Capital gains tax

Question 1

Who are chargeable persons for capital gains tax purposes?

Answer 1

• individuals (including sole traders)
• individual partners
• trustees
• personal representatives

Question 2

What is capital gains tax?

Answer 2

It is a tax on an increase in an asset’s value during a period of ownership. It is charged on a chargeable gain, made by a chargeable person, on disposal of a chargeable asset

Question 3

What is an example of a chargeable asset?

Answer 3

Land
Shares

Question 4

What is not included as a chargeable asset?

Answer 4

Plant/machinery and motor vehicles as they are wasting assets (they usually depreciate over time)

Question 5

What is included in disposal?

Answer 5

Sale (whether at full value or undervalue) or a gift. Death usually gives rise to a charge for inheritance tax and not capital gains tax

Question 6

What is the basic calculation for capital gains tax?

Answer 6

Disposal value
LESS
acquisition cost/value and allowable expenditure = basic gain
THEN
apply reliefs/exemptions
GIVES
Chargeable gain

Question 7

What is the disposal value?

Answer 7

Usually the sale price, however can be the market value if it is a gift, a sale at an undervalue with a gift element or disposal to a connected person

Question 8

Who would be a connected person?

Answer 8

• spouses and civil partners
• close relatives (parents, children, grandparents, grandchildren and siblings. Not aunts and uncles or nieces and nephews)
• close relatives of one’s spouse or civil partner

Question 9

What does allowable expenditure mean?

Answer 9

• incidental costs of acquisition (solicitors’ and surveyors’ fees)
• subsequent expenditure - capital improvements such as an extension. Does not include repairs, redecoration or replacement items
• incidental costs of disposal (estate agents’ and solicitors’ fees)

Question 10

What is the basic gain?

Answer 10

The gain made after the acquisition cost and allowable expenditure have been deducted from the disposal value but before application of reliefs and exemptions

Question 11

If a capital loss is made what happens?

Answer 11

This can be deducted from gains in the tax year or carried forward to future tax years to reduce the tax payable

Question 12

What are the four main rates capital gains tax is charged?

Answer 12

Business asset disposal relief - 10%
Standard rate - 10%
Higher rate - 20%
Property is residential 8% surcharge added

Question 13

What are the principle capital gains tax reliefs and exemptions?

Answer 13

• business asset disposal relief
• annual exemption
• hold-over relief
• roll-over relief on replacement of business assets
• deferral relief on reinvestment in EIS shares
• investors’ relief
• roll-over relief on incorporation of a business
• transfers between spouses
• buyback of shares

Question 14

When does business asset disposal relief apply?

Answer 14

Where there is a qualifying business disposal

Question 15

What is a qualifying business disposal?

Answer 15

There are three types of transactions:
1. the sale or gift of the whole or part of a business carried on as a sole trader or in partnership provided that the business has been owned for at least two years prior
2. the sale or gift of shares in a company provide that:
- the company is a trading company
- the shareholding represents at least 5% of the company’s ordinary voting shares with the right to at least 5% of the profits/assets
- the individual is an employee or officer of the company
- these conditions have been satisfied for at least the two years prior to the disposal
3. the sale or gift of assets used by such a trading company or partnership business, but owned individually by the partner or shareholder ….

Question 16

What is the annual exemption for capital gains tax?

Answer 16

£6000

Question 17

What is hold-over relief?