Capital Gains Tax

Question 1

When it comes to dates for CGT, the calculation date for the valuation of assets is, when?

Answer 1

The date the disposal becomes subject to a binding contract of sale, which is not necessarily the same date that the money changes hands.

Question 2

What are the two forms of deferred consideration?

Answer 2

Ascertainable: the amount to be received is fixed.

Unascertainable:

the amount to be received is not fixed. This is often the case in business transactions where the total sale price can depend on certain conditions and is known as ‘contingent consideration’.

Question 3

When is CGT payable?

Answer 3

Apart from any bill associated with a property, the bill would be paid on the 31st January after the end of the tax year, the same date as any balancing payment that would be due for income tax.

For any taxable gain in relation to UK residential property, the CGT is payable within 60 days of completion

Question 4

What is meant by ‘not at arm’s length’

Answer 4

Effectively, ‘not at arm’s length’ means there is a close connection between the individual disposing of the asset and the new individual owning the asset.

Question 5

How is an asset valued in order to ensure it is not sold at mates-rates, i.e. not at arm’s length?

Answer 5

HMRC will use the market value of the asset at the time of transfer as opposed to the actual value paid and received.

Question 6

What is they key factor relating to CGT between spouses?

Answer 6

Transfers of assets between spouses or civil partners, is not subject to CGT at the time of the transfer. Instead, the value taken on by the receiving spouse would be the acquisition cost of the gifting spouse.

This is a concept known as ‘no gain, no loss’ disposal.

Question 7

What are Chattels?

Answer 7

defined as ‘tangible movable objects’, so we are talking about items such as furniture, jewellery, antiques, stamps, books and magazines etc.

Chattels are assets that are exempt from CGT if the disposal proceeds do not exceed £6,000. This is increased to £12,000 if a chattel is jointly-owned, as the exempt amount applies per person.

Question 8

But what is the situation if the disposal does exceed £6,000?

Answer 8

Whichever calculation between the two below, produces the lowest gain:

1. The actual gain, disposal minus acquisition costs.
2. 5/3rds of the excess of the disposal cost over £6,000.

Question 9

Gretta purchased a lamp ten years ago for £2,000.

She sold it last month and received £9,000.

What is the gain>

Answer 9

The lower of:

£7,000 (the actual gain)

£5,000 (£9k - £6k x 5/3)

Question 10

What is apportionment and what is the formula?

Answer 10

Where only part of an asset is disposed of, only part of the gain needs to be calculated.

Apportionment can apply to the original cost of the asset, and could also apply to any expenditure incurred in the purchase or sale of the asset, if it was not absolutely incurred in relation to the part that is being disposed of, or the part being retained.

A / (A + B) x original cost

Where:

A = the proceeds of the part disposed of
B = the market value of the part retained.

Question 11

example:

A plot of land originally cost £60,000
The costs of buying the land were £3,000
Part of the land is now sold for £21,250
The value of the land being retained is £90,000

What is the gain?

Answer 11

Total value of land at time of sale:

£21,250 (sold) + £90,000 (retained) = £111,250

Proportion being sold:

21,250 / £111,250 = 19.1011%

Proportion of of the original cost to offset gain

19.1011% x £63,000 = £12,034

Gain = £21,250 - £12,034 = £9,216

Question 12

What is meant by share identification rules?

Answer 12

Another time we need to look at part disposals is in relation to shares, where there are specific rules about shareholdings when shares of the same type and class have been acquired at different times.

For example, an investor might buy some Company X shares one day, more of the same shares a month later, and more a year later. This means that when some or all of the shares are disposed of, we need to be clear on when the shares were acquired and what price was paid (the ‘acquisition cost’).

Question 13

When determining which of the group of same ‘type and class of shares’ is being disposed of at any one time, there is a set ‘order’ of disposal assumed.

Answer 13

1. Disposal of shares or units purchased on the same day.
2. Disposal of shares or units purchased within the previous 30 days.
3. Disposal of shares or units in the remaining pool.

Question 14

How do you know if a cost is to be taken off a capital gain or used to reduce income tax?

Answer 14

key thing is whether the cost is about…

Keeping the asset (or business) in a good state, such as ongoing maintenance and repairs (which will affect income tax)

Achieving a higher sale price, such as adding a conservatory or replacing the kitchen to a high spec version from a basic provision (Capital Gains Tax).

Question 15

What are the six steps of the CGT calculation?

Answer 15

1. Establish disposal proceeds
2. Deduct acquisition cost.
3. Deduct purchase, disposal and enhancement costs.
4. Set off allowable capital losses.
5. Deduct the annual exemption.
6. Calculate the tax.

Question 16

Can the personal allowance be used to offset capital gains?

Answer 16

No, capital gains have to be taxed, so even non-taxpayers will be taxed a minimum of 10% on gains.

Question 17

What consideration surrounds offsetting losses and the CGT exemption in relation to calculating the CGT on a gain?

Answer 17

You can offset losses and the exemption against the gain of your choosing, therefore it makes sense to offset these against the gains subject to the highest rates of CGT, i.e. 18/28%

Question 18

What gains qualify for relief against CGT>

Answer 18

1. BADR
2. Holdover Relief
3. Business Rollover Relief
4. Rollover Relief on incorporation
5. EIS reinvestment Relief
6. SEIS Reinvestment Relief

Question 19

Conditions for BADR to apply

Answer 19

1. The asset must have been owned for at least 2 years before the date of disposal.
2. The asset must have been used for the purpose of the business.
3. The ‘qualifying interest’ in the trading company applies where the individual has at least a 5% shareholding (pre-any dilution from further share issues) and is also an employee or director of the company.
4. The individual disposing of assets is entitled to at least 5% of either the profits that are available for distribution and the assets on winding up the company, or disposal proceeds if the company is sold.
5. If the business is closing, the individual must also dispose of the business assets within 3 years to qualify for the relief.

