Capital Gains Tax

Question 1

When do you pay CGT?

Answer 1

Payable on chargeable gains made by a chargeable person on the disposal of chargeable assets. PRs, individuals and trustees pay NOT companys.

Question 2

Calculating CGT

Answer 2

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

Question 3

Step 1 - Identify the chargeable disposal - Requirements

Answer 3

Must be a disposal of a chargeable asset. Disposal includes sale or gift. If it is a gift they use the market value of the asset at the time the gift was made instead of the consideration received. Even if they give away part of an asset it is still chargeable.

Question 4

Step 1 - Identify the chargeable disposal -What is a chargeable asset?

Answer 4

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

Question 5

Step 1 - Identify the chargeable disposal -What is a chargeable asset - Exclusions

Answer 5

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

Question 6

Step 2 - Calculate the gain or loss - Calculation

Answer 6

What you’re selling it for - Cost of disposal (solicitors fees) - Initial expenditure (cost of buying, conveyancing fees) - Subsequent expenditure = GAIN/LOSS

Question 7

Step 2 - Calculate the gain or loss - Gain

Answer 7

If you got a gain and you need to use indexation allowance (question will give it to you - not used a lot now for CGT as they removed it in 2008) then you need to times the indexation allowance to initial and subsequent expenditure and add up the figures and remove from gain

Question 8

Step 3 - Reliefs - Rollover relief on replacement of business assets

Answer 8

CGT postponed if the proceeds of sale of a qualifying business assets are invested in other qualifying business assets. Postponed until sale of new assets. Qualifying assets = land, buildings and goodwill for the use of the trade/business. Must buy replacement 1 year before sale or 3 years after

Question 9

Step 3 - Reliefs - Rollover relief on incorporation of a business

Answer 9

CGT postponed. When an individual sells their interest in an unincorporated business (sole trader or partner) to a company. The gain is rolled over into the shares which the seller receives as consideration for the sale of the assets to the company. CGT becomes payable when they dispose of the shares.

Question 10

Step 3 - Reliefs - Hold-over relief on gifts

Answer 10

Allows an individual to make a gift of certain types of business asset or sell them at an undervalue without paying CGT. If the donee disposes of the asset the donee will be charged tax on their own gain and the donor’s gain. Business asset = assets used in trade or shares

Question 11

Step 3 - Reliefs - Business asset disposal relief

Answer 11

If this applies the rate of tax will be reduced to 10% on the gains. There must be a qualifying business disposal for the relief to apply and this will be different for sole trader or partnership and company shares

Question 12

Step 3 - Reliefs - Business asset disposal relief - Qualifying Business Asset - Sole trader and Partnership

Answer 12

Where a sole trader or partner disposes of the whole or part of a business where:
1) the business is disposed of as a going concern - must have owned them for the period of 2 years before disposal
2) assets are disposed of following cessation of the business - must have owned them for the 2 years ending with cessation

Question 13

Step 3 - Reliefs - Business asset disposal relief - Qualifying Business Asset - Company shares

Answer 13

A disposal of company shares may qualify for relief if:
1) company is a trading company
2) the company is the disponer’s ‘personal company’ - they hold at least 5% of share capital and voting rights and they’re entitled to at least 5% of profits
These must both be applicable for 2 years before disposal

Question 14

Step 3 - Reliefs - Tangible moveable property

Answer 14

Wasting assets are exempt. These are assets with a predictable life of less than 50 years e.g consumer goods but not antiques because these will typically go up in value

Question 15

Step 3 - Reliefs - Private Residence Relief

Answer 15

Any gains made by individuals who dispose of a swelling house including grounds of up to half a hectare are exempt from CGT provided that they have occupied the dwelling house as their only or main residence through their period of ownership

Question 16

Step 3 - Reliefs - Damages for personal injury

Answer 16

These are exempt

Question 17

Step 4 - Aggregate gains and deduct annual exemption

Answer 17

Gains from all sources are added together any losses are deducted and annual exempted is deducted. Annual exemption £3,000.
The taxpayer can deduct the annual exemption first from gains that attract higher rates of tax. Can’t carry forward part of the exemption which you haven’t used.

Question 18

Step 5 - Apply correct rate of tax

Answer 18

Different rates of tax apply to different disposals depending on the nature of the asset and the tax payer’s financial position.
3 categories of chargeable asset:
1) Assets which are not residential property and do not qualify for business asset disposal relief
2) Assets which qualify for business asset disposal relief
3) Residential property

Question 19

Step 5 - Apply correct rate of tax - Assets which are not residential property and do not qualify for business asset disposal relief

Answer 19

1) Taxed at 10% if tax payer’s income does not exceed £37,700 (basic rate income)
2) Taxed at 20% if the tax payer’s income exceeds £37,700

Question 20

Step 5 - Apply correct rate of tax - Assets which qualify for business asset disposal relief

Answer 20

These gains are taxed at 10% regardless of tax payer’s income

Question 21

Step 5 - Apply correct rate of tax - Residential Property

Answer 21

1) Taxed at 18% if tax payer’s income doesn’t exceed £37,700
2) Taxed at 24% if tax payer’s income exceeds £37,700

Question 22

Disposals between spouse/civil partners

Answer 22

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.

Question 23

When a partnership disposes of an asset

Answer 23

This is treated as if each partner is making a separate disposal of part of the asset. Each partner pays a proportion of the CGT based on their % ownership of the partnership’s assets

Question 24

Losses from previous years

Answer 24

Use any losses from previous years against gain of current year