Capital Gains Tax Flashcards
What is capital gains tax?
Tax payable on chargeable gains made by a chargeable person on the disposal of chargeable assets
Who is a ‘chargeable person’ for the purposes of CGT?
Individual (in personal capacity or as sole trader)
Partners (each charged separately for their proportion of the gain)
PRs disposing of deceased’s assets
Trustees on chargeable asset from a trust fund
What is a chargeable asset for the purposes of CGT?
All form of property
(except cash sterling)
What are the 5 steps for calculating CGT?
- Identify disposal of chargeable asset
- Calculate the gain
- Consider reliefs
- Aggregate gains / losses & deduct the annual exemption
- Apply correct rate of tax
1. Identify disposal of a chargeable asset
What is a disposal?
Sale or gift
2. Calculate the gain
How?
Proceeds of disposal
less
Initial expenditure
less
Subsequent expenditure
less
Incidental costs of disposal
2. Calculate the gain
What is initial expenditure & subsequent expenditure?
Initial expenditure
- Cost price / market value (if gift) / probate value (if inherited)
- Any incidental costs of acquisition (eg. legal fees)
- Any incurred wholly & exclusively in providing the asset
Subsequent expenditure
Any incurred wholly & exclusively
- In establishing, preserving or defending title to the asset
- To enhance value of asset which is reflected in value at time of disposal (eg. cost of building extension)
3. Consider reliefs
What are the 5 main reliefs?
Rollover relief on replacement of business assets
Rollover relief on incorporation of business
Hold-over relief on gifts
Business asset disposal relief
Private residence relief
3. Consider reliefs
What is rollover relief on replacement of business assets?
CGT on sale of qualifying business assets is postponed until seller disposes of the new qualifying business assets
- ‘Qualifying business assets’: must be used in trade of business (eg. land, buildings, goodwill)
Time limits:
- Must acquire replacement 1 year before or 3 years after disposal of original asset
- Must claim relief within 4 years from end of tax year in which acquire replacement asset
3. Consider reliefs
What is rollover relief on incorporation of business?
CGT on sale of interest in unincorp business to a company is postponed until seller disposes of shares received as consideration for sale
Applied by HMRC automatically
Conditions
- Business must be transferred as a going concern
- Consideration must be all in shares issued by the company
- Business must transferred with all its assets
3. Consider reliefs
What is hold-over relief on gifts?
Allows individual to gift certain types of business asset or sell them at undervalue without paying CGT
Business asset
- Assets used in donor’s trade
- Shares in unlisted trading company
- Shares in a personal trading company (ie. donor owns at least 5% of voting rights)
- Assets owned by shareholder & used by their personal trading company
Time limit: both donor & donee must elect to apply for the relief within 4 years from end of tax year of disposal
3. Consider reliefs
What is Business Asset Disposal Relief & how does it apply to
(a) Sale of whole or part of business of sole trader/partnership
(b) Disposal of company shares?
BADR reduces tax rate on gains made of disposal of specific business assets to flat rate of 10% (subject to lifetime cap of £1m)
Sole trader / partnership: interest in business as a whole must be owned throughout 2 years ending with:
- Date of disposal; or
- The cessation of the business, provided that disposal is within 3 years after cessation
Company shares
- Company is trading company
- Company is disponer’s personal company (holds at least 5% voting rights & entitled to 5% profits/proceeds of sale if wound up)
- Disponer is employee / officer of company
- This has been the case throughout 2 years ending with:
- Date of disposal; or
- Date company ceased to be trading company, so long as made within 3 years of cessation
3. Consider reliefs
What are the 4 conditions for BADR to apply to the disposal of company shares?
- Company is trading company
- Company is disponer’s personal company (holds at least 5% voting rights & entitled to 5% profits/proceeds of sale if wound up)
- Disponer is employee / officer of company
- This has been the case throughout 2 years ending with:
- Date of disposal; or
- Date company ceased to be trading company, so long as made within 3 years of cessation
3. Consider reliefs
What is private residence relief?
Any gains made by individuals disposing of dwelling house (incl grounds of 1/2 hectare) are exempt from CGT, provided they occupied the house as their only or main residence throughout period of ownership
4. Aggregate gains & losses and deduct annual exemption
What happens if the taxpayer has made any CGT losses in the tax year?
These can be deducted from the gains in the order most beneficial to the taxpayer (ie. against gains which don’t qualify for BADR first)
4. Aggregate gains & losses and deduct annual exemption
How much is the annual exemption?
£6,000
Can be deducted from gains in order most beneficial to taxpayer (ie. against gains which don’t qualify for BADR first)
Nb. cannot use annual exemption on disposals attracting rollover relief or hold-over relief
5. Apply the correct rate of tax
What are the tax rates for CGT?
Assets which do not qualify for BADR
- Capital gains & taxable income do not exceed £37,700: 10%
- Capital gains & taxable income exceed £37,700: 20%
Assets which qualify for BADR: flat rate of 10%
Residential property: 8% surcharge on normal rates of 10% or 20%
How does disposal between spouses work for the purposes of CGT?
Can dispose without paying CGT → becomes chargeable when recipient disposes of asset
Receiving spouse acquires asset for amount gifting spouse paid for it / its market value
When in the tax year is CGT payable?
On or before 31 Jan following end of tax year (or 30 days from making an assessment if later)
When can payment of CGT be by 10 annual instalments?
- Disposal was gift
- Qualifying asset is land, a controlling shareholding in any company, or any shareholding in unquoted company
- Conditions for hold-over relief to apply are not met
Is CGT payable on death?
No → look to Business Property Relief
What is the effect of Business Property Relief on IHT?
Reduces value by 100% if:
- Business or interest in business
- Unlisted company shares
Or by 50% if:
- Listed company shares where transferor had voting control of company
- Land, buildings, machinery, plant owned by transferor personally but used for business purposes
To attract relief, must have been owned by transferor for at least 2 years at time of transfer
