Capital Gains Tax

Question 1

Rates of capital gains tax- individuals

Answer 1

-> any individual can realise capital gains up to the annual amount (AEA) each year before any liability to CGT arises
-> AEA is £6,000
-> two main rates
1. Standard rate of 10% (residential property is 18%)
2. Higher rate of 20% (residential property is 28%)
-> 10% rate re business asset disposals relief (BADR)

-if basic rate band (or higher if increased by gift aid donations or pensions) then 10%/18%
-if higher or additional rate band then 20%/28
-partial gain falling into higher rate band is taxed at 20%/28%

Question 2

Chargeable persons

Answer 2

CTG is chargeable when a chargeable person makes a chargeable disposal of a chargeable asset

Chargeable persons
-individual residents or ordinarily resident in UK
-partners in a business
-companies
-husbands, wives and civil partners
-> separate individuals, can’t transfer allowances or losses
-> jointly owned assets, gain split proportionately
-> may transfer assets at no gain no loss, tax efficient to maximise benefit of allowances

Question 3

Chargeable disposals

Answer 3

A chargeable disposal is
-sale or gift of all or part of an asset
-deriving a capital sum from an asset
-excludes
1. Transfers on death bed (inheritance tax is charged)
2. Gifts to charities and national heritage bodies
3. Compensation received for damage to property
-> where proceeds reinvested to repair asset, proceeds deducted from original cost, thus increasing gain when asset ultimately sold (tax deferral)
-> where proceeds less than 5% of value

Question 4

Chargeable assets

Answer 4

Exempt
-motor vehicles
-ISAs
-gift edged securities
-tangible moveable property (chattels bought and sold for less than £6,000)
-wasting chattels (expected life less than 50 yrs)
-disposal of an individuals own only or main residence (principle private residence)

Question 5

Payment of CGT by individual

Answer 5

-due by a single payment due on the same day as the financial income tax payment for the year (31 Jan)
-estimated amount due on disposal of uk residential property is payable within 60 days of completion of disposal

Question 6

Enhancement expenditure

Answer 6

-money spent on improving an asset, that improvement being represented in the value of the asset at the date of sale
-separate part of the cost of the capital gains tax calculation
-expenditure must be reflected in the state of the asset at the date of sales to be allowable
-> eg extensions to houses, costs incurred in establishing preventing or defending title to asset

Question 7

CGT Losses

Answer 7

If a loss is made on disposal
-offset it against profits on other assets for the same year
1. You cannot restructure the use of the loss to the level of the annual exemption. Thus, you may lose some of the annual exemption for this year
2. If any loss remains, carry this forward to offset against the first available gain in future years

A loss brought forward from a previous year
-first deduct any losses for this year from gains for this year
-then use brought forward loss. Only offset enough of the losses to reduce the balance of the gains to the level of the annual exemption. Thus you will not lose annual exemption when you use losses brought forward
-any excess losses can be carries forward again

Question 8

Chattels and wasting assets

Answer 8

A chattel is tangible movable property (vase, paintings)

-if a chattel bought and sold less than £6,000, it is not subject to CGT (exempt)
-wasting asset = remaining useful life less than 50 years
-> exempt from CGT unless subject to capital allowances, no charge unless sold at profit over original cost

Question 9

Chargeable chattels

Answer 9

Gross proceeds. Cost. Treatment.
>£6,000. <£6,000. Gain is lower of
-gain computed in usual way
-5/3 (gross proceeds-£6,000)
<£6,000. >£6,000. Calculate loss, assuming proceeds £6,000
>£6,000. >£6,000. Normal calculation

Question 10

Part disposals

Answer 10

When we need to calculate the cost of the asset, when only part of it is sold (portion of land)

The attribute cost is calculated as

Total original cost x A/(A+B)

A= value of part sold at time of sale (proceeds)
B= market value of remainder at the time of sale

Question 11

Disposal of property

Answer 11

1. Principle private residence (PPR)
2. Letting relief
3. Business use

Question 12

Principle private residence relief

Answer 12

-a gain to an individual on the disposal of private residence is exempt from CGT
-only one residence at a time qualifies
-includes a dwelling or house or apartment together with associated garden land of up to half a hectare in area. Bigger garden okay if in character with house
-full exemption if continuous period of ownership since 1 April 1982 or since purchase and the property has been occupied as the taxpayers PPR for all of that ownership period
-if there are periods where the taxpayers PPR was elsewhere, there are a number of deemed occupation which may be claimed to increase the amount of the time apportioned gain that qualifies for the exemption

