Capital Gains Tax

Question 1

Who can be chargeable persons/entities under Capital Gains Tax?

Answer 1

Capital gains of individuals (including partners in a business partnership) are taxed separately and apart from income tax.

Note : whilst capital gains realised by a company are calculated in the same manner as for individuals they don’t pay CGT but capital gains are taxed like other income of the company.

Question 2

Basis of charge for Capital Gains Tax?

Answer 2

Capital gain is the profit when a capital asset is disposed of.

A capital asset is almost every kind of property including land, buildings, antiques and shares of a company. This doesn’t include wasting chattels defined as moveable property with a life of under 50 years eg cars, watches and farm animals and machinery not used in business.

Profit is the difference between the sale price (or fair market value) and costs of acquiring the asset this includes the cost of capital improvements made to the asset.

Question 3

What are the oversea provisions for CGT?

Answer 3

A resident of the UK are chargeable to CGT on the disposal of any chargeable assets they own regardless of where the asset was situated.

Typically a non-UK resident will not pay CGT even if the asset is in the UK. With the exception of disposing of an interest in UK land.

Question 4

What are four exemptions for CGT?

Answer 4

1. If non-wasting chattel are disposed of for less than £6,000
2. A transfer on death is exempt from CGT - the person inheriting is deemed to take the property at market value and this forms part of the estate for IHT purposes instead.
3. A transfer between spouses but they are deemed to acquire the asset at the cost their spouse did so CGT will be payable on the full amount when they dispose of the asset.
4. Transfer to charity.

Question 5

When is CGT due and payable and the exception to this?

Answer 5

Due and payable on 31 January following the year the gain was made included in individuals tax return.

Exception is disposal of UK residential property where tax must be reported to HMRC and paid within 30 days of completion.

Question 6

What is the CGT calculation?

Answer 6

Proceeds of Sale (or market value if gift or sold to close relative) - Costs of Acquisition = Capital Gain

Question 7

What can be subtracted from the proceeds?

Answer 7

Costs linked the disposition eg legal fees, estate agent fees, valuation and advertising costs.

Question 8

What does costs of acquisition include?

Answer 8

the initial cost of the asset and other associated costs such as legal costs on purchase, commission paid and SDLT.

If the asset was enhanced this cost can be added provided the enhancement is still part of the asset when sold.

Any cost in preserving, establishing or defending title eg legal fees in boundary dispute can also be added.

Question 9

What reliefs are available for CGT?

Answer 9

Private Residence Relief
Business asset disposal relief
Holdover relief
Incorporation relief

Question 10

What does Private Residence Relief do?

Answer 10

Exempts all/part of again on a property an individual has used as their home.

If the home was always occupied during ownership 100% of the gain is exempt from CGT. If didn’t occupy the home all the time, then calculate the exempt amount by formula

Question 11

What is the Private Residence Relief formula?

Answer 11

Gain x (period of occupation ÷ period of ownership).

Question 12

Under Private Residence Relief will be deemed to have occupied home even if not for what reasons?

Answer 12

1. any period of absence up to 3 years
2. abroad for employment (unlimited)
3. working elsewhere maximum of 4 years
   Note: these can apply cumulatively.

Question 13

When is Business asset disposal relief available?

Answer 13

On gains made by individuals on the sale or gift of certain business assets:
* All/part of a trading business as a sole trader or in partnership for at least two years before disposal.
* Shares in a trading company if the individual owns at least 5% of the ordinary voting shares of the company AND was an officer or employee of the company for two years before disposal.
* Assets owned and used by the individual’s personal trading company or trading partnership in the two year’s before disposal.
* Capital gains of these assets are taxed at 10% instead with a lifetime limit of £1 million.

Question 14

What does Holdover relief enable?

Answer 14

An individual to give away certain types of business assets without paying CGT. The donor and done must agree that the donor will not pay CGT and when the done sells the asset they’ll pay CGT on their gain and the donor’s deferred gain.

Question 15

What assets that qualify for holdover relief include?

Answer 15

• Assets used for the purpose of a trade or profession carried on by the transferor or their personal company (company own at least 5% of shares)
• Shares in an unquoted trading company
• Shares in the transferor’s personal company
• Assets that qualify for agricultural property relief

Question 16

When is Incorporation relief applied?

Answer 16

When an individual transfers their business or partnership interest as a going concern to a company.

Question 17

What is incorporation relief?

Answer 17

Gain from the transfer is deferred by subtracting the gain from the acquisition cost of the company shares the transferor receives in exchange for the business interest.
Gain will be taxed when transferor disposes of the shares.

Question 18

Can Annual Exempt Amount be carried into future years if unused?

Answer 18

No

Question 19

CGT calculation?

Answer 19

Taking all chargeable gains remaining after all relief’s applied (except Business Asset Disposal Relief) and deduct the Annual Exempt Amount. If BADR is available, the 10% rate is then applied where applicable

Question 19

What is CGT rate?

Answer 19

20% if individual pays income tax at higher or additional rate.

Otherwise, CGT rate is 10% to the amount that they do not exceed an individual’s unused income tax basic rate band.

Question 20

What is the CGT tax rate for residential property?

Answer 20

18% and 28% respectively.

This is on UK and overseas residential property. The Annual Exempt Amount can be used to set off gains on residential property before other gains taxed at lower rate.

Question 21

What can do with capital losses?

Answer 21

Capital losses can be used to offset gains in the same year before applying the Annual Exempt Amount.

If capital losses in the year exceed gains the excess loss can be carried over (the Annual Exempt Amount would be lost that year as a net loss).