Capital Gains Tax Flashcards
when is CGT payable?
CGT is paid when a chargeable asset is sold for profit
who pays CGT?
Individuals (inc. sole traders), PRs, trustees partners pay CGT
what is the position in relation to partnerships and CGT?
Where a partnership sells an asset, each partner will be charged separately
who does not pay CGT?
Companies and charities do not pay CGT
Give an overview of a CGT calculation
o Step 1: identify disposal of chargeable asset
o Step 2: calculate gain (or loss)
o Step 3: apply reliefs
o Step 4: aggregate gains & losses; deduct annual exemption
o Step 5: apply the correct rate of tax
re: step 1 - identify disposal of chargeable asset
what is meant by disposal?
Disposal = sale or gift (unless at death, then IHT applies)
There can be full or part disposal of an asset. Part disposals are apportioned.
re: step 1 - identify disposal of chargeable asset
what is a chargeable asset?
Chargeable assets = all property inc. land, shares, debts, options and incorporeal property
Incorporeal property = a legal right in property i.e. a patent or lease
re: step 1 - identify disposal of chargeable asset
what is not a chargeable asset?
sterling
re: step 1 - identify disposal of chargeable asset
if the asset was gifted, what value is it given?
If a gift is made, HRMC will use the market value of the asset at the time the gift was made
re: step 2 - calculate gain (or loss)
how is this calculated?
sale price or market value – total expenditure (or apportioned expenditure if part disposal) – indexation allowance = gain (or loss)
re: step 2 - calculate gain (or loss)
when is the market value used?
o when the asset is gifted;
o not a ‘bargain made at arm’s length’; or
o to a connected person
re: step 2 - calculate gain (or loss)
what is a ‘bargain made at arm’s length’?
A bargain made at arm’s length is a normal commercial transaction whereby parties are trying to get the best deal for themselves.
re: step 2 - calculate gain (or loss)
when will a ‘bargain made at arm’s length’ take and not take place? Give an example.
Simply because a bad bargain has taken place, does not mean a bargain at arm’s length has not taken place.
A bargain is not considered to be made at arm’s length where the transferer does not intend to get the best deal for themselves. In this instance, the market value is used.
i.e. Ahmed wants to sell his property quickly in order to move. John offers a low price. No one else makes an offer, so Ahmed accepts this price. This may not be the best possible price, but is the best deal for Ahmed and so would be a bargain at arm’s length
re: step 2 - calculate gain (or loss)
who is a connected person?
A person will be connected with another if they are:
o A spouse/CPs (and their ‘relatives’)
o A relative (or a spouse/CP of the relative), i.e.:
Parents
Siblings
Children
Grandchildren
o A partner, including:
Any spouses/CP of anyone in the partnership
Any relatives of anyone in the partnership
re: step 2 - calculate gain (or loss)
when will a company be connected with another?
o The same person has control of both companies
o A person(s) has control of one company, and a connected person (or combination of connected persons) has control of the other company
(control = has greater part of share capital or voting power)
re: step 2 - calculate gain (or loss)
what does initial expenditure include?
o Initial price/market value of asset (inc. consideration of part disposal apportioned values and spouse disposals)
o Costs of acquisition i.e. conveyancing fees, valuation fees, stamp duty
o Expenditure incurred wholly and exclusively in the course of obtaining the asset, i.e. cost of building the property
re: step 2 - calculate gain (or loss)
what does subsequent expenditure include?
This includes expenditure incurred wholly and exclusively for the purposes of:
o Establishing, preserving or defending title to an asset i.e. legal fees to resolve a boundary dispute)
o Enhancing the value of an asset, which is reflected at the time of disposal i.e. the cost of an extension
re: step 2 - calculate gain (or loss)
what does subsequent expenditure not include?
the cost of normal maintenance, repairs and insurance is not deductible
re: step 2 - calculate gain (or loss)
when is a part disposal common?
where part of a piece of land is sold
re: step 2 - calculate gain (or loss)
what does incidental costs of disposal include?
o Estate agent’s legal fees for selling property
re: step 2 - calculate gain (or loss)
if there has been a part disposal, what must happen?
If only part of an asset has been disposed of, the initial expenditure (and subsequent) will need to be apportioned to determine the sale price
re: step 2 - calculate gain (or loss)
where there has been a part disposal, what is the calculation to work out the apportioned expenditure?
A = consideration for part disposal
B = market value of part disposal
- A / (A+B) = apportioned %
- Apportioned % x initial value of asset = apportioned expenditure
Calculate gain: sale price – apportioned expenditure = £50,000
re: step 2 - calculate gain (or loss)
what is the position in relation to partnership disposals?
