Capital Gains Tax

Question 1

What is CGT

Answer 1

Capital gains tax

Question 2

What is capital gains tax

Answer 2

Tax that is payable on chargeable gains made by a chargeable son on the disposal of a chargeable asset in a tax year.

Question 3

What is a chargeable person

Answer 3

Individuals
PRs
Partners
Trsutees

Question 4

What is a chargeable asset?

Answer 4

Al forms of Property including debts, options and incorporeal property (patent or lease)

Question 5

What are the 5 steps of CGT calculation

Answer 5

Disposal of chargeable asset

Calculation of the gain

Consider reliefs

Aggregate gains/losses; deduct annual exemption

Apply te correct rate f tax

Question 6

What are the annual exemptions?

Answer 6

6,000 for 2023-24

Question 7

What are the tax rates for CGT?

Answer 7

There are 4 rebates

If the tax payers capital gains and taxable income added TOGETHER does not exceed basic rate income, 37,700, then it is 10% on gain

If taxpayers capital gain and income taxable is more than this, then any gain made UP to this amount is 10%, and any gains that EXCEED this, are taxed at 20%

Question 8

What is the tax rate for residential property?

Answer 8

If NOT main residential property, then it has a surcharge of 8%.

Therefore if normal rate is below basic, 18%. If higher, then anything that exceeds the basic rate threshold is 28%

Question 9

What is the tax rate for BADR, business asset disposal relief?

Answer 9

Taxed at 10%, regardless of taxpayers income.

Question 10

What is te tax rate for trustees ad PRs?

Answer 10

Gains made are ALL TAXED AT 20% or 28% if a residential property.

Question 11

Is there any CGT on teh death of the taxpayer?

Answer 11

No, there is no disposa, therefore no charge to CGT.

The PRs are deemed to acquire the assets at the market value at the date of death, probate value.

Question 12

How do you calculate the gain of the asset?

Answer 12

The initial expenditure (cost price of asset) and any incidental costs of acquisition.

Subsequent expenditure

Incidential costs of disposal

DISPOSAL - Incidential costs of disposal - Incidential expenditure - annual exemption - any reliefs = value that must be taxed.

Question 13

What is Indexation?

Answer 13

When an asset increases in value, the gain cannot all be regarded as profit, as some is due to inflation.

Apply initial and subsequent expenditure the percentage increases in the retail prices index from teh date of expenditure to disposal of asset.

Question 14

What are the 5 reliefs for CGT?

Answer 14

Rollover relief (replacement of asset)
Rollover relief on incorporation of business
Hold-over relief on gifts
BADR, business asset disposal relief
Private residence relief

Question 15

What is rollover relief for CGT ?

Answer 15

Enables sole traders and partners to sell certain assets, without paying CGT, provided the proceeds of sale ar invested into ANOTHER qualifying business asset.

Question 16

What counts as a qualifying business asset?

Answer 16

Land, buildings, goodwill

Must be used in the trade of business, rather than an investment

Question 17

What is the time limit for rollover relief to apply to CGT?

Answer 17

Must acquire the replacement asset within 1 year BEFORE, or 3 years AFTER the disposal of the original asset.

Question 18

How is the rollover relief applied?

Answer 18

Taxpayer must claim relief within 4 years from the end of the tax year. The gain is deducted from the acquisition cost of the replacement asset, which gives a LOWER ACQUSITION cost to use in CGT calculations in the FUTURE.

Question 19

What is the adjusted acquisition cost in rollover relief?

Answer 19

This is the acquisition cost (paid cost) of the new business asset, if you have used rollover relief.

Eg. If someone has a building, with a gain of 33,000, and purchased a larger shop for 95,000, its ADJSTED acquisition cost will be 95,000- 33,000, therefore being 62,000.

If they then make a gain, the gain on this woudl be BIGGER than original, therefore still benefitting tax.

Question 20

What is the rollover relief on incorporation of a business?

Question 21

What is rollover relief on incorporation of a business?

Answer 21

The chagre to CGT is postponed, when an individual sells their interest in an unincorporated business to a company

Question 22

Where is the gain in rollover relief on incorporation of a business, rolled over into?

Answer 22

The gain is rolled over into the shares which the seller receives as consideration for the sale of the assets to the company.

Question 23

What are the 3 conditions to allow rollover relief on incorporation of a business?

Answer 23

The business must be transferred as an ongoing concern, so after the disposal, it must be carried on as the same business but with a different owner.

The consideration must all be in shares issued by the company. If only part of the consideration was shares, then only that percentage could be rolled over

The busienss must be transferred with AL OF ITS ASSETS, ignoring cash.

Question 24

How is rollover relief of a business applied?

Answer 24

The gain is rolled over by notionally deducting it from the cost of acquisition of the new shares.

Question 25

What is the hold-over relief on gifts?

Answer 25

This relief allows an individual to make a gift of certain types of business asset, or sell them at an undervalue, without paying CGT.

