CAPITAL TAXATION Flashcards
What is the definition of Market Value for IHT and CGT and where is it found?
Section 272 Taxation of Chargeable Gains Act 1992 and s.160 Inheritance Tax Act 1984
The price which might reasonably be expected to be achieved on a sale in the open market, subject to the explicit qualification that the price is not to be reduced on account of the market being flooded by reason of the assets to be valued being marketed at one and the same time
Can you tell me the three occasions of charge for capital gains tax?
Disposal (sale of freehold, assignment of leasehold, gift of freehold/leasehold)
Part disposal (disposal of a physical part, grants a lesser interest e.g. lease)
Deemed disposal (taxpayer receives capital sum as compensation for damage or injury to an asset or for the surrender of rights, which is treated as a part disposal)
Can you tell me what it meant by the term ‘prudent lotting’?
It was established in Ellesmere V IRC (1918) that market price was a price based on the separate values of the various parts, sold in whatever lot or lots would realise the best price. Duke of Buccleuch v IRC (1967) established that lotting can only be rejected if there was evidence that it was unnatural or artificial.
Would you reflect a special purchasers bid?
It was established in IRC V Clay 1914 that where there is a purchaser willing to buy at a considerably higher price than anyone else, then the value is represented by the higher price or by a close approximation. The Indian Case established that the special purchaser could not be driven up to a price by the competition because he was not circumstance forced to buy. However, bidding could not be imagined to stop at the first advance over what other purchasers would be prepared to pay because the vendor is not compelled by circumstance to sell.
What are the typical allowances for undivided shares?
If the co-owner will not agree to sale of the entirety, the owner of the deceased’s share can apply to the courts for an order for sale under Section 14 of the Trusts of Land and Appointment of Trustees Act 1996. If it is highly likely that a sale would be ordered then we would normally make an allowance of 10%. If the property was bought for the purpose of joint occupation and the co-owner is still living in the property then, because the prospect of obtaining an order for sale is less likely, we make a deduction of 15%, derived from the case of Wight & Moss V CIR 1982.
Can you tell me three circumstances which give rise to hope value?
A use other than the existing use
Merger with an interest in another property
Merger with another interest in the same property
Can you name some exemptions for Inheritance Tax?
Nil rate band of £325,000 and residence nil rate band of £175,000
Exempted gifts
Annual exemption of £3,000 each tax year
What are some reliefs for IHT?
Loss on sale relief – sale within 4 years of death, sale value can be substituted for value determined. Sale value is sale price after adjustments. Have to apply to HMRC, if apply to HMC 3 years later and the market crashes then might not be gratned
Business relief – has to be relevant business property – sole trader/partnership. Shares in unlisted trading company. Must be trading company – investment or property dealing companies will not qualify. 100% relief. Shares in trading company (ownership >50%) get 50% relief. Land or building owned by individual used by partnership/company get 50% relief. Must have owned for at least 2 years.
Taper relief – only operates if the total value of gifts made in the 7 years before death is over the £325,000 tax threshold. Rate of tax on the gift reduces as the years between the gift and the death increase.
Agricultural Relief – Normally 100% relief on agricultural value. (Pre 1 Sep 1995 agricultural holdings act tenancy when vacant possession not obtainable within 2 years- 50% rate but this is rare). Occupation must exceed min period – 2 years if occupied by deceased or 7 years if tenanted. No limit on acreage or value. Includes various buildings and land occupied with them of character appropriate to the property.
Woodland relief – available if not covered by Agricultural property relief or business property relief. Claim must be made within 2 years of death and have been owner for 5 years. Value of land only is immediately charged. Tax will be paid when trees disposed of based on either proceeds of sale or net value at the time.
What is private residence relief?
S.222 TCGA 1992 provides 100% relief for a gain realised by an individual in
A dwelling house or part of a dwelling house which is or has at any time in the taxpayers period of ownership been his only or main residence
Land which the taxpayer has for his own occupation and enjoyment with that residence as its garden or grounds up to the permitted area
S222 (3) and (4) 1992 provided that the permitted area shall be 0.5 of a hectare or such larger area as is required for the reasonable enjoyment of the dwelling house as a residence, having regard to its size and character.
What are the exemptions from CGT?
