Capital Gains Tax

Question 1

What two grounds do James and Nobes give in defence for the case of taxing capital gains?

Answer 1

(1) On equity grounds: if capital gains are the equivalent to income, they should equally be subject to tax.
(2) Efficiency grounds: By exempting capital gains would encourage conversion from income to CG; a tax on CG reduces the attraction of investment in ‘non-productive’ assets.

Question 2

According to James and Nobes, on what basis is British CGT imposed?

Answer 2

On a realisation basis.

Question 3

What three problems, according to James and Nobes, are created by the realisation basis?

Answer 3

(1) ‘Locked-in’ effect: incentive to postpone payment of tax by not realising the asset.
(2) Assets realised in uneven lumps, hence difficult to make the tax progressive.
(3) Administrative: valuation is required for when asset is bought and sold, but for some types of assets this is a difficult task.

Question 4

What was available for taxpayers between 1982 and 1998?

Answer 4

An ‘indexation allowance’ after years of criticism on the inequitable effects of inflation.

Question 5

What was available for taxpayers between 1998 and 2008?

Answer 5

Taper relief: reduced the amount of the gain accorded to the length of time the asset had been owned.

Question 6

What did Muteen (1966) observe about the CGT?

Answer 6

The idea behind the tax was not to collect money for the revenue, but to bring more equity into the sytem.

Question 7

According to Tiley and Loutzenhiser, what does the realisation basis mean?

Answer 7

The tax is deferred until such time as the gain is realised.

Question 8

What alternative method of CGT could be used to tax capital gains?

Answer 8

To tax accrued but unrealised gains. But this would require annual valuations, which would include practical difficulties.

Question 9

According to Tiley and Loutzenhiser, why is there an exemption of CGT on primary residences? What is a problem with it?

Answer 9

It is a political decision. Encourages individuals to invest their wealth into the privileged asset of the family home.

Question 10

What is the main legislation of CGT?

Answer 10

Taxation of Chargeable Gains Act 1992 (TCGA 1992).

Question 11

What does TCGA 1992 s 21(1) tell us?

Answer 11

What is an asset: all forms of property are assets whether or not they are situated in the UK. Property is not further defined.

Question 12

What does TCGA 1992 s21(1)(b) say?

Answer 12

That any currency other than in sterling is an asset.

Question 13

What does TCGA 1992 s21(1)(c) say?

Answer 13

An asset includes any form of property created by the person disposing of it (e.g. painting), or otherwise coming to be owned without being acquired (e.g. property simply found).

Question 14

What did the Court of Appeal say in Kirby v Thorn EMI (1987)?

Answer 14

A company’s right to trade and compete in the market place is not an ‘asset’, but held that a payment which could be related to the goodwill of the company was taxable.

For a ‘right’ to count as an asset for CGT purposes, it must be legally enforceable and capable of being turned into money. In the case, the freedom to indulge in commercial activity was not a legal right constituting an asset.

Question 15

What did the House of Lords consider in O’Brien v Benson’s Hosiery Ltd (1980)?

Answer 15

The meaning of ‘asset’: the bundle of rights of an employer under a service agreement was an asset for CGT.

So a sum received by the employer to secure the release of the employee was derived from that asset and so liable to CGT.

The fact that the rights could not be assigned by the employer was irrelevant. It was sufficient that they could be ‘turned into account’.

Question 16

What is the relationship between O’Brien and Kirby?

Answer 16

Kirby provides a necessary check on some of the arguments in O’Brien, which had come close to saying that if a sum was received then it must have been derived from property.

Question 17

What is meant by the term ‘disposal’?

Answer 17

The central concept is not defined. But seems to cover any form of transfer or alienation of the beneficial title to the asset from one person to another.

Question 18

What does TCGA 1992 s 38 provide?

Answer 18

That some costs can be deducted from consideration (i.e. allowable expenditure), but are limited to certain categories.

Question 19

What are the 7 categories of allowable expenditure?

Answer 19

Acquisition costs:

(1) Consideration.
(2) Incidental costs to the taxpayer (must have been incurred by the disposer, wholly and exclusively , for the purposes of acquisition.
(3) If asset not required by T, then the expenditure wholly and exclusively incurred by T in providing the asset.

