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AF1 2018/19 > Capital Gains Tax > Flashcards

Capital Gains Tax Flashcards

1
Q

What is capital gains tax?

A

A tax paid by UK resident individuals and UK resident trustees/PRs on gains made of disposals of certain assets.
Companies pay corporation tax rather than CGT

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2
Q

What is the change in ruling that has come in on 6th April 2015 regarding UK residential property and a non UK resident?

A

If they sell any UK residential property after this date and they are non UK resident then CGT is payable

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3
Q

What are the 4 definitions of disposal?

A
  • Sale/surrender of an asset
  • Gift of an asset ( during a donor’s lifetime)
  • Transfer or assets from a trust to a beneficiary
  • Destruction of an asset where the money received from an insurance claim or compensation will be the disposal proceeds. [Where no monies are received then this will be classed as a loss for CGT purposes
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4
Q

How does HMRC decide whether someone is trading and therefore whether the asset is making a regular profit and should be taxed as income tax or this is a one off transaction which CGT should be paid?

A

They review 9 badges of trade - not every badge needs to be present as the court looks at the overall position:-

  • Is there a profit seeking motive
  • The number of transactions
  • The nature of the asset
  • Evidence of similar transactions
  • Changes to the asset - has it been repaired to sell on
  • Way the sale was carried out
  • Source of the finance
  • Interval of time between purchase and sale - trade is usually sold quickly
  • Method of acquisition
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5
Q

Name some of the assets that are exempt? - (16)

A
  • Bank/building society accounts
  • Gilts and qualifying corporate bonds
  • Principle private residence
  • Decorations for valour
  • Private motor vehicles
  • Foreign currency for expenditure abroad
  • Gaming winnings
  • Shares in VCTs
  • Shares in EISs and SEISs
  • Shares in an approved incentive plan
  • Woodlands
  • Pension funds
  • Life assurance
  • Non wasting chattels if deposit value is less than £6000
  • Wasting chattels ( with a useful life of less than 50 years eg race horse, fine wine
  • ISAs, Junior ISAs and CTFs
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6
Q

Name 4 assets that are not exempt?

A
  • Property that is not a main residence
  • Non qualifying corporate bonds
  • Second hand insurance polices
  • Unit trusts/OEICS investing in gilts and qualifying corporate bonds
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7
Q

What is the principle private residence relief (PPR)

A

Where a private residence is exempt from CGT
If a portion of the property has not always been part of the main residence then you apply a formula to see if there is some CGT that would need paying:-

Period of ownership

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8
Q

What absences are allowed in respect to private residence?

A
  • One year between taking residence and acquisition
  • Last 18 months ownership
  • where someone is absent as they have been living in job-related accommodation
  • Any 4 year period if caused by employment elsewhere in the UK, provided that the individual resided there before and after the absence and no other residence was exempt
  • Any 3 year period provided that the individual resided there before and after the absence and no other residence was exempt
  • Any period if caused by overseas employment, provided that the individual resided there before and after the absence and no other residence was exempt
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9
Q

What must an individual do if they have two residences?

A

They must notify HMRC as to which one is the main residence and which one is not. The notice must be given after 2 years after acquisition of the second property

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10
Q

What is the rule around non wasting chattels?

A

Exempt if disposal value is £6000 or less. If a set ie 2 vases then the £6000 is the set.

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11
Q

What happens with a chattel where it is worth more than £6000?

A

Chargeable gain is the lower of:-

  • the actual gain
  • 5/3 of the excess of the proceeds over £6000
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12
Q

What is the ruling around disposals between spouses and civil partners?

A

No disposal is classed as having taken place so no CGT

On the end disposal the acquisition cost of the first spouse is used

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13
Q

What is the rules around CGT transfers to spouses where they have separated?

A

In the first year the transfer is not subject to CGT.
On the next year there will be CGT payable and this is calculated on market value on the date of transfer as they would be classed as connected people

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14
Q

Is a transfer to a HMRC registered charity or national institution exempt?

A

Yes

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15
Q

Can you transfer the annual CGT exemption?

A

No

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16
Q

Is the date of the transfer of the asset or the date or payment or the date of disposal the date of the contract and from when CGT is payable?

A

Date of disposal

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17
Q

What is deferred consideration in respect to CGT?

A

Where there is a delay in payment and the amount of consideration is ascertainable, this means that CGT becomes payable by the seller before payment has been received

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18
Q

What is contingent consideration in respect to CGT?

A

This is where an additional payment is made if a certain event or circumstance occurs (eg. profits after a sale reaching a certain level) then this s later received will be classed as a separate disposal

19
Q

What happens with CGT when spouses or civil partners dispose of jointly held assets?

A

The gain is apportioned by:

  • Either 50/50
  • Or by the pre-agreed percentage if tenants in common
20
Q

What happens with CGT if the disposal is not at arms length?

A

This is where an asset is sold to a relative or a friend.

The market value is used rather than the sale proceeds.

21
Q

Name 4 examples of incidental acquisition costs that can be deducted in the CGT calculation?

A
  • Stamp duty land tax
  • Stamp duty reserve tax
  • Valuation costs
  • Estate agent fees
22
Q

What is enhancement expenditure in relation to CGT?

