Capital Gains Tax Flashcards
What are the 5 steps to calculate Capital Gains Tax (CGT)?
Step 1: Disposal of a chargeable asset
○ Here you need to identify the disposal i.e. sale or gift of a chargeable asset. E.g. the sale of a watch or other property.
Step 2: Calculation of the gain
○ Price paid/consideration received for the asset - the original cost of the asset
▪ The asset’s sale price - it’s purchase price (originally bought for) - Relevant deductions
- Some deductions are allowed which will reduce the gain further
Deductions:
Initial expenditure
▪ The cost price of the asset/ market value or probate value
▪ Incidental costs of original acquisition e.g. conveyancing or legal fees
▪ Expenditure wholly and exclusively incurred in providing the asset i.e. cost of building a property
Subsequent expenditure
▪ Expenditure wholly and exclusively incurred in establishing, preserving/defending title to the asset i.e. legal fees to resolve a dispute, like a boundary dispute.
▪ Expenditure wholly and exclusively incurred to enhance the asset
Incidental costs of disposal
▪ These include legal fees for the sale and the estate agent’s fees or commission
Step 3: Consider reliefs
○ There are various reliefs which may be available to reduce or postpone the tax payable.
▪ Rollover relief
▪ Rollover relief on incorporation of a business
▪ Hold over relief (on gifts)
▪ Business Asset Disposal Relief
Step 4: Add together gains/losses remembering to; deduct annual exemption
○ Gains and losses from all sources need to be added together. The annual exemption of £3000 is deducted at this stage.
○ The annual exemption of £3000 applies to individuals, personal representatives and trustees for disabled people. The annual exemption for other trustees is lower at £1,500.
Step 5: Apply the correct rate of tax
Standard CGT rates
· If the tax payer’s capital gains + taxable income added together do not exceed the threshold for the basic rate income tax (£37,700), the rate of tax payable on the gains is 10%.
· If the tax payer’s capital gains and + taxable income added together EXCEED the basic rate threshold then;
▪ The rate of tax for any gains up to the basic rate threshold is 10%
▪ Any gains which exceed this basic rate threshold are taxed at a rate of 20%
What are the 5 steps to calculate CGT
Step 1: Disposal of a chargeable asset
○ Here you need to identify the disposal i.e. sale or gift of a chargeable asset. E.g. the sale of a watch or other property.
Step 2: Calculation of the gain
○ Price paid/consideration received for the asset - the original cost of the asset
▪ The asset’s sale price - it’s purchase price (originally bought for) - Relevant deductions
Step 3: Consider reliefs
○ There are various reliefs which may be available to reduce or postpone the tax payable.
▪ Rollover relief
▪ Rollover relief on incorporation of a business
▪ Hold over relief (on gifts)
▪ Business Asset Disposal Relief
Step 4: Add together gains/losses remembering to; deduct annual exemption
○ Gains and losses from all sources need to be added together. The annual exemption of £3000 is deducted at this stage.
Step 5: Apply the correct rate of tax
Standard CGT rates
What are the CGT rates for residential property gains
If the chargeable asset is a residential property which is NOT the tax payer’s main residence, the gains are subject to an 8% surcharge for basic rate tax payers and 4% for high rate tax payers.
Gains which are below the basic rate threshold are taxed at 18% (i.e., 10% + 8%)
Gains which exceed the basic rate threshold are taxed at 24% (i.e. 20% + 4%)
What are the CGT rates for business asset disposal relief gains
Any gains for business asset disposal relief are taxed at 10% regardless of the tax payer’s income.
If tax payer’s have some gains which qualify for business asset disposal relief and other gains that do not qualify then;
▪ The business asset disposal relief gains (taxed at 10%), will be added to their income first.
The tax payer’s other gains will be treated as the top slice of their income and will most likely exceed the basic rate threshold so are more likely to be taxed at 20% or at 24% on residential property.
What are the CGT rates paid by trustees and PR’s
Gains made by trustees and PR’s are all taxed at 20%
For residential properties gains will be taxed at 24%.
What is Capital Gains Tax (CGT)?
Capital Gains Tax is a tax on the profit (gain) made when you dispose of (sell, gift, or transfer) an asset that has increased in value.
Only the gain (not the total amount received) is taxed.
Q: Which bodies do NOT pay Capital Gains Tax?
- Companies – They pay Corporation Tax instead.
- Charities – They are exempt from paying Capital Gains Tax.
Q: When calculating the gain, what examples of expenses can be deducted?
Initial Expenditure:
- The purchase price of the asset.
- The market value or probate value if the asset was gifted or inherited.
- Incidental costs of acquisition, such as:
○ Conveyancing fees.
○ Legal fees.
○ Valuation fees.
○ Stamp duty.