Improvement costs:

(4) Expenditure wholly and exclusively incurred by T for the purpose of enhancing the value of the asset. (s 38(1)(b)).
(5) Expenditure incurred in establishing title to the asset.
(6) Expenditure on preserving or defending the title of the asset.

Disposing of the asset: (7) Incidental costs of making the disposal are deductible (s 38(1)(c)): includes professional fees paid and includes stamp duty land tax (s 38(2)).

Question 20

What can count as incidental costs to the taxpayer for the purposes of allowable expenditure?

Answer 20

E.g. Costs of establishing title limited to fees, commission or remuneration paid for the professional services of any surveyor, valuer, auctioneer, accountant etc.

Fees for investment advice not allowable, or expenses to travel to inspect the property.

Question 21

What happened in Aberdeen Construction Group Ltd v IRC (1978)?

Answer 21

Expenditure on enhancement of the asset must make an identifiable change in the state or nature of the asset. In this case, the expenditure on the waiver of a loan could not be deducted since it did not make an identifiable change in the particular asset sold, i.e. shares.

Question 22

What happened in Emmerson v Computer Time International Ltd?

Answer 22

Rent was owed to a landlord. The landlord agreed to consent to an assignment of the lease on condition that the rent arrears were paid. The rent arrears were not deductible in the CGT computation.

Hence, the payment required to make a disposal does not, in itself, permit a deduction for this payment unless ti makes a change to the asset or its value.

Question 23

What was introduced for CGT purposes in FA 2008?

Answer 23

New ‘entrepreneurs relief’, restored the 10% rate of CGT on the first £1m of gains for the disposal of business assets. This was increased to £10m in FA 2011.

Question 24

What is the basic principle of CGT?

Answer 24

CGT is charged on any gain resulting when a chargeable person makes a chargeable disposal of a chargeable asset.

Question 25

What does TCGA 1992, s 2 tell us?

Answer 25

Who is a chargeable person. Essentially concerns whether they are resident in the UK.

Question 26

What happened in Marren v Ingles (1980)?

Answer 26

Shares in a private company were sold for £750 per share at the time of sale. A further sum would be paid if the company obtained a Stock Exchange quotation.

When, two years later, is quotation was obtained, a further £2,825 per share was paid.

The House of Lords held that the taxpayers were initially liable for CGT calculated on the original share price of £750 per share plus the value of this contingent right to the further sum, which was counted as a separate asset, a chose in action.

Question 27

What is the rule for transfers between married persons or civil partners living together?

Answer 27

No gain/no loss transactions are deemed by law to take place. TCGA 1992 s 58.

Question 28

How is a chargeable gain calculated?

Answer 28

The disposal consideration of the asset - allowable expenditure.

Question 29

What is the consideration for a disposal?

Answer 29

1) If by way of sale at arm’s length: the consideration will be the proceeds of sale.
2) Other disposals not at arm’s length: consideration is deemed equal to the market value of an asset (s 17). This applies to gifts and to disposals between ‘connected persons’ (s 18).

Question 30

What does TCGA 1992 s 17(1)(b) tell us?

Answer 30

The disposal consideration will be the market value of the asset if the actual consideration cannot be valued.

Question 31

How does the legislation prevent taxpayer’s taking advantage of the market value being deemed as a disposal consideration and therefore achieving a higher acquisition cost for any future disposal?

Answer 31

TCGA 1992 s 17(2): Where is an acquisition without a disposal (e.g. issue of shares by a company) and no consideration is given for the asset or is less than market value, the actual consideration (if any) given prevails.

Question 32

What are connected persons and where are they defined in the legislation?

Answer 32

Those where the disposal will always be deemed as not being at arm’s length: s 286.

Question 33

Where is the market value price defined in the legislation?

Answer 33

s 272: market value is the price which the asset could be sold on the open market. Market value for shares and securities listed in the Stock Exchange Daily Official List.

Question 34

What does s 19 provide?

Answer 34

Modifies the basic rule for ‘linked transactions’ applying when assets are fragmented.

