Capital Gains Tax

Question 1

Who qualifies as a chargeable person for CGT purposes, and who is exempt?

Answer 1

Chargeable persons include:
1. Individuals: Both in personal capacity or as sole traders.
2. Personal Representatives (PRs): When disposing of a deceased person’s assets.
3. Partners: Each partner is separately taxed on their proportion of the gain when disposing of a chargeable asset.
4. Trustees: On disposal of assets within a trust fund.

Exemptions:
* Companies: Pay corporation tax instead of CGT.
* Charities: Exempt from CGT entirely.

Question 2

What qualifies as a chargeable asset, and what does not?

Answer 2

Chargeable assets, as defined by TCGA 1992, include:
* All forms of property (e.g., real estate, stocks).
* Incorporeal property: Intangible rights like patents or leases.
* Debts and options.

Non-chargeable assets:
1. Sterling (cash): Disposals of cash in pounds are not subject to CGT.
2. Specific exempt assets (e.g., damages for personal injury).

Question 3

What are the steps to calculate Capital Gains Tax (CGT)?

Answer 3

1. Identify the disposal: Sale or gift of a chargeable asset.
2. Calculate the gain: Sale proceeds - Cost (adjusted for allowable deductions).
3. Apply exemptions and reliefs: Reduce or postpone the tax payable.
4. Aggregate gains and losses: Deduct the annual exemption (£6,000 in 2023/24).
5. Apply tax rates: Tax the remaining chargeable gain at the applicable CGT rate.

Question 4

What are the CGT tax rates for different asset classes in 2023/24?

Answer 4

1. General Assets:
   
   • 10% for gains within the basic rate income threshold (£0–£37,700).
   • 20% for gains above the basic rate threshold.
     2. Residential Property (Not Main Residence):
   • Basic rate: 18% (10% + 8% surcharge).
   • Higher rate: 28% (20% + 8% surcharge).
     3. Business Asset Disposal Relief:
   • Flat rate of 10% (lifetime cap: £1 million).
     4. Trustees and PRs:
   • 20% for most gains.
   • 28% for residential property.

Question 5

What is the annual CGT exemption for 2023/24, and how does it affect tax liability?

Answer 5

• Annual Exemption: £6,000 (reduced from £12,300 in 2022/23).
• Each taxpayer can deduct this amount from their total gains in a tax year before applying tax rates.
• Example: If total gains are £50,000, the chargeable gain would be £50,000 - £6,000 = £44,000.

Question 6

Margaret sells shares for £74,000 that cost her £30,000. Her taxable income is £43,000. How is her CGT calculated?

Answer 6

1. Step 1: Disposal – Sale of shares.
   
   2. Step 2: Calculate Gain – Proceeds: £74,000 - Cost: £30,000 = £44,000 gain.
   3. Step 3: Exemptions – None.
   4. Step 4: Deduct Annual Exemption – £44,000 - £6,000 = £38,000 chargeable gain.
   5. Step 5: Apply CGT Rate – Taxable income + chargeable gain = £43,000 + £38,000 = £81,000 (higher rate).
      * CGT: £38,000 × 20% = £7,600.

Question 7

What is rollover relief, and how does it defer CGT?

Answer 7

• Purpose: Defers CGT when proceeds from the sale of qualifying business assets are reinvested in new qualifying assets.
  
  • Qualifying Assets:
  • Land, buildings, and goodwill (used in trade).
  • Fixed plant and machinery.
  • Conditions:
  • Replacement asset must be acquired within 1 year before or 3 years after disposal.

Question 8

Peter sells a workshop for £77,000, making a gain of £33,000, and buys a new one for £95,000. How does rollover relief apply?

Answer 8

1. Original Gain Deferred: £33,000.
2. Adjusted Cost of New Workshop: £95,000 - £33,000 = £62,000.
3. Effect: Peter defers paying CGT on the £33,000 gain until he sells the new workshop.

Question 9

What is hold-over relief for gifts, and when does it apply?