Question 13

Deemed occupation

Answer 13

1. Actual periods of occupation as PPR
2. Any period of absence over the last 9 months of ownership provided that at some time the residence was occupied as PPR
3. Absence for any reason, provided not more than 3 years and both proceeded and followed by occupation as PPR
4. Absence for any period where owner in employment carrying out duties abroad
5. Absences amounting to not more than 4 years during which the owner
   -lived elsewhere in uk for reasons of employment because of distance to place of work
   -lived away from home at employers request, in order to perform employment more efficiently
   -> 3,4,5 only qualify if owner actually occupies the home before and after the absence and no other property is claimed as alternative PPR

Question 14

PPR RELIEF

Answer 14

Gain x period of occupation/period of ownership

Proceeds
Less cost
Gain
Less PPR relief
Chargeable gain

Question 15

Letting relief

Answer 15

Lowest of
1. PPE relief
2. Gain in let period
3. £40,000

Question 16

Business purposes

Answer 16

If use part exclusively for business use throughout whole ownership period
-no last 9 months exemption in business use part of property
-1/5 used for business so 4/5 exempt

Question 17

CGT business relief

Answer 17

Reliefs available on the disposal of business assets
- to protect the business
1. Rollover relief
2. Holdover relief
3. Incorporation relief
4. Gift relief
-to reward enterprise that has created business
1. Business asset disposal relief (BADR)

Question 18

Rollover relief (IMPORTANT)

Answer 18

-replacement of business assets
-individuals and companies
-proceeds of sale of old asset reinvested in new asset
-between one year before and three years after sale of old asset
-no gain/loss at time of sale
-gain used to reduce cost price of new asset, thus deferring the gain
-both old and new assets must be in recognise categories of assets
-full relief only available if the proceeds of the old asset are all reinvested in the new asset
-if not full investment, part of gain chargeable on sales of old asset

1. Land, buildings, fixed plant and machinery
2. Goodwill
3. Ships, aircraft, space stations

Question 19

Holdover relief (IMPORTANT)

Answer 19

-replacement of business asset with depreciating asset
-suspense account
-individuals and companies

This is when the new asset is a depreciating asset
-gain held over until earlier of
1. Replacement asset sold
2. Asset ceases to be used in business
3. 10 years after original sale

-> defined as an asset that will become a waiting asset for CGT purposes within 10 years of date of acquisition (last for less than 60 years from date of acquisition)
-> if a suitable non depreciating asset is acquired at any time before the earlier of the three dates above, then the held over gain at any time before the earlier of the three dates above, then the held over gain can be transferred to this new asset, so that the gain becomes a rolled over (permanent), not temporarily held over

Question 20

Incorporation relief (IMPORTANT)

Answer 20

-transfer of a business to a limited company
-individuals only

A form of rollover relief is available to an individual when they transfer their business and all of the assets of the business (except cash), to a company, in exchange for shares in that company
1. Any gains on assets at the date of transfer are deducted from the value of the shares subscribed for, and company treated as acquiring assets at market value
2. If part of consideration received by the individual is cash, this is taxable immediately
3. Business must be transferred as a going concern

For full incorporation relief to apply, the individual must receive shares in the company in exchange for the business and its assets.

If an individual received a combination of shades and cash, then only a part of the gain can be rolled over as follows

Value of shares received/total consideration received x total gain = gain rolled over

Question 21

Gift relief (IMPORTANT)

Answer 21

-business assets only
-individuals only

If a taxpayer makes a chargeable disposal for less than market value, then providing both the donor and beneficiaries make an election, and the asset qualifies, then some or all of the chargeable gain can be deferred:
1. Joint election by transferor and transferee
2. For transfer of assets or shares in a business or personal company
3. Any gain for transferor is reduced to nil and is deducted from market value (base cost for transferee)
4. If non business assets transferred as part of deal, that part becomes chargeable immediately, apportionment required

Question 22

Business asset disposal relief (BADR)

Answer 22

Applies when
1. Individual disposes of
-all or part of business
-shares in unquoted trading company that they have worked in and held at least 5% or shares in for 12 months
2. First £1 million is subject to tax at 10% rather than 10%/20%
3. £1 m in total as lifetime limit

Question 23

Damaged or destroyed assets

Answer 23

-individuals and companies
-if an asset is damaged and insurance proceeds are received, then unless certain conditions are met, transactions are treated as a part disposal for CGT purposes

