Capital Taxation Flashcards
1
Q
What is the statutory basis for capital gains tax?
A
The Taxation of Chargeable Gains Act 1992
2
Q
What is the statutory basis for IHT?
A
Inheritance Tax Act 1984
3
Q
What is the statutory basis for SDLT?
A
The Finance Act 2003
4
Q
What is the basis of value for IHT and CGT?
A
Market value defined as:
The value the property is expected to sell for if sold on the open market.
The price is not assumed to be reduced on the grounds that the whole property is to be placed on the market at the same time. I.e flooding the market
5
Q
How does the basis for CGT and IHT differ from market value?
A
for IHT/CGT the value of the properties are not assumed to be reduced because the market has been flooded.
6
Q
What did the Duke of Buccleuch case set out?
A
large estates should be ‘prudently lot’ to achieve the best possible price for the property.
7
Q
What did the Lady Fox case set out? (3 key points)
A
That the property must be valued as it actually existed at the date of valuation.
Even if a prudent seller would likely make some changes or alterations to the property before putting it up for sale.
Thirdly the property is assumed to be capable for sale in the open market even if in reality there are restrictions on sale that prevent it from being the case.
E.R.P
Existed. Restrictions. Prudent.
8
Q
What did the Clay case set out and what did Walton v IRC say?
A
That the effects of a special purchaser can be taken into account for IHT purposes.
This was expanded in Walton v IRC in that special purchasers have to be real not hypothetical.
9
Q
Where is the definition of market value for IHT found?
A
Section 160 IHT Act (1984)
10
Q
What is UK VPGA 15
A
Replaces UKGN3
Provides an overview of the statutory basis of market value for IHT CGT SDLT and ATED.
11
Q
What is ATED
A
Annual tax on enveloped dwellings
ATED is an annual tax payable mainly by companies that own UK residential property over £500k
12
Q
What is inheritance tax?
A
This taxes the transfer of assets on death and those made during life, in particular this includes gifts made within the last seven years of life.
13
Q
What is the date of valuation for IHT?
A
The moment before death. This was designed to ensure interests that terminate on death are treated as part of the estate.
14
Q
What is the IHT threshold?
A
£325,000
15
Q
What is the tax rate for IHT?
A
40%
16
Q
What is the nil rate band for IHT?
A
The value of an estate that is less than £325,000.
17
Q
Can the nil rate band for IHT be transferred?
A
Yes, if your estate is being inherited by your spouse or partner they inherit your nil rate band. This means that when they die they can leave an estate worth £650,000 that’s free from inheritance tax.
18
Q
When is the standard 40% rate used in IHT?
A
On amounts over £325,000
19
Q
What reliefs are available for IHT?
A
- Quick succession relief, this is to prevent estates being decimated by successive beneficiaries dying within a short time of each other.
- Agricultural
- Business property relief
- Loss on sale relief
- Tapered relief
20
Q
What is exempt from IHT?
A
- Foreign properties owned by a person living abroad
- Transfers between husband and wife or between civil partners are exempt. This applies to both lifetime and death transfers
- Annual exemption of £3,000 for lifetime transfers
- Lifetime transfers as wedding gifts
- Transfers to charities.
- Gifts when 7yr expired
21
Q
Why did HMRC instruct you to value at 1982?
A
Valuing as at 31st March 1982 as instructed in The Finance Act 1988.
The reason behind the rebase is that the 1970s saw significant inflation in the UK and it was deemed to be unfair to tax people on the growth in the value of their assets that was simply due to increases in general prices.
22
Q
How would you complete a 1982 valuation working outside of the VOA?
A
I would use one or all of the following methods:
1. Property market reports on the national archives website available on public domain
2. EIG 1982 records
3. Interrogate my companies records where possible
(street sheets for VOA)
23
Q
what does undivided shares mean in IHT?
A
Where a land interest has joint owners or owners in common where each owner shares an entitlement to a share in the property. Such shares are held under a trust of land.
24
Q
talk me through a capital tax valuation you have done
A
L3
House in Sevenoaks - 50% undivided share in a detached house. Inspected and measured and arrived at a full market value. Took 50% and further 15%. Negotiated with parties and reached agreement. Advised on market value for IHT and necessary discount.
Shop, Southall - valued a ground floor shop for CGT purposes. Adopted investment method of valuation by capitalising income. Advised of market value as at two valuation dates due to rebasing of chargeable gains as at 1982.
25
why did you value only 50% for the House in Sevenoaks?
Because the deceased owned the property with someone else.
26
Why did you carry out desktop valuations for your IHT cases?
Had sufficient information to do from the desk
Agreed with client – in working agreement with HMRC
27
What information made you change your valuation stance for the House in Kemsing?