This occurs when one transferor makes two or more transfers to connected persons and they occur within 6 years of each other.

Question 35

How is CGT treated for deferred consideration?

Answer 35

Consideration is payable in instalments (TCGA 1992 s 280): the disponer is taxed on the gain calculated by reference to the full amount of consideration receivable with no discount to the fact that payment was postponed.

s 48(1) adjusts liability where the full consideration is never actually received.

Question 36

What did Marren v Ingles (1980) say about deferred consideration which cannot be valued because it is dependent on some future contingency?

Answer 36

The taxpayer was treated as making two separate disposals.

The first was the disposal of shares: this included actual payment + the value (if any) of the right to receive the future deferred sum. The value of the chose in action then formed the acquisition cost of the asset.

When the deferred consideration became payable, this was treated as making a second disposal, this time of the chose in action. The House of Lords did not attempt to value the chose in action.

In some cases the deferred consideration is so uncertain that the value of it at the time of the sale of the shares is nominal.

Question 37

What was the principle in IRC v Richards’ Executors (1971)?

Answer 37

The requirement in TCGA 1992 s 38 that expenditure must be ‘wholly and exclusively’ incurred has been interpreted relatively liberally.

The costs in this case were ‘dual purpose expenditure’.

Question 38

What was the principle in Oram v Johnson (1980)?

Answer 38

Expenditure for TCGA 1992 s 38 must reduce the taxpayer’s estate in some quantifiable way: notional cost of own labour does not count.

Question 39

What is a part disposal? What is the formula for calculating this?

Answer 39

Whenever part of the asset or interest in an asset is disposed of it is necessary to calculate the original cost of the part sold before any gain is computed (TCGA 1992, ss 21, 42).

C x (A/(A+B)). C = all the deductible expenditure on the whole asset; A = consideration of the part of the asset disposed of; B = market value of part retained (at time the part is sold). This need not be used if the original cost can be easily calculated.

Question 40

What is a wasting asset?

Answer 40

A wasting asset is one with a predictable useful life not exceeding 50 years (s 44) (e.g. plant and machinery).

Tangible moveable property which is a wasting asset (e.g. washing machine) is not subject to CGT. Exemption to this is if the asset has been used solely for the purposes of a trade (s 47).

Question 41

What does s 62 tell us?

Answer 41

Death does not involve a chargeable disposal.

Question 42

What four specific instances of disposals are given in s 22(1)?

Answer 42

(a) Where a capital sum is received by way of compensation for the loss of, or damage to, an asset (e.g. damages received for compensation or damage to an asset).
(b) Where a capital sum is received under an insurance policy for the loss or damage to an asset.

[For both of these - won’t be treated as disposal if asset has not been totally lost or destroyed. Relief is only available if 1 of 3 conditions are met: one being that the compensation is wholly used to restore the asset].

(c) Where a capital sum is received in return for the forfeiture or surrender of rights (e.g. O’Brien).
(d) Where a capital sum is received for the use of exploitation of assets (e.g. right to exploit copyright).

The time of disposal is when the sum is received.

Question 43

Something about 24(1)

Answer 43

Something about 24(1)

Question 44

Are private motor vehicles exempt from CGT?

Answer 44

Yes: s 263.

Question 45

What is the annual exemption for an individual from CGT?

Answer 45

£11,000 (for 2015-16) in the tax year.

Question 46

What is the most important exemption from CGT for the individual taxpayer?

Answer 46

Gain made on the disposal of the principal private residence (s 222-226).

Question 47

What did Moore v Thompson (1986) tell us?

Answer 47

What qualifies as a ‘dwelling house’ is a question of fact: in this case it was held that a caravan was not a dwelling house because of no supply of water of electricity.

Question 48

What does ‘residence’ connote?

Answer 48

Some degree of permanence. Property must have been occupied by the taxpayer at some stage during his ownership. Ownership per se is not enough.

Question 49

What did the case of Goodwin v Curtis (1988) tell us?

Answer 49

Distinction between permanent residence and temporary accommodation. In this case, despite the taxpayer’s occupation of the property, there was not the required ‘degree of permanence, continuity and the expectation of continuity’ for the occupation to count as residence. More of a ‘stop gap’ measure.

