental costs of disposal e.g costs of solicitor/estate agent/valuation fees/stamp duty

Question 9

Step 2 - Calculate the gain or loss - Deduct the initial expenditure/costs

Answer 9

Deduct the initial expenditure/costs e.g costs incurred when you acquired the asset/market value at time of gift

Question 10

Step 2 - Calculate the gain or loss - Deduct subsequent expenditures

Answer 10

Deduct subsequent expenditures e.g costs of improving (enhancing value) not maintaining the asset, capital enhancing e.g building a conservatory not painting a wall

Question 11

Step 2 - Calculate the gain or loss - Best possible way for the taxpayer

Answer 11

Where a taxpayer makes gains in 2 or 3 categories any losses and the annual exemption can be deducted from gains in the best way possible for the taxpayer

Question 12

Step 2 - Calculate the gain or loss - Example

Answer 12

You own a holiday cottage in Cornwall and you are disposing of the asset. You didn’t buy the cottage you built it. Any expenditure in building the cottage counts as initial expenditure. If you build an extension (thereby increasing the value of the asset) this is subsequent expenditure but regular maintenance and repairs will not count. Costs of defending a boundary dispute/trademark infringement would count as subsequent expenditure because it is expenditure wholly and exclusively incurred in establishing, preserving or defending title to the asset

Question 13

Step 3 - Consider reliefs - Effect

Answer 13

Reliefs can totally exclude the asset from tax or postpone the time that the tax becomes payable

Question 14

Step 3 - Consider reliefs - Non-business assets - Main dwelling house

Answer 14

• Main dwelling house - no capital gains tax payable when selling your main home - can only use this one 1 property

Question 15

Step 3 - Consider reliefs - Non-business assets - Tangible moveable property

Answer 15

• Tangible movable property - wasting assets with a predictable life of 50 years or less do not attract capital gains tax payable. Household goods, television, fridges, washing-machines. Antiques not included

Question 16

Step 3 - Consider reliefs - Non-business assets - Asset worth less than £6,000

Answer 16

• Asset worth less than £6,000 - no capital gains tax payable

Question 17

Step 3 - Consider reliefs - Non-business assets - Damages for personal injury

Answer 17

• Damages for personal injury - no capital gains tax payable

Question 18

Step 3 - Consider reliefs - Business assets - Entrepreneurs’ relief

Answer 18

Reduces the tax payable, charges a flat rate on the disposal of business assets at 10%.

Question 19

Step 3 - Consider reliefs - Business assets - Entrepreneurs’ relief - Requirements

Answer 19

This is applicable to qualifying business assets only:
- All or part of a trading business the individual carries on as a sole trader or in a partnership
- Shares in a trading company that the individuals holdings is at least 5% of the ordinary voting shares of the company
- Assets owned and used by the individuals personal trading company or trading partnership

Question 20

Step 3 - Consider reliefs - Business assets - Hold over relief

Answer 20

Applies to gifts of businesses, does not apply to sales. E.g parents running a business who want to retire and give the assets to the children. This is simply postponing the CGT payable until the children decide to dispose of the asset. Both the donor and the donee must elect for this to happen since it shifts the burden of paying the tax onto the donee

Question 21

Step 3 - Consider reliefs - Business assets - Roll over relief on incorporation

Answer 21

Applies to sole traders who incorporate their business - all the business assets are going from the business into the company in return for shares, instead of paying CGT on incorporation, you will pay CGT on the shares when you eventually dispose of them. This is simply postponing the CGT payable until the shares are sold

Question 22

Step 3 - Consider reliefs - Business assets - Roll over relief on replacement of a qualifying business asset

Answer 22

If you are selling a business asset and replacing it with another at the time of the disposal you will not pay CGT but will pay it when you dispose of the replacement asset. Limited to qualifying assets e.g land, buildings, goodwill NOT shares.

Question 23

Step 4 - Aggregate gains and deduct annual exemption

Answer 23

You have to add up all the gains and then you deduct the annual exemption. Deduct any losses. Annual exemption £12,500

Question 24

Step 5 - Apply correct rate of tax

Answer 24

Multiply the taxable capital gain by the rate of tax. CGT rate of tac depends on which income tax band you are in:
- Basic rate = pays CGT 10%
- Higher rate = pays CGT 20%

Question 25

Special rules for disposals between spouse/civil partners

Answer 25

Disposals between spouses/civil partners are treated as no gain/no loss. It is a deferral of the tax - the tax will not be charged until the spouse who received the asset disposes of it.