Capital Gains Tax 2: Basic Rules Flashcards
What is capital gains?
A profit realised when an individual, partnership or company disposes of a capital asset.
What is a taxable disposal (disposition)?
May include:
- the sale of gift of an asset,
- trading one asset for another asset
- destruction of an asset if insurance proceeds are received
What is capital gains taxed for individuals, partnerships and companies?
Individuals (including partners in partnership)
- pay tax on capital gains at lower rate than tax rate on income
Companies
- do not pay CGT
- capital gains made are taxed at company tax rate of 19%
CGT rules for ukresidence vs non uk residence?
UK Residence
- pay CGT on disposal of any chargeable asset they own regardless of where in world asset is
Non UK Residence
- do not pay CGT even on assets in the UK
EXCEPTION - pay CGT if they dispose of interests in UK land (residential and commercial)
When is CGT not charged?
Exempted Assets
- wasting chattels (property of life less than 50 years)
- assets worth less than £6k at time of disposal
Exempt Disposals
- transfers on death (person takes it at probate value)
- Transfer between spouses (recipient deemed to have acquired assets at cost donor acquired it)
- Transfers to charity
What is wasting chattels (inc. examples)?
Property of life less than 50 years is exempt from CGT
Includes
- cars
- boats
- watches
- farm animals
- machinery not used in business (is taxable if used in business)
When is CGT due?
Generally due and payable in full on 31st Jan FOLLOWING the year in which gain was made.
Land
- disposals of UK residential property CGT must be reported and paid within 60 days of completion
How is CGT calculated for assets disposed of by gift and where the transaction is with connected person?
Use market value instead of proceeds of sale.
Connected person is someone close to the person disposing of the asset.
How are the proceeds of sale for CGT purposes calculated?
Amount sold for (minus) incidental cost of disposal.
Incidental cost of disposal:
- legal fees
- valuation fees
- advertising cost
How is the cost of acquisition calculated for CGT purposes?
cost of acquiring the asset (plus) allowable costs and expenses
Allowable costs and expenses:
- legal fees,
- commissions
- stamp duty land tax
- cost relating to title
- cost of enhancement (inc allowable expenses) (ONLY if enhancement is still part of asset when disposed of)
Is there an annual exempt amount for capital gains tax?
Yes of individuals
- is currently £12,300
Is the annual exempt amount for capital gains tax applied before or after any applicable exemption?
After the exemptions
EXCEPT for Business Asset Disposal Relief which is applied after exemption is subtracted.
What is the CGT rate?
Depends on the income tax band and asset.
The exempt amount does not count towards pushing you into next band.
Band
- if income falls in basic band CGT is taxed at 10% so far as taxable capital gains continues to fall fall in basic rate
- CGT that exceeds basic band is taxed at 20%
Land
- residential property CGT is 18% and 28% instead
- applies to residential land in UK and abroad
Steps for working out brackets
- work out taxable Capital Gains
- work out if they have any room in basic income tax bracket remaining
- If yes then tax CG at corresponds to remaining in basic tax bracket at 10% (or 18% if residential land)
- Tax remaining CG (exceeds basic tax bracket) at 20% (or 28% if residential land)
How can you use your annual exempt amount to minimise CGT?
Annual Exempt Amount can be allocated in most beneficial way, meaning it can be applied to the asset with the highest CGT.
- basically prioritise residential property