A/ (A+B)
A= the amount of money received from insurance
B= value of the asset on the date that the insurance money is received

A part disposal can be avoided if
-all of the insurance money is used to replace the damaged asset
-the asset is not a wasting asset and the insurance money is used to restore the asset
-the asset is not a wasting asset and the amount of money received is small in comparison (higher of £3,000 or 5%)

Question 24

Destroying assets

Answer 24

-results in a chargeable disposal for CGT purposes, unless all insurance money is spent within 12 months on replacing the asset
-taxpayer can elect that the disposal of the original asset should give rise to no gain and no loss

Question 25

Chargeable gains for companies

Answer 25

1. Companies not liable to capital gains tax as separate tax
2. Their chargeable gains and allowable losses are subject to corporation tax
3. Companies do not pay tax on chargeable gains at 10%/18% and 20%/28% like individuals
4. Pay corporation tax on their chargeable gains
5. Applies to chargeable disposals of chargeable assets
6. No PPR available
7. No BADR
8. No annual exemption
9. Capital losses offset against gain and excess loss carried forward
10. Companies chargeable gains are reduced by indexation allowance (IA) which is applied to allowable costs, to compensate for inflation

Question 26

Indexation allowance

Answer 26

-applied to all items of allowable cost, except for incidental costs of disposal as these are taken to already be in current money value
-so that company only pays tax on the real gains they make not those solely due to inflation
-if asset acquired before march 1982 then two calculations needed
-no indexation allowance after 31 December 2017, any date past this uses this date

Question 27

IA allowance calculation

Answer 27

Proceeds of sale
Less original cost
Less IA:
Cost x RPI at sale - RPI at purchase / RPI at purchase
Chargeable gain

-> IA rounded to three decimal places
-> IA is not applied to costs of disposal
-> if indexation negative, treat as nil
-> cannot convert gain to loss
-> cannot create a loss, if unindexed loss, do not calculate IA

Question 28

Pre 31 march 1982 acquisition

Answer 28

-only part of gain that has occurred since 31 march 1982 is chargeable
-market value at 31 march 1982 is used (rebasing)
-do not have to automatically rebase at march 82 is using original cost would give lower gain
1. Indexation is always based on the higher figure to maximise relief
2. If both gain, take smaller
3. I’d both loss, take smaller
4. If one gain and one loss, no gain no loss

Question 29

Chargeable gains in groups

Answer 29

-companies are in 75% group
-chargeable assets move between group companies at no gain no loss (NGNL)
-can elect to re allocate gains/losses to other group member
-rollover relief applies across the group

Question 30

Capital losses (IMPORTANT)

Answer 30

-> If a taxpayer has net capital losses for the year then the CGT assessment for that year is £nil and the annual exemption is lost
-> capital losses must be offset against the first available net gains, but are only offset to the extent that those gains exceed the annual exemption so preventing the wasting of the annual exemption

Question 31

Deemed residence (IMPORTANT)

Answer 31

Deemed residence can apply so long as
1. There is a period of residence both some time before the period of absence and at some time after the period of absence
2. The taxpayer claims no other property to be PPR during the period of absence

Deemed residence
-> any period where taxpayer working abroad
-> total up to 4 years of absence when taxpayer is working elsewhere in Uk
-> total of up to 3 years for any reason

Question 32

Depreciating asset (IMPORTANT) held over relief

Answer 32

If the new asset is a depreciating asset (useful life of 60 years or less), then the gain arising on disposal of the old asset cannot be rolled over. Instead it is temporarily held over until it crystallises at the earliest of the following three dates
-> the date on which the new asset is disposed of
-> the date on which the new asset ceases to be used for trade purposes
-> the 10th anniversary of the acquisitions n of the new asset

If a suitable non depreciating asset is acquired at any time before the earliest of the above dates, then the held over gain may be transferred to this new asset, so converting a temporary held over gain inti a permanently rolled over gain

Question 33

Roll over relief (IMPORTANT)

Answer 33

1. Can be claimed by traders and companies
2. Business assets only
3. Old assets deemed to have no gain or loss
4. Disposal of old asset is replaced by purchase of new asset
5. Gain is rolled over against case cost of new asset
6. Full relief is proceeds are reinvested
7. If proceeds nit fully reinvested, the amount not reinvested is taxable at the time of disposal of old asset
8. New asset must be purchased one year before to three years after the disposal old asset
   -land, buildings, fixed plant, goodwill