Capital gains tax- Individual Relief

Question 1

What is entrepreneurs relief?

Answer 1

This is triggered when there is a disposal of certain business assets.

This is where the first £10m (lifetime limit) of gains on Qualifying business disposals are taxed at 10% regardless of the taxpayers income.

Question 2

What are qualifying assets for Entrepreneurs Relief and the conditions

Answer 2

‘Personal trading company’ (Quoted OR Unquoted) is where they own at least 5% of the ordinary shares and which carry 5% of the voting rights

▪ All or a substantial part of sole trader/partnership trading business e.g. department. It’s got to continue as a going concern. Owned the BUSINESS more than 2 years

▪ Assets of sole trader/partnership trading business that has now ceased. **Remember that period of ownership of the individual assets don’t matter. Only the period of ownership. INVESTMENT ASSETS NO RELIEF

▪ Shares in personal company

• Own ≥5% and
• Must be a trading company- not investment
• Employee (full or part time)
• Owned and employee for more than 2 years (24m)

Question 3

What are Non- qualifying assets for Entrepreneurs Relief?

Answer 3

▪ Individual assets using in the continuing part of the business e.g. a computer
▪ Shares in investment company
▪ Assets held as investments

Question 4

How does the Entrepreneurs Relief work?

Answer 4

1) Calculate gains and losses for qualifying and non qualifying separately and net them off (i.e. total)
2) Offset all other losses and AEA against non-qualifying gains
3) If necessary, deduct any remaining losses or AEA from qualifying gains

4) Tax the gain as follows
▪ Qualifying net chargeable gains at 10%
▪ Non qualifying gains are as normal 10%/20% depending on the Basic/Higher rate band. ( Remember that the qualifying gains utilise the BR band before non-qualifying gains)

Or 18/28% where residential property is disposed.

***Remember that the band is first allocated against qualifying assets first.

Question 5

Where is annual exemption and losses b/fwd allocated first for entrepreneurs relief regarding qualifying or non qualifying

Answer 5

Non qualifying to maximize relief

Question 6

Where is basic rate band allocated first for entrepreneurs relief

Answer 6

Qualifying assets

Question 7

What is the time limit to claim Entrepreneurs Relief

Answer 7

2 years- for 19/20 by 31 Jan 2022

Question 8

Interaction of reliefs, what must be remembered?

Answer 8

• Other specific reliefs (if available) reduce the chargeable gains before ER is considered
• If also eligible for ER, the remaining gain is taxable at 10%

Question 9

What is the relief that you must always look out for

and which q must you leave for last?

Answer 9

Entrepreneurs relief

Principle private residence

Question 10

For entrepreneurs relief, what uses the basic rate band first?

Answer 10

Gains that qualify for ER are set against any unused basic rate band before non qualifying assets :(

Question 11

For entrepreneurs relief, Where are losses and AEA offset against first

Answer 11

Losses & Annual exempt amount can be offset against non qualifying assets first :)

Question 12

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Question 13

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Question 14

For principal private residence relief, what is the deemed occupation rules?

Answer 14

▪ Any reason for 3 years
▪ Up to 4 years for working int he UK
▪ Any period working overseas
- Last 18 months for any reason

Question 15

What is the letting relief?

Answer 15

Lower of
▪ £40k
▪ PPR Relief
▪ Gain re-letting period. Period still in charge. Chargeable gain relating to the letting period

Question 16

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Answer 16

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Question 17

What is roll over relief

Answer 17

Deferral relief- where the gain is deferred

This is the relief for the replacement of a qualifying business asset. The gain arising from the disposal of a QBA is rolled over ( where the net sale proceeds are reinvested in a replacement qualifying asset ) within a qualifying time frame.

individual sole trader, partnership and companies

Question 18

For the disposal and reinvestment, what are the qualifying business asset for a roll over relief?

Answer 18

▪ Goodwill (not available for companies)
▪ Land and buildings
▪ plant and machinery (Only FIXED I.e. not movable)
▪ MUST be used in Trade. Only that portion is allowed

Question 19

For the disposal and reinvestment, what is the qualifying time period

Answer 19

The reinvestment must take place between one year before and three years after the date of disposal.

The qualifying time period for the disposal and reinvestment is from 12 months before to 36 months after the sale

Question 20

For roll over relief, what is the claim for relief?

Answer 20

The claim is not automatic so it must be made within 4 years from the later of the end of the tax year of
- Sale
- Replacement
for 19/20 the disposal and replacement is by 5th APril 2024

Question 21

How does the roll over relief work?