- Each partner will pay a portion of the CGT based on their percentage of the share capital / capital profits (i.e. the partnership assets)
- If the percentage has not been agreed, then it will be split equally
- The sale price and expenditure will need to be apportioned accordingly
- Each partner can then choose which reliefs to apply
re: step 2 - calculate gain (or loss)
Explain a partnership disposal calculation and give an example of a partnership disposal
- Joan – 25% | Kevin – 50% | Larry – 25%
- In 2008, they purchased premises for £200,000
- In 2010, they sell the premises for £300,000
1) calculate the apportioned sale price for each partner (sale price x P’s % = apportioned sale price)
* Kevin owns 50% of partnership assets, so will be taxed on 50% of the proceeds of sale (£300k x 50% = £150k)
2) calculate the apportioned expenditure (expenditure x P’s % = apportioned expenditure)
* £200k x 50% = £100k
3) work out the gain for that partner
- Apportioned sale price (£150,000) – apportioned expenditure (£100,000) = £50,000 gain
4) repeat for other partners
re: step 2 - calculate gain (or loss)
what is the position regarding disposals between spouses? What effect does this have?
When there is a disposal between spouses/CPs that live together, there is deemed to be no gain or loss
The sale/market value will be the price the original purchasing spouse paid i.e. if they brought it for £75k when they transfer it, the market value will be deemed to be £75k (£75k - £75k = £0)
The recipient spouse will need to pay CGT on the original spouses’ and their gain when they dispose of the asset
re: step 2 - calculate gain (or loss)
when are inter-spouse/CP disposals particularly advantageous? Give an example.
o One spouse/CP has already used up their annual exemption and the other has not
o One spouse/CP pays a lower rate of tax than the other
Example
* 10 years ago, Jamila bought a clock for £74,000.
* This was recently valued at £115,000
* Jamila gifts this to her husband, Simon. She will not pay CGT.
* Usually where a gift is made, the donee is deemed to receive this at market value at the time of the gift. Because this is an inter-spouse disposal, Simon is deemed to acquire it for the amount Jamila paid (i.e. £74,000)
* Simon sells the clock for £130,000.
* Sale price (£130,000) – expenditure (£74,000) = £56,000 gain
re: step 2 - calculate gain (or loss)
how is indexation allowance calculated?
Initial expenditure x RPI at the date the expenditure was incurred
Subsequent expenditure x RPI at the date of the disposal of the asset
NB: Costs of disposal are not included
If different items of expenditure were incurred at different times, different indexation factors will need to be used for each item
re: step 2 - calculate gain (or loss)
what is important to remember about the indexation allowance?
Indexation allowance can reduce a gain, but it cannot create a loss. If it creates a loss then the indexation allowance is 0.
re: step 3 - apply reliefs
in summary, what are the types of relief and their effects? Why might someone choose one type of relief over another
o Business asset disposal relied - flat rate of 10% tax applies
o Other reliefs - CGT is not paid until a later date
Generally, with business asset disposal, the tax payable will be cheaper, but the person disposing of the asset must have the means to pay the tax now.
Business asset disposal cannot be used in conjunction with most other reliefs
re: step 2 - calculate gain (or loss)
when is indexation allowance relevant?
Only relevant where the asset was owned between 31 March 1982 and 5 April 1998 and CGT was deferred using rollover or holdover reliefs before 2008
re: step 3 - apply reliefs
what is the criteria for a qualifying business asset?
o Must be a certain type of asset i.e. land, buildings, goodwill, fixed plant and machinery (a ship is a QBA). Shares, goodwill and intellectual property are not QBAs. The QBAs need not be the same type of asset
o Must be owned by a ST, GP or individual SH. The SH must own at least 5% of that company
o Must be used for trade (i.e. not investment) and used in the same trade
re: step 3 - apply reliefs
when is rollover relief on replacement of business assets relevant?
Relevant where the taxpayer disposes of a qualifying business asset (QBA) and uses the proceeds to acquire another QBA.
If the taxpayer disposes of the new QBA and buys another QBA, they can continue to roll this gain over.
re: step 3 - apply reliefs
if an asset qualifies for rollover relief on replacement of business asset, what happens if the taxpayer does not use all of the proceeds of sale on the a new QBA?
All of the proceeds of disposal must be reinvested, or the relief will be apportioned
re: step 3 - apply reliefs
what are the timescales for the new QBA to be acquired?
The taxpayer must acquire the new QBA either:
o 1 year before disposing of the old QBA; or
o 3 years after disposing of the old QBA
o HMRC can permit extensions
re: step 3 - apply reliefs (rollover relief on replacement of business asset)
what are the timescales to claim the relief?
The taxpayer must claim the relief within the longer of:
o 4 years from the end of the tax year the old QBA was sold; or
o 4 years from the end of the tax year the new QBA was acquired;
re: step 3 - apply reliefs (rollover relief on replacement of business asset)
when will the taxpayer pay CGT?
- The taxpayer will not pay any CGT on the asset until it is sold
re: step 3 - apply reliefs (rollover relief on replacement of business asset)
what is the calculation for the adjusted cost of the new QBA?
cost of new QBA – previous gain = adjusted cost of new QBA
re: step 3 - apply reliefs (rollover relief on replacement of business asset)
when is the adjusted cost of the new QBA relevant?
This figure is used to calculate gain when CGT is paid in the future