Answer 9

Purpose: Allows CGT to be deferred when gifting certain business assets or selling them below market value. The CGT liability is transferred to the recipient (donee).
* Qualifying Assets:
* Assets used in the donor’s trade.
* Shares in a trading company not listed on a recognized stock exchange (AIM excluded).
* Shares in a personal trading company where the donor owns at least 5% voting shares.
* Assets owned by a shareholder used in their personal trading company.
* Conditions:
1. The transfer must be a gift or part of a sale at undervalue.
2. Both donor and donee must jointly elect for the relief.
3. The donee takes on the deferred CGT liability.
4. Claim must be made within 4 years of the tax year in which the transfer occurred.
* Effect: The deferred gain is subtracted from the recipient’s acquisition cost, meaning they will pay CGT on both their gain and the deferred gain when they dispose of the asset..

Question 10

Gianni gifts his family business (market value: £212,000, gain: £100,000) to his daughter Laura. How does hold-over relief apply?

Answer 10

1. Gianni’s CGT: Deferred – No tax payable.
2. Laura’s Adjusted Cost: £212,000 - £100,000 = £112,000.
3. Future CGT: If Laura sells the business, the deferred gain is taxed alongside her own gain.

Question 11

How does private residence relief work for CGT?

Answer 11

• Eligibility: Exempts gains on the disposal of a taxpayer’s only or main residence, including grounds of up to half a hectare.
• Last 9 Months: Always exempt from CGT, even if the property is not the taxpayer’s main residence during that time.
• Effect: Completely exempts CGT for qualifying disposals.

Question 12

Are damages for personal injury subject to CGT?

Answer 12

Damages received for personal injury are entirely exempt from CGT.

Question 13

What is business asset disposal relief (BADR), and who qualifies?

Answer 13

• BADR is a CGT relief that reduces the tax rate on qualifying gains to a flat 10%, subject to a £1 million lifetime cap on qualifying gains per individual.
  1. Qualifying Business Disposals:
     * Sole traders or partners disposing of the whole or part of a business.
     * Business must be disposed of as a going concern or shortly after cessation (within 3 years).
     * Company shares (conditions below).
  2. Qualifying Period:
     * The business or assets must have been owned and used in the business for at least 2 years prior to the date of disposal.
     * For companies, the shareholder must meet the ownership criteria for the same 2-year period.
  3. Assets Eligible for BADR:
     * Assets used in the trade of the business at the time of disposal or cessation.
     * Shares in a trading company that meet personal company criteria.

Qualifying Conditions for Company Shares

*	The company must be a trading company (or the holding company of a trading group).
*	The individual must own at least 5% of the shares and voting rights in the company.
*	The individual must also meet one of the following two conditions:
1.	Be entitled to 5% of distributable profits and 5% of assets on a winding-up, or
2.	Be entitled to at least 5% of proceeds if all shares were sold.
*	The individual must also be an employee or officer (director) of the company during the qualifying 2-year period.

Tax Rate and Lifetime Cap

*	Tax Rate: 10% on gains qualifying for BADR.
*	Lifetime Cap: A taxpayer can claim BADR on up to £1 million of lifetime gains.
*	Any gains exceeding £1 million are taxed at standard CGT rates.

Question 14

A sole trader sells their business (qualifying for BADR) for £500,000, making a gain of £300,000. What is their CGT liability?

Answer 14

1. Gain: £300,000.
   
   2. Lifetime Cap: Below £1 million, so eligible for BADR.
   3. Tax: £300,000 × 10% = £30,000 CGT.

Question 15

What happens to chargeable assets for CGT purposes when the taxpayer dies?

Answer 15

• No disposal occurs upon death, so no CGT is charged.
  
  • PRs acquire assets at their market value (probate value) at the date of death.
  • Gains accrued during the deceased’s lifetime are exempt from CGT but may be subject to inheritance tax (IHT).

Question 16

What are the time limits for claiming rollover relief?

Answer 16

1. Acquisition of Replacement Asset:
   
   • Must occur within 1 year before or 3 years after the disposal of the original qualifying asset.
   • HMRC may allow extensions in certain circumstances.
     2. Claiming the Relief:
   • Taxpayer must claim within 4 years from the end of the tax year in which the replacement asset is acquired or the original asset is disposed of, whichever is later.