A

It is something that is wholly and exclusively incurred on a asset for the purpose of enhancing the value of the asset and reflects in the state of the asset on the date of the disposal eg building an extension to a property

23
Q

Can maintenance expenses be deducted for CGT purposes?

A

No but they can for income tax purposes
Eg repairs and re- decorating could be deducted as an income tax expenses but if an extension to a property is built then this would be treated as enhancement expenditure

24
Q

What are the rules on when losses can be offset when calculating CGT? (7)

A

The loss must be :-

  • A loss that is not exempt from CGT
  • A loss from an EIS or SEIS

The loss must be registered with HMRC
This has to be within 4 years from the end of the tax year
If not registered then it cannot be used
The loss must be offset against losses in that same tax year
Losses cannot be carried back
Losses can be carried forward indefinitely

25
Q

What is the advantage of a brought forward loss with CGT?

A

It can be used more flexible than the same tax year loss as you can use just the amount up to the level of the annual exemption. Any left over can then be carried forward again to use on a another year

26
Q

What is the rule with CGT if an asset was bought before 1st April 1982?

A

The gain is calculated using the market value of 31st March 1982

27
Q

Why are CGT reliefs given?

A

To ensure that businesses are not disadvantaged and to encourage entrepreneurship and venture capital

28
Q

What are the rules in using EIS and SEIS to offset any capital gains tax? (4)

A

If the gain is made from the disposal of another investment, then the CGT may be deferred if the gain is invested either into an EIS or SEIS
There is no upper limit on this
Investment must be made either one year before or 3 years after the disposal
This deferred gain may be taxable at a later date on disposal of the EIS ( at the rate of CGT at this point)

29
Q

When can someone claim entrepreneurs’ relief?

A

When an individual disposes after holding for at least a year:-
* all or an independent separate part of a trading business on as a sole trader or partner
*assets of a trading (individual/partner) business following its cessation
*Shares/securities in a personal trading company where the individual is a director or employee of the company and holds a minimum of 5% of the ordinary share capital and 5% of voting rights for at least 1 year
Can still apply for relief if the shares are sold within 3 years of the cessation of trade

30
Q

What must you firstly do with entrepreneurs relief before an non qualifying gains?

A

ER must be applied first and set against the basic rate band then any other gains are applied after that.
The individual can still offset their highest gain to the personal allowance

31
Q

What is the new investors relief?

A

This is an extension of CGT and has ben extended to external investors in unlisted trading companies. So individuals can claim 10% on any disposal of ordinary shares in an unlisted trading company provided that they:-

  • were newly issued to the individual and acquired for new consideration on or after 17 March 2016
  • have been held for a period of at least 3 years from 6 April 2016
  • it is also subject to the lifetime cap of £10m
32
Q

What is CGT holdover relief? (3)

A

It means that the individual making the gift of personal assets is not chargeable too CGT on disposal, instead the recipient will be liable on CGT on any gain at a later disposal.
Both the recipient and the transferor must be UK resident
Application must be made jointly by both recipient and transferor

33
Q

What can CGT holdover relief be claimed on?

A
  • Business assets used for the trade, profession and vocation of the transferor and of their personal company
  • Shares not listed on a major stock exchange nor AIM ( and the donor holds a minimum of 5% share capital)
  • Qualifying agricultural property
34
Q

What is business rollover relief?

A

This allows a UK resident to rollover a gain or part of a gain on disposal of a qualifying business asset (used for trading purposes) if the gain is re-invested into a new qualifying asset
Also available where assets of an unincorporated business are transferred to a limited business

35
Q

What are the rules regarding business rollover relief? (2)

A

It must be acquired within 12 months before the disposal of the asset of 3 years after
Do not have to use it can use it as a disposable for CGT and claim ER

36
Q

What is the share matching rule that the HMRC has put in place to determine when shares are sold, which ones that they are?

A
  • Any shares acquired on the same day as the disposal
  • Any shares acquired in the following 30 days
  • From a weighted average pool of shares held
37
Q

Why did the “any shares acquired in the following 30 days rule” come into force from the HMRC?

A

This was to stop any bed and breakfasting where shares were sold in the evening and then bought in the morning at a similar price to crystalise any gains

38
Q

What is a rights issue?

A

If a company wishes to raise further share capital then it must offer shares to existing shareholders. Usually the number offer is in proportion to what the holder has and at a discount to the current share price
Any shares bought is considered as a purchase and will be added to the average pool

39
Q

What is a bonus issue? ( or scrip or capitalisation)

A

Shares are issued fully paid to existing shareholders without any further capital being raised. No acquisition for CGT purposes and the new shares are deemed to have been acquired on the same day as the holding.

40
Q

Is share buy back considered a CGT disposal?

A

Yes

41
Q

What are scrip dividends?

A

Where a company issues dividends in the form of shares rather than cash and these are treated as new acquisitions for CGT. Acquisition cost is the cash equivalent of the dividend

42
Q

What is the unit trust equalisation payment?

A

This is where an investor buys a unit trust and within the purchase price is the accrued income. When the investor receives their first income payment then the accrued interest has already been paid for and therefore classed as a return of capital. This must be deducted from the acquisition cost when calculating the gain

43
Q

When does CGT get paid and how?

A

Lump sum payment and deadine date is the same as a tax return ie 31st January the following tax year

AF1 2018/19 (16 decks)

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