Subsequent Expenditure:
- Costs incurred to establish, preserve, or defend title to the asset (e.g., legal fees for a boundary dispute).
- Costs incurred to enhance the asset’s value at the time of disposal (e.g., building an extension to a property).
- Exclusions: Routine maintenance, repairs, and insurance costs are not deductible.
Incidental Costs of Disposal:
- Legal fees for the sale.
- Estate agent’s fees or commission.
What is Rollover Relief and how does it work?
Rollover relief allows sole traders, partners, and certain shareholders to defer paying Capital Gains Tax (CGT) on a gain when they dispose of a qualifying business asset and reinvest the proceeds in another qualifying business asset. The gain is not eliminated, but postponed until the replacement asset is sold.
How it works:
1. The gain from the disposal is deducted from the acquisition cost of the replacement asset, lowering its base cost for future CGT calculations.
- The taxpayer cannot use their annual exemption before rolling over the gain.
- If the replacement asset is sold, the deferred gain is added to any new gains made
Example:
* If a workshop is sold for £77,000 with a gain of £33,000, and a new workshop is purchased for £95,000, the acquisition cost of the new workshop becomes £62,000 (£95,000 − £33,000). When the new asset is sold, CGT will apply to the adjusted cost.
What is Rollover Relief on Incorporation of a Business and how does it work?
Rollover relief on incorporation allows sole traders or partners to defer paying CGT on a gain when they transfer their unincorporated business to a company. The gain is “rolled over” into the value of the shares received in exchange for the business. CGT becomes payable only when the individual sells the shares.
How it works:
1. The gain on the transfer of the business is deducted from the acquisition cost of the shares.
- The relief applies automatically unless the taxpayer opts out.
Annual exemptions cannot be used before rolling over the gain, meaning the taxpayer forfeits that benefit for the tax year.
Example:
* A business worth £150,000 is transferred from an un-incororated business to a company, resulting in a gain of £88,000. The acquisition cost of the shares becomes £62,000 (£150,000 − £88,000). If the shares are sold later for £200,000, CGT will apply to the gain of £138,000 (£200,000-£62,000)
What is Hold-Over Relief on Gifts and how does it work?
What is Hold-Over Relief on Gifts and how does it work?
Hold-over relief allows individuals to defer paying CGT on a gain on certain gifts OR sales of assets at undervalue by transferring the CGT liability to the donee (recipient of the gift). The donee pays CGT when they dispose of the asset, including the donor’s deferred gain and any gain accrued during their ownership.
How it works:
- The donor and donee must jointly elect to apply for the relief.
- The donor’s gain is deducted from the market value of the asset to calculate the donee’s acquisition cost.
If the donee dies before disposing of the asset, all deferred gains are wiped out, and no CGT is payable.
Example:
A business worth £212,000 is gifted with a gain of £100,000. The donee inherits the deferred gain and their acquisition cost is adjusted to £112,000 (£212,000 market value − £100,000 gain). If the donee sells the business for £300,000, their gain is £188,000 (£300,000 − £112,000).
What is Business Asset Disposal Relief and how does it work?
Business Asset Disposal Relief (BADR) is a relief that allows individuals to pay a reduced CGT rate of 10% on qualifying business disposals, up to a lifetime limit of £1 million. It applies to gains from the sale or gift of business assets.
How it works:
1. If the disposal (sale, gift, transfer) meets the qualifying conditions, the gain is taxed at 10%.
- Gains exceeding the £1 million lifetime cap are taxed at the normal CGT rate.
The taxpayer must claim the relief within specific time limits (e.g., by 31 January following the tax year of disposal).
Example:
A taxpayer sells a consultancy business, making a £650,000 gain subject to a reduced CGT rate of 10%. Later, they sell shares in another business, making a £400,000 gain. BADR applies to £350,000 of the second gain (up to the £1 million cap). The remaining £50,000 is taxed at the normal CGT rate.
When can a sole trader or partnership qualify for Business Asset Disposal Relief?
A sole trader or partnership can qualify for BADR if they dispose of:
- The whole business or part of the business as a going concern.
- Assets that were being used in the business when it ceased trading i.e. Assets following cessation (business assets that were used in the trade when the business ceased trading) , provided the assets were used in the business when it ceased trading.
Eligibility criteria:
- The business or assets must have been owned for at least 2 years before disposal or cessation.
- The disposal must occur within 3 years of cessation if the business has ceased trading.
- Only assets used in the trade qualify (e.g., business premises); investments do not.
Example:
A sole trader sells a café they’ve owned and operated for 5 years (more than 2 years before the disposal). The sale qualifies for BADR as the café was part of the trade and the 2-year ownership condition is met.
Q: What are the conditions for the disposal of company shares to qualify for Business Asset Disposal Relief (BADR)?