Example:
* Edith sells a business property on 1 May 2023.
* To claim rollover relief, she must acquire a replacement qualifying business asset between 1 May 2022 and 30 April 2026 and submit a claim by the end of tax year 2027/28.

Question 17

How are gains and losses aggregated under CGT?

Answer 17

1. Aggregate All Gains and Losses:
   
   • Combine all capital gains and losses from chargeable disposals during the tax year.
     2. Apply the Annual Exemption:
   • Deduct the annual exemption (£6,000 for 2023/24) from the total gains.
   • The exemption is a general deduction and cannot be carried forward if unused.
     3. Order of Application:
   • Deduct the exemption first from gains taxed at higher rates (e.g., residential property gains at 28%).
     4. Outcome:
   • The net remaining gain becomes the taxable gain for the year.

Question 18

How do CGT reliefs affect the application of the annual exemption?

Answer 18

1. Exclusive Use of Reliefs:
   
   • Gains deferred under rollover relief or hold-over relief cannot use the annual exemption.
     2. Business Asset Disposal Relief (BADR):
   • The annual exemption can be applied to reduce gains before applying BADR, lowering the taxable gain further.
     3. Order of Reliefs:
   • Taxpayers must often choose between reliefs, as multiple reliefs (e.g., rollover relief and BADR) cannot be applied simultaneously.

Question 19

Can rollover relief on incorporation work with other reliefs?

Answer 19

1. Incompatibility:
   
   • Cannot be combined with rollover relief for replacement assets (as shares are not qualifying assets) or hold-over relief (since there is no gift).
     2. Partial Application:
   • If part of the business is sold for cash, BADR or the annual exemption can apply to the cash portion, while rollover relief applies to the shares.
     3. Outcome:
   • Rollover relief defers CGT until the new shares are sold.

Question 20

What relief options does Felicity have after gifting her catering business?
A:
* Scenario: Felicity, a higher-rate taxpayer, disposes of her business to her daughter with a gain of £175,000.

Answer 20

1. Option 1: Hold-Over Relief:
   
   • No CGT liability for Felicity now.
   • Full £175,000 gain deferred to her daughter, who pays CGT on future disposal.
   • Felicity cannot use the annual exemption or BADR.
     2. Option 2: BADR:
   • Apply the £6,000 annual exemption, reducing the taxable gain to £169,000.
   • Taxed at 10% under BADR, resulting in a tax bill of £16,900.
   • Felicity pays CGT immediately, avoiding deferred liability.
     3. Decision:
   • Option 1 defers liability but transfers it to the daughter.
   • Option 2 minimizes overall tax liability but requires immediate payment.

Question 21

What rates of tax apply to CGT?

Answer 21

1. Non-Residential/Non-Business Assets:
   
   • Below basic rate threshold: 10%.
   • Above basic rate threshold: 20%.
     2. Residential Property (Not Main Residence):
   • Surcharge of 8% on standard rates.
   • Below basic rate threshold: 18%.
   • Above basic rate threshold: 28%.
     3. Business Asset Disposal Relief (BADR):
   • Flat rate of 10%, subject to a lifetime cap of £1 million of qualifying gains.

Question 22

How are CGT losses handled?

Answer 22

1. Current Year Losses:
   
   • Offset losses against gains to reduce taxable gains.
   • Any unused losses are carried forward to future years.
     2. Carry Forward Losses:
   • Losses carried forward are applied to future gains but cannot exceed the annual exemption.
     3. Optimal Application:
   • Apply losses to gains taxed at the highest rates first (e.g., residential property gains taxed at 28%).

Question 23

How are CGT losses used to minimize tax liability?

Answer 23

• Current Year Losses: Deduct from gains to reduce taxable amount.
  
  • Carrying Forward Losses:
  • Losses not fully absorbed in the current year can be carried forward indefinitely.
  • Future use is limited to reducing gains to the annual exemption threshold.
  • Optimal Application: Losses are applied to gains taxed at the highest rate first.