Exempt persons and organisations (crown, local authorities, charities)
Exempt assets (trees and underwood growing in commercial woodlands, chattels with a value of less than £6,000 and motor vehicles)
Exempt transaction (transfers between husband and wife, civil partners who are living together, gifts for the public benefit)
Do non-resident taxpayers pay CGT?
Finance Act 2015 extended CGT to non resident taxpayers on the disposals of UK residential properties made after 5th April 2015
What are the current CGT tax rates?
10% and 20% for individuals (not including residential property gains and carried interest gains)
18% and 24% for individuals for residential property gains
18% and 28% for individuals for carried interest gains
20% for trustees (not including residential property gains)
24% for trustees for residential property gains
20% for personal representatives of someone who has died (not including residential property gains and carried interest gains)
24% for personal representatives of someone who has died for residential property gains
28% for personal representatives of someone who has died for carried interest gains
10% for gains qualifying for Business Asset Disposal Relief
Individual and most trusts qualify for annual exemption
23/24 £6,000 for individuals and £3,000 for most trusts. Halfing for 24/25
What is the definition of agricultural value and where is it found?
s.115 of inheritance tax act 1984
The agricultural value of any agricultural property shall be taken to be the value of the property if the property were subject to a perpetual covenant prohibiting its use otherwise than as agricultural property.
What is the difference between the perpetual covenant and an Agricultural Occupancy Condition (AOC)?
AOCs can and often are lifted by the planning authority and the occupation of the dwelling is not dependent on there being nay land to be farmed (retired farmers and hobby farmers).
Under the perpetual covenant in s115 property must always be occupied for purposes of agriculture and occupied with enough land for it to remain of a character appropriate and thus meet the agricultural property definition in section 115. It must remain a farmhouse where the day-to-day farmer of the land resides and it must be the centre of farming operations.
What affect does AOC have on value?
It is a very severe restriction because it impacts on the way the buyer can use the house in the future and depresses demand from purchasers. It also restricts prudent lotting
What is the leading case on agricultural valuation?
Lloyds TSB Banking (Antrobus)V IRC 2005 where the lands tribunal found for a 30% discount from market value to agricultural value
What do you understand by the term special purchaser?
Someone to whom the asset concerned may have an especial value that they will be prepared to pay a premium over and above what might be normal market value for the strategic advantage in mind.
You undertook a CGT valuation for HMRC as at 1991. Please can you talk me through some of the difficulties with this valuation?
There was a lack of evidence of comparable values. Due to this I looked at internal market repots from Autum 1991 and Spring 1992.
How did you adjust your land comparables?
I looked at agricultural land values these needed to be adjusted up to account for hope value. I also looked at industrial land values which needed to be adjusted down as the subject was land with hope value for industrial in 1991.
Bromsgrove- What advice did you give HMRC?
I advised HMRC of my opinion of market value at both the 1991 and 2022 valuation dates.
What method of valuation did you use for the disposal?
I used both the comparable and investment method.
How did you determine what rent and yield to apply?
From looking at comparable evidence of rental values of offices within close proximity. This was the same for yields and I also looked at market report evidence for Bromsgrove
Can you talk me through a valuation where you have considered prudent lotting?
I considered prudent lotting for a valuation of a residential dwelling and adjoining paddock in Swanage. I had to determine if I would value the house and paddock together or separately to reflect prudent lotting. In order to do this I looked at comparable sales for both the house and land separately. There was little evidence of land sales in the locality. There was evidence of larger properties selling with large plots of land. I had regard to local planning policy and discovered the property was located outside the settlement boundary and the council had a 5-year housing supply. I therefore decided to value the house and land together and reported the valuation to HMRC.
What case law is there to consider for prudent lotting?
Ellesmere V IRC 1918 - price must be estimated on the basis that the properties were sold in whatever lots would realise the best price
Duke of Buccleuch v IRC 1967 – lotting can only be rejected if there was evidence that it was unnatural or artificial
How did you approach the valuation for undivided share?
I had to determine what allowance to apply to the valuation for the undivided share. I considered case law. This included the James Anson St Clar Fod v HMC 2006 which determined a 10% discount was applied where the other owner is not in occupation. In this case, the co-owner was the partner of the deceased and they were in occupation of the property. I had regard to Wight and Moss V CI 1982 which determined a 15% allowance is adopted if the co-owner is in occupation f the property due to the sale being less likely. However in this case I was valuing a 92% share and felt that a 10% discount was still appropriate as this was a high value property and the deceased had the large majority share and therefore in a more powerful position.