Question 20

Key consideration of BADR in relation to gains made in the total year.

Answer 20

With AF1 questions, it is important to watch out for assets that are not used in the business, as the sale of these will not qualify for this relief.

It is also important to note that, when doing the CGT calculation under Step 6, assets qualifying for business asset disposal relief have to be accounted for first, so will use up any basic-rate band available, making it more likely that any other assets disposed of in that tax year will be subject to 20% and 24% rates.

Question 21

What is holdover relief?

Answer 21

Holdover relief allows the CGT on gains to be deferred, when assets are gifted, this is most commonly used when assets are placed into trusts.

If used, no CGT is payable at the time of the gift, but the acquisition cost of the donor is taken on by the donee, which effectively transfers the CGT issue to the donee, when they eventually sell the asset.

Question 22

Conditions for holdover relief in relation to transfers between individuals

Answer 22

1. relief is only given if both the donor and donee claim holdover relief.
2. holdover relief is only available on gifts of ‘trading assets’.

These are:

assets used in donor’s trade or by their own personal company

shares and securities of trading companies, as long as they are not quoted on a recognised stock exchange (i.e. they are in respect of a private company) and the donor holds at least 5% of the voting rights in the company

Question 23

Conditions for holdover relief in relation to transfers to a trust

Answer 23

1. Only the donor needs to claim holdover relief
2. The trustees must accept the gift of the property and the deferred gain.

Question 24

What is business asset rollover relief?

Answer 24

Business can claim relief if they sell an assets used in the business to buy other assets for the business.

The relief defers the gain until the disposal of the new assets.

New assets must be purchased between, one year before and ending three years after disposal of the old assets.

Question 25

Capital Gains reinvested relief for using an EIS?

Answer 25

A gain made on the sale of other assets can be reinvested in EIS shares and deferred over the life of the investment.

There’s no upper limit on the value of gains that can be deferred.

It’s the gain, not the proceeds of the sale that should be reinvested. For example, if an asset was sold for £50,000 and cost £10,000, this would result in a gain of £40,000. This £40,000 would need to be reinvested in EIS-qualifying shares in order to defer the gain.

To qualify for deferral relief, the reinvestment into EIS-qualifying shares needs to be made no earlier than 12 months prior to, or three years after, the original gain was made.

The gain will be deferred until the earliest of any of the following events:

The EIS shares are sold.
The company ceases to be EIS-qualifying within three years of investment.
An investor ceases to be a UK resident within three years of investment.

When the deferred gain comes back into charge, it’s subject to capital gains tax at the relevant rate at that time.

Question 26

Capital Gains Relief for using an EIS?

Answer 26

If an investor holds EIS shares for at least three years, any capital gain realised on the disposal of the shares will be capital gains tax free, provided income tax relief has been given and has not been withdrawn.

AND THE ORIGINAL INVESTMENT WASNOT A DEFERRED GAIN

Question 27

Explain briefly the CGT rules of any new investment into an EIS, if the investment were made with the proceeds from the sale of the shares.

Answer 27

• Existing gain;
• deferred until disposal;
• without limits/unlimited;
• can be deferred again.
• New gain;
• exempt from CGT;
• after 3 years;
• if Income Tax relief obtained.
• Loss relief available;
• offset against income or gains

Question 28

Capital Gains reinvestment relief by using SEIS (seed)?

Answer 28

CGT re-investment relief can apply if income tax relief is claimed. This relief reduces capital gains made on disposal of other assets by 50%.

The maximum gain reduction is £100,000 per annum (50% of £200,000). The gain must arise in the tax year in respect of which SEIS income tax relief is given (i.e. either in the tax year of investment or the preceding tax year if a carry back claim is made). The remaining 50% of the gain remains chargeable.

For example: this would mean that, should an additional or higher rate taxpayer sell shares gained other than the SEIS and realise a £40,000 gain, where usually they would be liable to pay £8,000 in CGT (20%), using SEIS reinvestment relief, should they reinvest the full sum of the gain into SEIS qualifying shares, this charge would be reduced by 50%, saving the individual £4,000.

Question 29

Tax planning opportunities for CGT?

Answer 29

1. Annual allowance is use it or lose, crystallise gains on a regular basis.
2. Transfer all or part of an asset to a spouse, to share gain.
3. If asset can be disposed of in parts (shares), spread disposal over tax years.
4. carry forward losses.
5. use BADR at 10%.
6. Gift aid and pension contributions extend the basic rate band

Question 30

What are the implications of CGT when someone is non resident?

Answer 30

Except for residential property, individuals who are not resident in the UK are not usually liable to CGT unless they are temporary residents.

Anyone leaving the UK must be non-UK resident for at least 5 years before they are no longer liable for CGT on assets sold. Individuals cannot escape CGT by disposing of an asset whilst they are resident outside the UK for a period of five years or less.

If the gain occurs in the tax year they leave, then it is chargeable straight away.
For any tax year after leaving the UK, it will become chargeable on their return.

Question 31

Tom will leave the UK this tax year.

Explain the conditions that would need to apply for Tom to be able to sell the remainder of his shares whilst abroad and not be subject to CGT on the disposal.

Answer 31

• He would need to sell the shares in the next tax year
• as he would then be non-UK resident for tax purposes.
• He would have to be non-UK resident for 5 years
• starting from 6th April 2025
• to avoid paying CGT on the shares.

Question 32

Explain the consequences if Tom sold his shares whilst he was abroad but returned to the UK after 4 years

Answer 32

• He will be caught by the temporary non-residence rules
• as he would not have five years of non-residence
• and will be liable for CGT on the gain
• in the tax year he resumes UK residence.