Capital Gains Tax Flashcards
When is capital gains tax chargeable? What four requirements are needed?
- there is a chargeable disposal
- of a chargeable asset
- by a chargeable person
- which gives rise to a chargeable gain
What is a chargeable asset?
Most valuable personal possession and certain non-physical assets such as shares
Not cars.
Land although exemption for main home - Private Residence Relief
Certain invests also excluded - government securities, National savings certificates, shares and securities held in individual savings accounts (ISAs) and life assurance policies
Excluded - UK sterling and any foreign currency held for your own or your family’s personal use
Who is a chargeable person?
Individual who is a UK taxpayer for the relevant tax year
Companies do not therefore pay CGT
What is a chargeable gain?
Increase in value between purchase price and sale price less any allowable expenditure
What disposals are not seen to give rise to a chargeable gain?
- disposals to or from charities
- disposals between spouses
- disposals on death
What will be the consideration when a sale is at arm’s length?
Will be the price paid by the buyer
What will the consideration be between connected persons?
HMRC will deem the seller to have received the market value irrespective of the actual sale proceeds
Who are connected persons for CGT purposes?
- individuals relatives and spouses - parents, grandparents, lineal descendants, siblings but not uncles, aunts, cousins, nephews, nieces
- companies if they are under common control
- partners in business
What happens if there is a disposal at an undervalue?
If transaction is between unconnected persons at an undervalue, then CGT will deem sale to be at the market value at date of disposal
What happens where an asset has been gifted?
Donor will be deemed to have received the market value of the asset from the donee at date of gift
What allowable expenditure can be deducted from any chargeable gain amount?
- cost incurred in acquiring the asset (such as conveyancer’s fees and purchase cost)
- costs incurred that contribute to the value of the asset (the cost of building an extension but not costs of maintenance or repair) or preserve value of asset/title
- costs incurred in disposing of the asset (such as conveyancer’s fees for the sale and estate agents’ commission)
What happens if the taxpayer has made losses at the same time they made the gains?
The taxpayer can offset any loses against any gains made
Is there a time limit on how far losses can be carried forward?
- but must be applied against first available gains
What annual exemption is a taxpayer entitled?
£3,000 currently for individuals
£0 for companies
What conditions must be met for Private Residence Relief to apply so no CGT due?
- It has been the person’s main home for all the time that they lived in it
- they have not let it out (other than taking a lodger)
- it has not been used for business purposes
- the grounds including all buildings are less than 5,000 square metres
- it was not bought just to make a gain
Do companies pay CGT?
No they pay corporation tax on gains
What rates are there for CGT?
18% or 24%
When will taxpayers pay lower or upper rates of CGT?
18% - where individual’s taxable income plus total chargeable gains after all allowable deductions is less than the basic threshold
24% - where individual’s income exceeds basic rate tax threshold
18%/24% - where individual’s taxable income is less than basic rate band but above basic rate band once gain added, then gain will be taxed at respective amounts that are above and below basic rate band
What is the simplified process for CGT?
- Sale proceeds/market value
- Less disposal expenditure
- Net sale proceeds
- Less initial expenditure
- Less subsequent expenditure
- Total chargeable gain
- Less carried forward or carried across losses
- Less annual exemption
- Taxable chargeable gain at relevant rate
What is business asset disposal relief?
Reduces rate of CGT to 10% for all qualifying disposal
What is a qualifying disposal for business asset relief?
- all or part of a trading business (business must be owned for at least two years prior to disposal)
- assets in a business that used to trade (owned at least two years prior to disposal, assets must have been used in business when it ceased to trade, assets must be disposed of within three years of the business ceasing to trade)
- shares in a trading company (the company must be and have been for at least two years prior to disposal a trading company, shares must have been held for at least two years, person must have officer or employee of company and hold at least 5% of ordinary voting shares and entitled to at least 5% of distributable profits and 5% of assets on winding up) or
- shares in a company that used to trade (shares must have been owned two years before the company used to trade, person must have officer or employee of company and hold at least 5% of ordinary voting shares and entitled to at least 5% of distributable profits and 5% of assets on winding up, shares must be disposed of within 3 years of the company ceasing to trade)
How much business asset relief can an individual benefit from?
A lifetime allowance of £1 million
What is investor’s relief?
IR reduces higher rate of CGT from 20% to 10% for gains arising on disposal of qualifying shares
How much investor’s relief can an individual benefit from in their lifetime?
£1 million
What are qualifying shares for investor’s relief?
Will be qualifying if following conditions are met:
- fully paid ordinary shares and issued for cash consideration on or after 17 March 2016
- company is a trading company or the holding company of a trading company
- at the time of issue of shares, none of the company’s shares were listed on a recognised stock exchange
- shares are held by the individual for at least three years from 6 April 2016 (and continuously since issue)
- individual (or any connected person) is not (nor at any time from issue of shares) an officer or employee of the company (or any connected company)
What are the two main business reliefs?
- replacement of business assets relief (rollover relief)
- gift of business assets relief (hold-over relief)
What is replacement of business assets relief?
Taxpayer can elect to postpone CGT liability the arises on sale of such asset by rolling over the gain into qualifying replacement asset
What is a qualifying replacement asset for replacement business asset relief?
Must be one of the following:
- land and buildings
- fixed plant and machinery
- goodwill
New asset does not need to be same as old. Long as it is on the list
Is there a limit on how many times a gain can be rolled over for?
No
What is gift of business assets relief?
CGT is postponed where there is a gift of business assets until donee ultimately disposes of asset by sale
Annual exemption not allowed to be used here
Can gift of business asset relief only be used on gift?
No can be used where asset sold at undervalue but only on party which if a gift ie difference between price paid and market value
What assets will qualify for gift of business assets relief?
- goodwill
- assets used in the business
- shares in a trading company not quoted on the stock market