Question 24

How do transfers between spouses affect CGT?

Answer 24

1. No Gain/No Loss:
   
   • Transfers between spouses or civil partners incur no immediate CGT.
   • The receiving spouse inherits the original acquisition cost.
     2. Deferred Liability:
   • CGT is deferred until the receiving spouse disposes of the asset.
     3. Tax Planning:
   • Utilize both spouses’ annual exemptions or transfer assets to the lower-tax-rate spouse.

Question 25

Jamila, a higher-rate taxpayer, purchased an antique clock ten years ago for £74,000, which she recently valued at £115,000. She decided to gift the clock to her husband, Simon, a basic-rate taxpayer. Five years later, Simon sold the clock for £130,000. How did this spousal transfer reduce their overall CGT liability, and what steps were involved in calculating the tax implications for Simon?

Answer 25

1. No Gain/No Loss Rule:
   
   • When Jamila gifted the clock to Simon, she incurred no CGT under the no gain/no loss rule for spousal transfers.
   • Simon inherited Jamila’s original acquisition cost of £74,000 as his acquisition cost.
     2. Simon’s Sale:
   • Simon sold the clock for £130,000.
   • Gain: £130,000 - £74,000 = £56,000.
     3. Tax Rate Applied:
   • Simon, as a basic-rate taxpayer, paid CGT at 10%, resulting in a tax liability of £5,600.
     4. Comparison with Jamila’s Liability:
   • Had Jamila sold the clock, she would have paid CGT at 20%, resulting in a tax liability of £11,200.
     5. Outcome:
   • By utilizing the spousal transfer, Simon and Jamila reduced their combined tax liability by £5,600, demonstrating the benefit of transferring assets to the lower-rate taxpayer.

Question 26

How is CGT calculated for part disposals of an asset?

Answer 26

1. Apportionment of Costs:
   
   • Determine the proportion of the total asset value represented by the disposed portion.
   • Apply that proportion to the acquisition cost to find the acquisition cost of the part sold.
     2. Example:
   • Isabel sells part of a plot worth £100,000. The original cost of the full plot was £200,000.
   • The sold part represents 25% of the total value.
   • Acquisition cost for the sold part: 25% of £200,000 = £50,000.
   • Gain: £100,000 - £50,000 = £50,000.

Question 27

How does CGT apply to partnerships?

Answer 27

. Individual Partner Liability:
* Each partner is taxed on their share of the gain based on ownership percentages.
2. Proceeds and Costs:
* Disposal proceeds and acquisition costs are allocated among partners according to their ownership shares.
3. Example:
* Joan, Kevin, and Larry share partnership profits at 25%, 50%, and 25%.
* If a property is sold for £300,000 (cost: £200,000), Kevin pays CGT on:
* Gain: £100,000 × 50% = £50,000.

Question 28

How is CGT treated for LLPs?

Answer 28

1. Normal Partnership Rules:
   
   • Treated the same as ordinary partnerships for CGT purposes.
     2. Ceasing to Trade:
   • If an LLP stops trading, it may be treated as a body corporate for CGT purposes.

Question 29

When is Capital Gains Tax (CGT) typically payable, and under what circumstances can payment be made in instalments?

Answer 29

1. General Payment Deadline:
   
   • CGT is payable on or before 31 January following the end of the tax year, or 30 days from the making of an assessment, if later.
     2. Residential Property Sales:
   • Taxpayers must submit a provisional calculation of gains and pay any tax due within 30 days of completion of the sale.
     3. Payment Methods:
   • HMRC’s real-time CGT service.
   • HMRC property service.
   • Self-assessment tax return.
     4. Payment by Instalments (Rare Option):
   • Available only if:
   • The disposal was a gift.
   • The qualifying asset is land, a controlling shareholding in a company, or unquoted company shares.
   • The conditions for hold-over relief do not apply.
   • If eligible, the first instalment is due by 31 January following the end of the tax year in which the disposal was made.