Inspection uncovered that modernisation was required.
Dated features such as single glazed windows and leaking conservatory.
28
Tell me about Wight and Moss v CIR (264 EG 935) 1982 case (Nellie Wight)
Provides us with important guidance on the valuation of undivided half-shares, where a co-owner was in occupation of the property at the valuation date.
- undivided half share in a dwelling house fell to be valued, following the death of one of the joint owner-occupiers
- The DV valued on the basis of the vacant possession value of the house divided by two and then deducting 10%. The Tribunal approved the DV’s approach though it increased the final deduction to 15%.
- percentage of 10 is derived from the decision in Cust
29
what is a leasehold
A leasehold agreement is where you occupy a property interest for a defined period of time from the freeholder.
30
what effect does a short leasehold have on value?
Depends on terms but generally Will decrease property value
31
What were the details of the leasehold on the flats in Harrow? How did this effect your valuation?
Had a long unexpired term, therefore considered a virtual freehold.
32
what is the leasehold enfranchisement method?
Leasehold enfranchisement is the process you go through to either extend your lease, or purchase a share of the freehold
33
What is ATED
Annual tax on enveloped dwellings
ATED is an annual tax payable by companies that own residential property over £500k.
34
What law relates to undivided shares for valuations on or after 1 January 1997?
Trusts of Land and Appointment of Trustees Act 1996 (TLATA)
35
What law related to undivided shares for valuations before 1997?
Law of Property Act 1925
36
How do you calculate Capital gains tax?
Work out the difference between what was paid for the property and the amount received when sold.
If the gains are over the yearly allowance then tax is due.
You bought a house for £200,000 and sold it for £250,000. You would have a gain of £50,000
37
What are chargeable assets in relation to CGT?
Assets you pay capital gains tax on when you sell
38
examples of chargeable assets CGT
Most personal possessions worth £6,000 or more apart from your car
Property that is not your main home
Your main home if you’ve let it out, used for exclusive business purposes or its larger than 5,000 sqm
Any shares not in an ISA or Personal equity plan (PEP)
Business assets
39
what assets do you not pay CGT other than personal home?
ISA or PEP (personal equity plan)
UK government gilts and bonds.
Betting or lottery winnings.
40
You do not pay Capital Gains Tax when you sell (or ‘dispose of’) your home if what applies?
you have one home and you’ve lived in it as your main home for all the time you’ve owned it
you have not let part of it out - this does not include having a lodger
you have not used a part of your home exclusively for business purposes (using a room as a temporary or occasional office does not count as exclusive business use)
the grounds, including all buildings, are less than 5,000 square metres (just over an acre) in total
you did not buy it just to make a gain
If all these apply you will automatically get a tax relief called Private Residence Relief and will have no tax to pay. If any of them apply, you may have some tax to pay.
41
What is important to remember when valuing undivided shares in land?
Need to remember that I am valuing the particular interest which the transferor has. Not the whole property (Walton v CIR, 1995)
42
What rights does a hypothetical vendor in an undivided share agreement have?
Right to receive appropriate portion of net income
Appropriate share of net sale proceeds
Right to occupy unlet property jointly with other co-owners.
43
what discounts are to be applied when valuing an undivided half-share interest?
10% - where other co-owner is not in occupation and the purpose behind the trust no longer exists
15% - where the other co-owner is not in occupation, but they have a clear right to occupy as main residence and the purpose behind the trust still exists.
15% - where the other co-owner is in occupation as their main residence.
44
What was the nature of the co-owners occupation for House in Sevenoaks?
Two sisters co-owned and occupied the property, after the deceased passed the other sister stayed in occupation maintaining their rights
45
What RICS guidance relates to capital taxation valuations?
UK VPGA 15
46
Why and how did the IHT rules change?
Residence nil rate band of £175,000 was introduced due to rising property prices
More and more people have been pulled into inheritance tax in recent years.
The property allowance was introduced to help people leave property to family without being hit with large tax bills.
Crucially, you only qualify for this new allowance if your estate includes a property that you've used as a home at some point in your life.
47
Does the inheritance tax main residence allowance apply if I'm not married?
If you are single and have a property in your estate, your heirs will benefit from the main residence nil-rate band.
This means you’ll have the £325,000 nil-rate band, plus an extra £175,000 in 2022-23.
Unmarried couples will not be able to inherit their partners unused nil-rate bands which in effect, double the amount that can be passed on.
48
Why did you inspect the farmhouse in Edenbridge?
If we are presenting an alternative value to HMRC we must have undertaken an inspection
Unless: HMRC instruct otherwise, sales particulars are sufficient, recent VOA inspection has occurred, inspection is not safe.