Answer 21

The sales proceeds (or the partial roll over amount) is deducted from the original cost of the replacement asset to give a lower new base cost. This increases the gain on the disposal of the replacement asset. And this gain can again be rolled over.

Question 22

For roll over relief, if there is partial reinvestment of proceeds, how is this treated?

Answer 22

The gain that can be rolled over is restricted.

The gain chargeable is the lower of:
▪ Whole gain i.e. the gain on the qualifying asset disposed of
▪ Proceeds not reinvested

This is then taxable on the disposal of the original asset. The balance (difference) of the remaining gain can be deferred by rolling it into the base cost of the replacement asset

Question 23

What is a depreciating asset?

Answer 23

Depreciating assets- Life of <60 years

e. g. Fixed plant and machinery
e. g. short leasehold property of <60 years

Question 24

Roll over relief: If investing in depreciating assets, what is the method of relief?

Answer 24

• Condition and calculation of amount of relief is the same as ROR but the method of relief is different. Gain not deducted from the base cost of the new depreciating asset

▪ Gain is not deducted from the base cost of new asset. Instead, gain is deferred/frozen and crystalises on the earlier of
✓ Disposal/sale of depreciating asset
✓ Asset ceases to be used for trade purposes
✓ 10 years from date of acquisition

When the deferred gain crystallises it is taxed at appropriate rate of CGT at that time (not at the time of deferral)

Question 25

What are some things to remember for Roll over relief?

Answer 25

▪ It is not an automatic claim
▪ Partial claim is allowed
▪ Can roll over as many times as you want
▪ i.e. defer indefinitely until the replacement non-depreciating asset is sold provided the deferred gain has not previously become chargeable

Can defer a gain using a depreciating asset (for up to 10 years) and later acquire a non depreciating asset and claim to rollover the deferred gain instead.

Question 26

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Question 27

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Question 28

What is gift relief?

Answer 28

This happens when you gift an asset outright as a gift OR you sell it under market value so it is still a part gift. The giftor has received no funds/or only partial ( sold under value) to which pay the tax so the gain can be deferred until they sell the asset.

Question 29

For gift relief, What are qualifying assets for gift of business assets relief?

What is the condition?

Answer 29

Gifts by individuals of BUSINESS ASSETS.

▪ Assets used in trade of donor’s personal company

▪ Shares in donor’s personal trading company (where the individual has at least a 5% shareholding). DOESN’T REQUIRE THE PERSON TO WORK THERE

▪ Shares in unquoted trading companies

▪ Quoted shares are only qualifying if they are in the donors personal trading company i.e.g own 5% of voting rights

A company qualifies as donors personal trading company for the purposes of gift relief if at least 5% of the voting rights are held by the individual. Unlike for ET, here there is no minimum holding period and no requirement for the individual to work for the company

Question 30

What is a requirement for gift relief in order to get the relief?

Answer 30

For a gift in 2019/20. a joint election is required
▪ Signed by both parties
▪ by 5th april 2024 i.e. within 4 tax years from the end of the tax year in which the gift is made

Question 31

How does the relief work for donor

Answer 31

Donor:
▪ Proceeds = market value
▪ No gain at the time of the gift
* if it is an outright gift i..e. 100% given, so the chargeable gain is nil

Question 32

How does the relief work for donee

Answer 32

Donee:
▪ Donor’s gain is s deducted from the donee’s cost of the gifted asset (MV) to give a new base cost. It’s basically deducting the amount that would give NIL to the donor

Higher gain arises on the donee later as The donee in effect takes over the donor’s gain which will be taxed when the donee disposes of the asset themselves.

Higher gain on disposal of donee taxed at appropriate rate of CGT at that time- not at the time of the gift

Question 33

For gift relief, What is the chargeable gain for sales at an undervalue (i.e. sold for less than MV) This means that they received money and so not all of it is gift

Answer 33

This means that only the gift amount can be held over.

The actual consideration received is ignored.The gain is still calculated using MV

Lower of;

• Gain
• Sales proceeds- cost

Question 34

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Question 35

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Question 36

For gift relief, What happens to the deferred gain if the donee looses their residency?

Answer 36

Donee has to be UK Resident

If the donee loses their residency (through leaving the UK permanently, or for work which spans a complete tax year within 6 years of the end of the tax year in which the gain was made)

The deferred gain now becomes chargeable on the donee, the day before they leave.

Question 37

when is CGT paid?

Answer 37

31 Jan 2021

Question 38

What is investors relief

Answer 38

Entrepreneurs relief is only available on a disposal of shares if the shares are in the invidividuals personal trading company (i.e. hold 5% of the shares) and they are also an officer or employee of the company.