A: The disposal (sell, gift or transfer) of company shares qualifies for BADR if all the following conditions are met:
1. Trading Company:
- The company must be classified as a trading company (i.e. the company trades), meaning it is not substantially involved in non-trading activities (e.g., holding investments).
2. Personal Company:
* The taxpayer must own at least 5% of the ordinary share capital, with:
* At least 5% voting rights, and
Beneficial entitlement to:
* At least 5% of distributable profits or proceeds of sale, and/or
* At least 5% of the company’s assets on winding up.
3. Employee/Officer Requirement:
* The taxpayer must be an employee or officer of the company.
Timing:
The conditions must be satisfied for 2 years:
- Ending on the date of disposal, or
- Ending on the date the company ceased trading (disposal must occur within 3 years of cessation).
How does CGT work in relation to spouse transfers?
No CGT on Transfers Between Spouses:
Transfers of assets between spouses or civil partners are treated as no gain, no loss transactions for CGT purposes. This means no CGT is payable at the time of the transfer. Spouses don’t pay CGT on assets that have increased in value when they transfer the asset between each other.
Deferred CGT Liability:
The receiving spouse inherits the original acquisition cost of the asset. When they later dispose of the asset, they will pay CGT on:
- The gain made during their ownership.
- The gain made during the donor’s (i.e., their partners) ownership.
Tax Planning Benefits:
Spouses can transfer assets strategically to:
* Use both individuals’ annual exemptions.
* Take advantage of different CGT rates if one spouse has a lower tax rate.
Example:
* A higher-rate taxpayer gifts an antique to their basic-rate taxpayer spouse. The spouse later sells it and pays CGT at 10% (as a basic-rate taxpayer) instead of 20%, saving tax.
Is CGT paid on death?
No CGT is Paid on Death:
- ## When a person dies, their assets are not considered disposed of (transferred, gifted or sold) for CGT purposes.
- Instead, personal representatives inherit the assets at their market value on the date of death.
Inheritance Tax (IHT):
While no CGT is payable upon death, the deceased’s estate may be subject to IHT on:
- The total value of their estate at the time of death.
- Any gifts made in the seven years prior to death (potentially exempt transfers).
What assets are covered by Business Property Relief (BPR) when a person dies?
BPR provides relief from IHT on certain business assets, reducing or eliminating the taxable value of those assets.
Assets Eligible for 100% Relief (Fully Exempt from IHT):
- A business or interest in a business (e.g., a sole trader business or partnership share).
- Unlisted shares in a company (NOT traded on a recognised stock exchange, excluding AIM).
Assets Eligible for 50% Relief (Partial Reduction):
- Shares in a listed company (i.e. listed on the stock exchange) if the transferor had voting control (over 50% of voting rights).
- Land, buildings, or machinery that was used for business purposes;
* Personally owned by the deceased but used for business purposes by:
* A partnership in which they were a member.
* A company they controlled (listed or unlisted).
Key Conditions:
- The asset must have been owned for at least two years before the transfer.
- Ownership periods can include time the asset was owned by a deceased spouse or civil partner.
- Binding contracts for the sale of a business or shares may disqualify assets from BPR.
Example: CGT Calculation Flashcard
Q: How is CGT calculated in the case of Margaret’s share disposal?
Scenario:
* Margaret sells shares for £74,000 in May.
* The shares originally cost her £30,000.
* Her taxable income for the year is £43,000, meaning all of her gain is taxed at 20%.
This is her only disposal during the tax year.
Steps:
- Identify the Disposal:
○ Sale of shares. - Calculate the Gain:
○ Gain = Proceeds of Disposal (£74,000) − Cost (£30,000).
○ Gain = £44,000. - Consider Exemptions and Reliefs:
○ No exemptions or reliefs apply. - Deduct Annual Exemption:
○ Annual exemption = £3,000.
○ Chargeable gain = £44,000 − £3,000 = £41,000. - Calculate the Tax Payable:
○ CGT Rate: 20% (as Margaret’s income exceeds the basic rate threshold).
○ Tax payable = £41,000 × 20% = £8,200.
Answer: Margaret’s CGT liability is £8,200.
Example: CGT Calculation with Deductible Expenditure and Incidental Costs of Disposal
Q: How is CGT calculated in the case of Sunjeev’s factory disposal?
Scenario:
Sunjeev sells a factory for £268,000.
- He inherited it with a market value of - £205,000 at the date of inheritance.
- He incurred the following costs:
○ £5,100 on renovations.
○ £8,500 on legal fees for resolving a dispute over rights of way.
○ £750 in legal fees for the sale.
○ £2,700 in estate agent’s commission.
His taxable income for the year is £32,000.
Steps:
1. Identify the Chargeable Disposal:
- Sale of factory.
- Calculate the Gain:
- Proceeds of Disposal: £268,000.
- Less: Incidental Costs of Disposal:
* Legal fees: £750.