Question 50

What happened in Regan v R & C Comrs (2012)?

Answer 50

The need for permanence or continuity should not be overstated and the issue of whether there was residence is a matter of fact determined by the quality (and not merely the length) of the occupation.

Here, a couple’s third house, which the couple would always want to move out of and planned for it, was treated as residence.

Question 51

What does s 37 TCGA 1992 provide for?

Answer 51

Disposal consideration excludes amounts charged to income tax or taken into account in computing income.

Question 52

What does s 28 TCGA 1992 tell us?

Answer 52

Where an asset is disposed of an acquired under a contract, then, unless the contract is conditional, the time at which the disposal and acquisition takes place is the time when the contract was made and not the time when the asset was subsequently transferred.

Question 53

What was decided in Jerome v Kelley (2004)?

Answer 53

In 1987, A, B and C agreed to sell some land to X. In 1989, A and B each assigned half their interest in the land to D. The transfer of the land to X was completed in 1992.

The disposal was held not to have been made by A, B, C only, as to their shares in the land in 1987, but by A, B, C and D as to their shares in 1992. The 1989 assignments were part disposals, by A and B to D.

Hence, s 28 does not have the additional effect of fixing the parties to the disposal as being the parties to that contract as distinct from those at the time of completion.

Question 54

What was decided in Lyon v Pettigrew (1985)?

Answer 54

Where there is a conditional contract, the date of the disposal/acquisition is the date when the condition is fulfilled. In this case it was held that this rule only applied where all the liabilities under a contract of sale were conditional and not where title in only part of the property was to pass on payment of all installments.

Question 55

Are deemed disposals governed by the rule in s 28?

Answer 55

No, deemed disposals are governed by s 22(2), which defers the disposal to the time when the capital sum is actually received.

Question 56

What is the extended meaning of ‘disposal’ found in s 22(1)?

Answer 56

Where a capital sum is derived from the assets by their owner, notwithstanding that no asset is acquired by the person paying the capital sum.

So s 22(1) means that where:

(i) an owner receives an amount and,
(ii) that amount is derived from an asset,
(iii) then the owner is deemed to have made a disposal or part disposal, and
(iv) the capital sum is treated as consideration received for that disposal.

An example of this would be where a shareholder receives a capital distribution in respect of his shares.

Question 57

What does s22(3) do?

Answer 57

Defines what ‘capital sum’ is for the purposes of s 22: means money or money’s worth which is not excluded from consideration taken into account the computation of the gain.

Question 58

What happened in the case of Davenport v Chilver (1983)?

Answer 58

The judge decided that if a capital sum was received within one of the specific headings of s 22(1) (a)-(d), the section could apply even if the capital sum did not strictly derive from an asset as required by the general wording of the section (e.g. access to an independent compensation fund).

Question 59

What happened in Zim Properties v Procter (1985)?

Answer 59

A firm of solicitors acting for the taxpayer in a conveyancing transaction were allegedly negligent, with the result that a sale of 3 proprieties owned by the taxpayer fell through.

The solicitors paid the taxpayer £69,000 out of compensation. This was a capital sum, but was it derived from the disposal of an asset?

Warren J held that it arose from a right of action against the solicitor which, as it could be turned into a capital sum by negotiating a compromise, was an asset for CGT purposes. This being so despite the fact that the sum was not derived from the properties (assets) themselves.

Question 60

How have some of the difficulties resulting from the Zim case been resolved by ESC D33?

Answer 60

If:

i) a right of action arises
ii) due to the total or partial loss or destruction of or damage to a form of property which is an asset for CGT purposes
iii) or because the claimant suffered some loss or disadvantage in connection with such a form of property
iv) any gain or loss on the disposal of the right of action is computed as if the compensation was derived from that asset and not from the right of action.

As a consequence, part of the acquisition cost of the chargeable asset may be deducted from the gain in accordance with the usual part-disposal rules.

Additionally, if there is no underlying asset, any gain accruing on the disposal of the right of action will be exempt from CGT (From January 2014: only the first £500,000 of this kind of capital compensation will be exempt).