49
how does IHT gifting work?
if you give away your home but continue to live in it rent-free until your death, you'll be deemed to be the beneficial owner, and it will still be taxed as part of your estate when you pass away.
If you give away a home within your lifetime, it will be classed as a potentially exempt transfer, meaning inheritance tax may be charged if you die within seven years of making the gift.
If the gifts are worth less than the £325,000 allowance, they'll be added to your estate to work out your taxable estate.
If they're worth more, then they will use up your tax-free allowance, and you'll be charged a tapered rate on the excess, which depends on how long you live after making the gift.
0 - 3 years = 40%
3 - 4 years = 32%
4 - 5 years = 24%
5 - 6 years = 16%
6 - 7 years = 8%
More than 7 = 0%
If you live for at least seven years after making the gift then no tax will be due – and your £325,000 tax-free allowance will not be affected.
50
talk me through the reliefs for CGT
Private Residence Relief
- lived in whole ownership
- not let any part out
Roll over relief
Entreprenuers relief
51
Talk me through the reliefs for SDLT
First time buyer’s relief
- 0% on first £300,000 and 5% on the remainder up to £500,000
- If the purchase price is more than £500,000 you cannot claim the relief and you must pay the standard rates on the total purchase price.
Multiple dwelling relief
- You can claim relief when you buy more than one dwelling where a transaction or a number of linked transactions include freehold or leasehold interests in more than one dwelling.
- If you claim relief, to work out the rate of tax HMRC charge:
divide the total amount paid for the properties by the number of dwellings
work out the tax due on this figure
multiply this amount of tax by the number of dwellings = total (must exceed 1% of total price)
The minimum rate of tax under the relief is 1% of the amount paid for the dwellings.
Charity relief
Compulsory purchases
House builder buys a customer’s home
52
Talk me through the exemptions for CGT
- ISA or PEP.
- UK government gilts and bonds.
- Betting or lottery winnings.
- Main home
53
Talk me through the exemptions for SDLT
- no money or other payment changes hands
- property is left to you in a will
- property is transferred because of divorce or dissolution of a civil partnership
- you buy a freehold property for less than £40,000
- you buy a new or assigned lease of 7 years or more, as long as the premium is less than £40,000 and the annual rent is less than £1,000
- you buy a new or assigned lease of less than 7 years, as long as the amount you pay is less than the residential threshold or non-residential threshold of SDLT
54
What is the threshold for CGT?
£6000 for individuals
£3000 for trusts
due to half in April 2024
Companies pay corp tax on gains!
55
What is the threshold for SDLT?
£0 - £125,000 = 0%
£125,001 - £250,000 = 2%
£250,001 - £925,000 = 5%
£925,001 - £1.5 Million = 10%
£1.5 million + = 12%
If you’re buying an additional property you have to pay an extra 3% in Stamp Duty on top of the standard rates.
Starting at £40,000 – 125,000 = 3%
125,001 -250,000 = 5%
250,001 – 925,000 = 8%
925,001 – 1.5mill = 13%
1.5mill+ = 15%
56
What are the Capital Gains Tax rates?
Commercial – 10% lower rate 20% higher rate
Residential – 18% lower rate 24% higher rate - as of March 2024
57
What are PETs?
Potentially Exempt Transfers – aka lifetime transfers
Enables an individual to make gifts of unlimited value which will become exempt from Inheritance Tax (IHT) if the individual survives for a period of seven years.
If you don’t survive the gift by seven years, the PET becomes a Chargeable Consideration, and is added to the value of your estate for IHT
58
What is agricultural property relief?
You can pass on some agricultural property free of Inheritance Tax, either during your lifetime or as part of your will.
Agricultural property that qualifies for Agricultural Relief is land or pasture that is used to grow crops or to rear animals intensively. It also includes:
- growing crops
- stud farms for breeding and rearing horses and grazing
- trees that are planted and harvested at least every 10 years (short-rotation coppice)
- farm buildings, farm cottages and farmhouses
The property must have been owned and occupied for agricultural purposes immediately before its transfer for 2 years if occupied by the owner or 7 years if occupied by someone else.
Agricultural Relief is due at 100% if:
the person who owned the land farmed it themselves
59
What is business property relief?
Business Property Relief (BPR) provides relief from Inheritance Tax (IHT) on the transfer of relevant business assets at a rate of 50% or 100%.
Operated business themselves
You can only get relief if the deceased owned the business or asset for at least 2 years before they died.
60
What are undivided shares?
Equal undivided part or share of land or property.
61
What are the two ways of owning a undivided share?
Joint tenancy
Tenants in common
62
What is a joint tenancy?
Where you have an undivided share of the property and can own the property with up to 4 joint tenants (you cannot have more than 4 joint tenants registered at the Land Registry).