* Estate agent’s commission: £2,700.
* Total incidental costs: £3,450. - Net Proceeds of Disposal: £264,550.
- Less: Initial Expenditure:
- Inherited value (probate value): £205,000.
- Renovations: £5,100.
- Legal fees (rights of way dispute): £8,500.
- Total expenditure: £218,600.
*
Gain: £264,550 − £218,600 = £45,950.
- Consider Exemptions and Reliefs:
No exemptions or reliefs apply. - Deduct Annual Exemption:
* Annual exemption = £3,000.
* Chargeable gain = £45,950 − £3,000 = £42,950. - Calculate the Rate of Tax:
- 10% on £5,700 (gain below basic rate threshold of £37,700, less taxable income of £32,000):
* £5,700 × 10% = £570
- 20% on remaining £37,250 (gain above basic rate threshold):
- £37,250 × 20% = £7,450.
Total CGT: £570 + £7,450 = £8,020.
Example: Rollover Relief on Replacement
Q: How does rollover relief apply in the case of Peter’s workshop replacement?
Scenario:
- On 13 March 2024, Peter sells a workshop he has owned since 1994 for £77,000, making a gain of £33,000.
- This is his only chargeable disposal for the tax year.
- On 1 February 2025, Peter buys a replacement workshop for £95,000.
He claims rollover relief on the replacement asset.
How Rollover Relief Applies:
- No Immediate CGT Liability:
○ The gain of £33,000 is postponed, so Peter does not pay CGT in 2023/24. - Adjusted Acquisition Cost for Replacement Workshop:
○ The purchase price of the new workshop is reduced by the deferred gain: £95,000 − £33,000 = £62,000. - Annual Exemption Forfeited:
Peter cannot use his annual exemption for the 2023/24 tax year.
Subsequent Sale of Replacement Workshop:
- In 2026, Peter sells the new workshop for £140,000.
- Gain Calculation:
○ Proceeds of Disposal: £140,000.
○ Adjusted Acquisition Cost: £62,000 (instead of £95,000).
○ Gain: £140,000 − £62,000 = £78,000 (compared to £45,000 without rollover relief).
Further Rollover:
- If Peter meets the qualifying conditions, the £78,000 gain from the 2026 sale can also be rolled over.
Answer: Rollover relief postpones the initial CGT liability but increases the taxable gain when the replacement asset is sold, unless further relief is claimed.
Example: Rollover Relief on Incorporation
Q: How does rollover relief apply in the case of Hayley incorporating her business?
Scenario:
- Hayley, a private dietician, decides to incorporate her business.
- Her company, HJ Limited, purchases the business at a market value of £150,000 in exchange for 150,000 shares.
- Hayley makes a chargeable gain of £88,000 on the disposal to HJ Limited.
How Rollover Relief Applies:
- No Immediate CGT Liability:
○ By rolling over the gain, Hayley defers paying CGT on the £88,000 gain.- Adjusted Acquisition Cost of Shares:
○ The gain is deducted from the shares’ market value to calculate their adjusted acquisition cost:
£150,000 − £88,000 = £62,000.
- Adjusted Acquisition Cost of Shares:
- Future Disposal of Shares:
○ When Hayley sells the shares, her gain will be calculated using the adjusted acquisition cost of £62,000.Example of Future Sale:
If Hayley sells her shares for £200,000, her gain is calculated as:
£200,000 − £62,000 = £138,000 (subject to CGT at the time).
Example: CGT on Part Disposal
Q: How is CGT calculated on the part disposal of an asset in Isabel’s case?
Scenario:
- In 2011, Isabel purchased a commercial property plot for £200,000.
- In October 2024, she sold part of the plot for £100,000, while the remaining land is valued at £300,000.
- This is her only disposal during the tax year, and her taxable income for the year is £40,000.
How CGT on Part Disposal Works:
- Identify the Disposal:
○ Sale of part of a commercial property. - Calculate the Gain:
- Consideration Received: £100,000.
- Apportioned Cost:
* The total value of the two pieces of land is £400,000 (£100,000 + £300,000).
* The sold land represents ¼ of the total value (£100,000 ÷ £400,000).
* The acquisition cost of the sold portion is therefore ¼ of the original cost: £200,000 × ¼ = £50,000.
- Gain Calculation:
Proceeds of Disposal (£100,000) − Apportioned Cost (£50,000) = Gain (£50,000).
- Deduct Annual Exemption:
Gain (£50,000) − Annual Exemption (£3,000) = Chargeable Gain (£47,000). - Calculate the Rate of Tax:
- Isabel is a higher-rate taxpayer (taxable income: £40,000).
- CGT is taxed at 20%.
- £47,000 × 20% = £9,400.
Answer: Isabel’s CGT liability on the part disposal is £9,400.