The donee will be charged to tax on their OWN gain and the donors gain

Question 26

What are 4 conditions for hold-over relief on gifts

Answer 26

It is only available on gifts, or the gift element of a sale at undervalue

Only part of the gain relating to chargeable business assets qualify for the relief

If the donee is a company, the relief does not apply to a gift of shares

Both donor and donee must elect to apply for the relief.

Question 27

When must the donor and donee elect for hold-over relief on gifts to apply?

Answer 27

Must elect for the relief to apply within 4 years from teh end of the tax year of the disposal.

Question 28

How is the hold-over relief applied?

Answer 28

Calculated by taking market value as the consideration for the disposal. The deemed gain is then deducted from the market value of the asset to produce an artificially low acquisition cost for the donee.

Question 29

What is the business asset disposal relief/

Answer 29

BADR has been available on gains made by individuals on the disposal of certain assets. The flat rate of 10%

Question 30

What are qualifying business disposals for sole traders or partnerships?

Answer 30

Dispose of whole or part of business.

To be a qualifying disposal or the whole of a business, the interest as a WHOLE, not just one or more assets, must have been owned either:

• throughout the period of 2 years before disposal
• throughout period of 2 years ending with cessation of business

Question 31

What counts as a business asset disposal in a company?

Answer 31

Disposal of company shares, if the company is a trading company, and the disponers PERSONAL COMPANY (must hold at least 5% of the ordinary share capital and voting rights).

The disponer is an employee or officer of the company.

WITHIN 2 years ending with date of disposal/ceases to be trading

Question 32

What is the effect of BADR?

Answer 32

If the conditions are met, the taxpayer will pay a flat rate of 10% tax on the gains. This is subject to a LIFETIME CAP of 1 million of qualifying gains.

Once taxpayer has made 1 million qualifying gains, any gains over and above, WLL NOT BENEFIT from BADR.

Question 33

What is private residence relief?

Answer 33

Any gains made by individuals who dispose of a dwelling house, including grounds of up to hald a hectare, are exempt from CGT.

PROVIDED that they have occupied the dwelling house as their only or main residence throughout period of ownership.

Last 9 months of ownership are ignored.

Question 34

How to reliefs and annual exemption operation together?

Answer 34

Sometimes more than one relief could apply, therefore you have to CHOOSE.

You CANNOT use annual exemption, if you have used rollover relief.

You can use exemption to reduce gains befoer applying BADR.

Question 35

How do you calculate CGT when there is more than one disposal?

Answer 35

They msut be calculated separately, so the right rate of tax can be applied.

Any losses and annual exemption can be deducted from gains int he BEST WAY for TAXPAYER.

Losses and annual exemptions should be deducted frm gains that would otherwise be subjected to higher tax rates - eg, residential properties first, then assets that do not qualify for BADR< then BADR.

Question 36

What happens if taxpayer experiences loss not gain ?

Answer 36

Setting the losses against hte gains will wipe them out, and taxpayer will have NO CGT to pay.

If there are still unabsorbed losses, they may be carried to future years and then sued to reduce gains to the limit of the annual exemptions available in those future years.

Question 37

What happens if there is a disposal between spouses?

Answer 37

There is NO CGT, if you make a disposal of an asset to your spouse. However, the reciever will have to pay CGT both on any gain they have made, and on any gain their spouse made, during the period of ownership, if they decide to sell it.

Can use annual exemption of 12,000 together.

Question 38

When will buyback of shares attract CGT?

Answer 38

If the buyer is a trading company and its shares are not listed on a recognised stock exchange,

And the purpose of buybac must be to raise cash to pay IHT, or be for benefit of company’s trade, and,

The seller must have owned thes hares for at least 5 years. And,

The seller must ether be selling al of their shares, or substantially reducing their percentage shares int (at leat 25%) to a max of 30% of the issued share capital.

Question 39

When does CGT have to be paid?

Answer 39

Generally it is payable on or before 31 January, or 30 days from making of an assessment.

Payment can be done through tax return

Can also do 10 instelaments, ONLY when disposal was a gift, qualifying asset is land, and conditions for hold-over relief are NOT MET.

Question 40

What is the general anti-avoidance rule?

Answer 40

HMRC makes adjustments to a taxpayers liability, to counteract the tax advanatgaes arising from abusive tax arrangements

Question 41

What is business property relief, BPR

Answer 41

This operates to reduce the value transferred by transfer of value of relevant business property.

Reduction of 10% of value transferred is alowed.

A reduction of 50% is allowed where the value transferred is attributable to an other relevant business property.

To attract relief, the assets in question must have been owed by transferor for at least 2 years, OR must be a replacement of relevant busienss property wehre the combined period of 2 years. §q

Question 42

When is it 100% and 50% reduction for BPR?

Answer 42

100:
No charge on IHT. A business or interest in business, company shares that are NOT on stock exchange

50: company shares that ARE listed on stock exchange, land, buildings, machinery or plants by transfer personally, but used for business purposes.