The property is undivided, meaning the joint tenants own 100% of the property together, then if any of the joint owners dies, the surviving joint tenants continue to own the property 100%.
+ve
Simple beneficial ownership
In the event of death the surviving joint tenant owns the property 100%
-ve
Harder to force a sale
Risk in relationship breakdown - if one party pays more than the other to buy the property this is not recognised and any gain or loss is shared equally.
63
What is a tenancy in common?
Where a property is owned as tenants in common, this means that each owner has their distinct share of the property. In the absence of a document which lists what share is owned by which owner it is assumed that each owner owns an equal share.
+ve
Your beneficial interest is separate and can be unequal - you own your own individual share of the property that belongs to you.
Easier to force a sale - if you have a deed of trust that has an exit clause
-ve
Need to draft a deed of trust - a deed of trust details the beneficial interest share between the joint owners.
Need to draft a will - as tenants in common your share of you property goes to your beneficiaries on your death and not to the other joint owner.
64
Which tenancy is the most common? (Undivided shares)
Joint tenant used mainly by married couples
Tenancy in common used by friends, family and unmarried couples.
65
What are the difficulties in valuing an undivided share?
Need to determine occupation status and if the purpose in the trust still exists.
factors to be borne in mind when valuing a half share in a property in which the other co-owner is in occupation, will include:
- likelihood of the actual co-owner wishing to purchase the deceased’s share
- The age and state of health of the co-owner, the market may take a very different view when the property is occupied by an 85 year old widower in poor health, than if it were to be occupied by a healthy 40 year old
66
What is prudent lotting?
The dividing or grouping of property and land into parcels in order to achieve the best value. DOB v IRC (1967)
Best value attainable - Ellesmere (1918)
67
What is the maximum threshold for IHT for a couple and why?
£325,000 can be passed and added to partners £325,000 equalling £650,000
Partner can then pass down £175,000 relief for being a direct descendant of a main residence.
68
Any recent updates to Capital Taxation?
Office for Tax Simplification Report - recommendation to use digital reporting systems
- potential to scrap IHT but not done in latest budget March 2024
Threshold down to £3000 indv
higher rate down to 24%
69
What does the Lynall case regard?
Determined that the vendor and purchaser should be hypothetical - no one excluded
70
How may i assess a minority share?
Due to the difficulty in obtaining an order for sale a higher discount may be applied ranging 10-20%. As per Charkham case
71
Capital Taxation market value differences
- flooding of market disregarded
- special purchaser considered
- prudent lotting
72
What do you understand by Hope Value?
The extra value attainable for the prospect of achieving planning permission.
Spierose v TFL - hope value = full value with PP - EUV
Found in Red Book VPS 4 - special value
73
What is charitable relief?
Can donate 10% to charity and pay 36% on rest.
74
What did you consider with regards to prudent lotting for flats in Harrow?
I determined that the two self contained flats would achieve the best value sold separately as this was common in that particular market based on transactional evidence.
75
With regards to the Farmhouse in Edenbridge , how would you approach the valuation if hope value was present?
I could have valued the land area using a residual valuation approach or taken a percentage of the development value.
76
For the retail in Catford how did you adjust the yield?
For factors such as location, condition, lease terms and tenant covenants
77
What advice did you give regarding the Farmhouse in Edenbridge?
During negotioations of a market value on a Farmhouse in Edenbridge i advised a unrepresented taxpayer of the IHT valuation processs and the next steps they could take regarding the matter.
78
What advice did you give regarding the House in Sevenoaks?
I provided advice on a 50% share value and how it was reached.
79
What advice did you give regarding the Shop in Southall?
I provided advice of a market value at 2 valuation dates to calculate CGT as originally acquired prior to 1982.
80
What is prudent lotting?
The act of lotting or separating property to achieve best price in the market.
81
Reliefs for CGT?
Roll over relief
PRR
Business Asset Disposal Relief
82
Exemptions for CGT?
ISAs or PEPs
UK government gilts and Premium Bonds
betting, lottery or pools winnings
marriage gifts
83
What are the assumptions for IHT Market Value?
- The sale is hypothetical
- The vendor is hypothetical, prudent and willing.
- Purchase is hypothetical (unless special), prudent and willing.
- For purposes of the hypothetical sale, the vendor would divide the property, to achieve best overall price.
- All preliminary arrangements necessary for the sale to take place, have been carried out prior to the valuation date.
- The property is offered for sale on the open market by whichever method of sale will achieve best price.
- There is adequate publicity or advertisement before the sale takes place, so it is brought to the attention of all likely purchasers.
- The valuation should reflect bid of any special purchaser in the market (provided they are willing and able to purchase)