Where do you find UK VPGA 15? What does it stand for?
Within the Red Book UK National Supplement. It stands for Valuations for Capital Gains Tax, Inheritance Tax, Stamp Duty Land Tax and the Annual Tax on Enveloped Dwellings and Residential Propety Developer Tax
What is annal tax on enveloped dwellings?
Annual tax payable mainly be companies that own UK residential property valued at more than £500,000.
What legislation is there for Inheritance Tax and Capital Gains Tax?
Taxation of Chargeable Gains Act 1992 & Inheritance Tax Act 1984
When is payment due for Inheritance Tax?
By the end of the six month after the person died.
What is the Inheritance Tax Nil Rate Band?
Nil rate band of £325,000 and residence nil rate band of £175,000
Basically no one pays tax under £325,000. Extra £175,000 if giving to direct descendants making it £500,000. Nil rate and residence nil rate can be transferred to spouse making total relief of £1million for husband and wife
What is a potential exempt transfer?
No immediate charge on gifts between individuals. If donor dies within 7 years.
How do you work out what the chargeable gain is for CGT?
Disposal proceeds less acquisition cost and any allowable expenditure = unindexed gain
Less indexation allowance (companies only now and frozen from Dec 2017) = Chargeable gain.
Do companies pay CGT?
If you are self employed sole trader or in a business partnership. Other organisations pay Corporation Tax.
Do non-resident taxpayers have to pay CGT on UK residential property?
If an individual dies and not domiciled in the UK, IHT is only charged on UK assets.
Please list three valuation assumptions made when arriving at market value for inheritance tax?
The sale is a hypothetical sale
The vendor is a hypothetical, prudent and willing party to the transaction
The purchaser is a hypothetical, prudent and willing party to the transaction
For the purpose of the hypothetical sale, the vendor would divide the property i.e asset to be valued in whatever natural lots would achieve the 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 the best price
There is adequate publicity or advertisement before the sale takes place so that it is brought to the attention of all likely purchasers and
The valuation should reflect the bid of any special purchaser in the market
What is the difference between market value in the Red Book and for Capital Taxation?
Based on the concept of hypothetical sale, special purchaser is reflected, ignore effect of flooding of the market and take into account prudent lotting.
What is agricultural relief?
Normally 100% relief on agricultural value. (Pre 1 Sep 1995 agricultural holdings act tenancy when vacant possession not obtainable within 2 years- 50% rate but this is rare). Occupation must exceed min period – 2 years if occupied by deceased or 7 years if tenanted. No limit on acreage or value. Includes various buildings and land occupied with them of character appropriate to the property.
Can both agricultural relief and business relief apply at the same time?
You cant claim business relief on the value of an asset that you have already claimed agricultural relief on. You may be able to claim business relied on the value of an asset not fully covered by agricultural relief if you are a farming business and the conditions of business relief are met.
What is loss on sale relief?
Where there has been a sale within 4 years of death, sale value can be substituted for value determined. Sale value is sale price after adjustments.
What was the construction of the office in Bromsgrove?
Built in 1997, red brick construction with pitched tile roof.
What planning had been on the site?
The land was included within Phase 2 planning permission of the development of Saxon Business Park. Planning for the office was submitted in 1996 and granted.
Why did you consider agricultural and industrial land values?
Because as at 1991 the land was land with development potential for industrial. By considering agricutual land and industrial land values this helped to understand what the land would be worth without planning and once completed. I then knew my value would be somewhere between these figures.
What valuation did you determine for 1991?
£12,500
What yield did you apply in your investment method?
9%. This was based on comparable yields on offices within the locality and evidence from market reports in Bromsgrove.
Why did you adopt both comparable and investment method for 2022?
As the yield evidence was poo in quality and an upwards adjustment in the yield brought the value down fairly significantly. Therefore I carried out the comparable method as a cross check and to make my valuation more reliable.
What valuation did you determine for 2022?
£215,000
Can you tell me more about the construction of the farm buildings?
Steel portal framed shed with timber purlins, concrete breeze block lower elevations, pat cement fibre and steel block profile sheeting upper elevation. Roof lights, concrete flooring.