However, investors’ relief extends relief to external investors in trading companies which are not listed (unlisted) on a stock exchange

Question 39

To qualify for investors’ relief, shares must be?

Answer 39

IR applies to the disposal of:
▪ Unlisted ordinary shares in a trading company (Including AIM)
▪ subscribed for (i.e. newly issued shares) on/after 17 March 2016,
▪ Owned for at least three years after 6 April 2016 (when investors’ relief was introduced).
▪ By an individual that is not an employee of the company

Given the three-year holding period, investors’ relief is only now available.

Question 40

What is the limit on the IR

Answer 40

IR is subject to a separate lifetime limit of £10m of qualifying gains

Question 41

For rollover relief, only which kind of Plant and machinery qualify for rollover relief?

Answer 41

Only fixed (not movable) P&M qualify for ROR.

Question 42

What condition for goodwill must be met in order for it to qualify for roll over relief?

Answer 42

It only qualifies for ROR provided it is disposed of by the sole trader and not a company

Question 43

When is rollover relief not available on the replacement asset.

Answer 43

The gain chargeable is the lower of:
▪ Whole gain i.e. the gain on the qualifying asset disposed of
▪ Proceeds not reinvested

So if the whole gain is chargeable (if the proceeds not invested is greater than the whole gain then the whole gain will be chosen), there is no ROR available because we didn’t reinvest enough money.

Question 44

For gift relief, What is the chargeable gain and the amount of gift relief available for sales made at a profit (i,e, donor has made a profit)

Answer 44

The full gain cannot be deferred using gift relief where there are actual proceeds in excess of cost (i,e, donor has made a profit)

Anika sold her 3k shares in a trading company to her son for £53k which was originally bought for £41.5k. The market value of the shares is 98k

Chargeable gain is;
Proceeds - Cost (£53k-£41.5k)= 11.5

The gift relief will be limited to this 11.5k

Gift Relief

Proceeds (MV) 98K
Less: Cost (41.5k)
Gain before relief= 56.5k
Less: GIFT RELIEF (Bal Figure) (45k)
Chargeable gain= 11.5k

Base Cost 98k- GR (45K)= 53K

Question 45

What must you remember when there are disposals of assets of a business ceasing to trade which qualifies for entrepreneurs relief?

Answer 45

▪ Assets of sole trader/partnership trading business that has now ceased. PERIOD of ownership of the individual assets don’t matter as long as the business itself was owned for 2 years

Question 46

When are the times gift relief restricted?

Answer 46

▪ The GAINN (NOT THE COST) that is eligible for gift relief is basically going to be restricted by the proportion of business assets only.

It is restricted where there is a non-business use of asset i.e. investment assets

For shares in a personal trading company and with investment assets, the gain eligible for relief is;

gain x (MV of Comp’s Chargeable business asset/MV of company chargeable assets)

▪ If the amount paid exceeds the cost to the donor, the gift relief must be restricted so that any actual capital profit made by the donor at the time of the sale will be immediately chargeable

Question 47

For roll over relief, when must a further claim be made by?

Answer 47

A further claim for ROR may be made if another qualifying asset is acquired by 30 November 2022 (three years after the disposal)

Question 48

In what order is AEA relieved?

Answer 48

AEA should be offset against gains on residential property in priority to other gains in order to save the max amount of tax

Question 49

Explain why the disposal of shares and holiday cottage will not be subject to Inheritance tax

Answer 49

Inheritance tax is charged on transfer of value of chargeable property by a chargeable person. A transfer of value is a gift of any asset which results in a reduction in value of donors estate. If the person is going to see these at arms length and receive consideration in return then he does not intend to make a gift of either asset so there is no transfer of value for inheritance tax purposes.

Question 50

How do you calculate the gift element in shares that are gifted at under value?

Answer 50

The gift element is the amount that was not charged

E.g.
MV 6.4 Per shares
Selling at 4 per shares

=Gift element is what is not charged so £2.4 (6.4-4)

Question 51

How do you calculate the cost in shares that are gifted at under value? i.e. when we are working backwards

Answer 51

SP : MV
Less (Cost)
=Gain
Less: Gift Relief
=Chargeable gain     12000
Less: AEA                   -12000
=Taxable gain = most questions want it to be nil

**You have to work backwards in this question to know how much one can sell without incurring any capital gains tax liability. To find out what the cost is we need to know how many shares we sold. The chargeable gain is divided by the profit element (Consideration paid - Original Cost) to give the number of shares

Question 52

When is roll over relief not available?

Answer 52

if the amount not reinvested is greater than the chargeable gain, the full gain will be immediately chargeable and no rollover relief will be available.