Capital Gains Tax Flashcards
1
Q
6 step process for establishing CGT:
A
- Establish disposal proceeds
- Deduct acquisition costs/ selling costs/ costs of enhancements
- Deduct current year losses
- Deduct previous year losses down to annual exemption amount
- Deduct AEA
- Add gain to taxable income to determine CGT rate
2
Q
Opportunities for CGT planning:
A
- Making personal pension / gift aid payments extends the basic rate band, meaning more of a capital gain can fall into the basic rate.
- Expenses of sole traders / partners are deductible, meaning more of a gain could fall into the basic rate.
- CGT rates are generally lower than income tax rates, growth funds may be more attractive than income funds for HR/AR taxpayers.
3
Q
- If money is received at a later date from a disposal:
- Ascertainable
- Unascertainable
- Contingent consideration
A
- Where there is an ascertainable value, i.e. a fixed amount will be paid at a later time, that amount is charged to CGT when the sale becomes binding. HMRC will refund if the sale does not go ahead or may agree to instalment oayments if the money is not epected within 18 months.
- Where there is an unascertainable value, i.e. part of the sale price is not known at the sale date, the market value is used to establish the CGT due with a further calculation made when the final payment takes place. If this leads to a loss, the loss can be treated as having been made at the time of the original sale.
- Contingent consideration - payable only if certain conditions are satisfied
4
Q
Assets exempt from CGT include:
A
- Private residence
- Private motor cars
- Directly held gilts / qualifying corporate bonds
- Pension funds
- ISAs
- Woodlands
- National Savings Certificates
- EIS (if held for 3 years) / VCT
- Gains on gambling
- Wasting assets
5
Q
Transfers between spouses and civil partners:
A
- Treated on a no gain no loss basis;
- Receiving spouse takes on the gifting spouse’s original acquisition cost rather than the value at the time of transfer.
- Inter-spouse transfers are only treated this way if the spouses are living together at somepoint during the tax year.
- Disposals between spouses after the tax year of separation but before divorce are taxable - the market value would be used rather than the proceeds as the transaction would be treated as not at arms length.
6
Q
How are losses treated for CGT?
A
- Losses must be set against gains in the same tax-year even if it means the annual exempt amount is effectively lost.
- Losses in excess of gains can be carried forward indefinitely. But in future tax-years, only need to be used to the extent that the AEA is fully utilised.
- Losses have to be claimed within four years of the end of the tax year in which they arose.
7
Q
Business Asset Disposal Relief (previously Entrepreneur’s Relief) - key points:
A
- Can be claimed on disposal of all or part of a business after 5 April 2008.
- Gains made after 6 April 2020 can be relieved up to £1m during a person’s lifetime.
- Gains that qualify for ER are set against the BRT (10%) first before any non-qualifying gains.
- Asset disposed of must have been owed for at least 2 years to apply.
8
Q
Who can benefit from Business Asset Disposal Relief (ER)?
A
- Assets must have been owned for at least 2 years to qualify
- Available to sole traders/ partners
- And on disposals of shares in a trading company if individual is an employee / director of the company and the 5% shareholding test met:
- hold at least 5% voting rights plus
- entitled to at least 5% of either
- companies ditributable profits + assets available for distribution or wind up or
- disposal proceeds on disposal of company’s ordinary share capital
9
Q
Investor’s Relief - key points:
A
- Available to external investors who are not employees/ officers of the company whose shares they acquire.
- 10% rate applies and the limit is £10m
- this is in addition to the £1m business asset disposal relief limit
- Shares must be newly issued.
- Issued after 16 March 2016
- Held for at least 3 years from 6 April 2016 and held continually for 3 years until disposal.
10
Q
Holdover Relief - key points:
A
- Hold over the gain on a disposal by way of a gift
- Main categories of gits are transfers chargeable to IHT and disposals of trading assets in qualifying business activities.
- If holdover relief is claimed - no CGT is payable at the time of gift by the donor.
- The donee receives the asset at market value and the gain is deferred until disposal. (The acquisition cost is reduced by the amount of heldover gain).
11
Q
Business Rollover Relief - key points:
A
- Available where business assets are sold and the proceeds reinvested in other assets for the business.
- Must be a trading business and assets used for trading purposes.
- New assets must have been purchased one year before or three years after disposal of old assets in order to qualify.
- Relief only defers gain until the sale of new assets.
12
Q
Incorporation relief - key points:
A
- Defers gain due when an unincorpoated business is incorporated in exchange for new shares in the company.
- Any gain is deducted from the issue price of the shares in the new company.
Sole trader may wish to transfer the business to a company for various reasons. A company offers the advantage of limited liability and a possible reduction in the tax charge on profits (e.g. sole trader liable at 45% income tax versus 19% corporation tax payable by the company).
13
Q
EIS reinvestment - key points for CGT:
A
- CGT due on a disposal can be deferred if the gain is reinvested into EIS shares.
- Reinvestment must be made within 12 months before or up to three years after disposal.
- Gain is only deferred until the EIS shares are disposed of (unless the proceeds are reinvested into EIS) or the investor dies.
- Investor gets 30% income tax-relief (tax reducer) and CGT relief at 10% or 20% as appropriate + 8% if gain was on residential property not exempt through PPR.
14
Q
SEIS reinvestment - key point for CGT:
A
- 50% of the CGT due on a disposal can be exempted totally if the proceeds are reinvested into SEIS.
- This is restricted to a limit of 50% of the reinvested gain up to a maximum of £100,000 in the current tax year.
15
Q
CGT Planning - useful strategies to minimise CGT:
A
- Use AEA for tax-free profits up to £12,300
- Realise losses to reduce CGT payable
- Plan disposal date of assets to ensure CGT AEA is used each year/ when tax will be paid at a lower rate.
- Split asset (if possible) to sell before and after the end of the tax-year to benefit from 2 x AEA.
- Ensure record is kept of all costs involved in buying and selling an asset so these can be deducted from the gain.
- Report and use losses from current and previous tax years.
- Use exemptions (ISAs), reliefs (EIS deferral, SEIS 50% exempt).
- Invest in income producing assets - where more favourable to tax position.
- Transfer assets between spouses - outright and unconditional.
