Capital Taxation

Question 1

What is the statutory basis for capital gains tax?

Answer 1

The Taxation of Chargeable Gains Act 1992

Question 2

What is the statutory basis for IHT?

Answer 2

Inheritance Tax Act 1984

Question 3

What is the statutory basis for SDLT?

Answer 3

The Finance Act 2003

Question 4

What is the basis of value for IHT and CGT?

Answer 4

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

Question 5

How does the basis for CGT and IHT differ from market value?

Answer 5

for IHT/CGT the value of the properties are not assumed to be reduced because the market has been flooded.

Question 6

What did the Duke of Buccleuch case set out?

Answer 6

large estates should be ‘prudently lot’ to achieve the best possible price for the property.

Question 7

What did the Lady Fox case set out? (3 key points)

Answer 7

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.

Question 8

What did the Clay case set out and what did Walton v IRC say?

Answer 8

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.

Question 9

Where is the definition of market value for IHT found?

Answer 9

Section 160 IHT Act (1984)

Question 10

What is UK VPGA 15

Answer 10

Replaces UKGN3

Provides an overview of the statutory basis of market value for IHT CGT SDLT and ATED.

Question 11

What is ATED

Answer 11

Annual tax on enveloped dwellings

ATED is an annual tax payable mainly by companies that own UK residential property over £500k

Question 12

What is inheritance tax?

Answer 12

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.

Question 13

What is the date of valuation for IHT?

Answer 13

The moment before death. This was designed to ensure interests that terminate on death are treated as part of the estate.

Question 14

What is the IHT threshold?

Answer 14

£325,000

Question 15

What is the tax rate for IHT?

Answer 15

40%

Question 16

What is the nil rate band for IHT?

Answer 16

The value of an estate that is less than £325,000.

Question 17

Can the nil rate band for IHT be transferred?

Answer 17

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.

Question 18

When is the standard 40% rate used in IHT?

Answer 18

On amounts over £325,000

Question 19

What reliefs are available for IHT?

Answer 19

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

Question 20

What is exempt from IHT?

Answer 20

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

Question 21

Why did HMRC instruct you to value at 1982?

Answer 21

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.

Question 22

How would you complete a 1982 valuation working outside of the VOA?

Answer 22

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)

Question 23

What does undivided shares mean in IHT?

Answer 23

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.

Question 24

Why did you carry out desktop valuations for your IHT cases?

Answer 24

Had sufficient information to do from the desk
Agreed with client – in working agreement with HMRC

Question 25

Tell me about Wight and Moss v CIR (264 EG 935) 1982 case (Nellie Wight)

Answer 25

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

Question 26

What is a leasehold

Answer 26

A leasehold agreement is where you occupy a property interest for a defined period of time from the freeholder.

Question 27

What effect does a short leasehold have on value?

Answer 27

Depends on terms but generally Will decrease property value

Question 28

What is the leasehold enfranchisement?

Answer 28

Leasehold enfranchisement is the process you go through to either extend your lease, or purchase a share of the freehold.

Question 29

What is ATED

Answer 29

Annual tax on enveloped dwellings ATED is an annual tax payable by companies that own residential property over £500k.

Question 30

What law relates to undivided shares for valuations on or after 1 January 1997?

Answer 30

What law relates to undivided shares for valuations on or after 1 January 1997?

Question 31

What law related to undivided shares for valuations before 1997?

Answer 31

Law of Property Act 1925

Question 32

How do you calculate Capital gains tax?

Answer 32

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

Question 33

What are chargeable assets in relation to CGT?

Answer 33

Assets you pay capital gains tax on when you sell

Question 34

Examples of chargeable assets CGT

Answer 34

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

Question 35

What assets do you not pay CGT other than personal home?

Answer 35

ISA or PEP (personal equity plan) UK government gilts and bonds. Betting or lottery winnings.

Question 36

You do not pay Capital Gains Tax when you sell (or ‘dispose of’) your home if what applies?

Answer 36

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.

Question 37

What is important to remember when valuing undivided shares in land?

Answer 37

Need to remember that I am valuing the particular interest which the transferor has. Not the whole property (Walton v CIR, 1995)

Question 38

What rights does a hypothetical vendor in an undivided share agreement have?

Answer 38

Right to receive appropriate portion of net income Appropriate share of net sale proceeds Right to occupy unlet property jointly with other co-owners.

Question 39

What discounts are to be applied when valuing an undivided half-share interest?

Answer 39

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.

Question 40

What was the nature of the co-owners occupation for House in Sevenoaks?

Answer 40

Two sisters co-owned and occupied the property, after the deceased passed the other sister stayed in occupation maintaining their rights

Question 41

What RICS guidance relates to capital taxation valuations?

Answer 41

UK VPGA 15

Question 42

Why and how did the IHT rules change?

Answer 42

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.

Question 43

Does the inheritance tax main residence allowance apply if I’m not married?

Answer 43

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.

Question 44

How does IHT gifting work?

Answer 44

a 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.

Question 45

Talk me through the reliefs for CGT

Answer 45

Private Residence Relief - lived in whole ownership - not let any part out Roll over relief Entreprenuers relief

Question 46

Talk me through the reliefs for SDLT

Answer 46

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

Question 47

Talk me through the exemptions for CGT

Answer 47

ISA or PEP. UK government gilts and bonds. Betting or lottery winnings. Main home

Question 48

Talk me through the exemptions for SDLT

Answer 48

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

Question 49

What is the threshold for CGT?

Answer 49

£3000 for individuals £1500 for trusts Since April 2024 Companies pay corp tax on gains!

Question 50

What is the threshold for SDLT?

Answer 50

£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 Stamp Duty, usually around 5%

Question 51

What are the Capital Gains Tax rates?

Answer 51

Commercial rate aligned with residential rate in October 2024: 18% and 24%

Question 52

What are PETs?

Answer 52

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

Question 53

What is happening with agricultural property relief?

Answer 53

From April 2026, 100% relief from IHT restricted to first £1 million. Above this, landowners access 50% relief (40% effectively becomes 20%).

Question 54

What is business property relief?

Answer 54

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.

Question 55

What are undivided shares?

Answer 55

Equal undivided part or share of land or property.

Question 56

What are the two ways of owning a undivided share?

Answer 56

Joint tenancy Tenants in common

Question 57

What is a joint tenancy?

Answer 57

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.

Question 58

What is a tenancy in common?

Answer 58

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.

Question 59

Which tenancy is the most common? (Undivided shares)

Answer 59

Joint tenant used mainly by married couples Tenancy in common used by friends, family and unmarried couples.

Question 60

What are the difficulties in valuing an undivided share?

Answer 60

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

Question 61

What is prudent lotting?

Answer 61

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)

Question 62

What is the maximum threshold for IHT for a couple and why?

Answer 62

£1,000,000. £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.

Question 63

Any recent updates to Capital Taxation?

Answer 63

Threshold down to £3000 indv Agricultural property relief - used to be 100%. Now 100% under 1 mil, 50% relief above 1 mil.

Question 64

What does the Lynall case regard?

Answer 64

Determined that the vendor and purchaser should be hypothetical - no one excluded

Question 65

How may I assess a minority share?

Answer 65

Due to the difficulty in obtaining an order for sale a higher discount may be applied ranging 10-20%. As per Charkham case

Question 66

Capital Taxation market value differences

Answer 66

flooding of market disregarded special purchaser considered prudent lotting

Question 67

What do you understand by Hope Value?

Answer 67

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

Question 68

What is charitable relief?

Answer 68

Can donate 10% of your estate to charity and pay 36% on rest.

Question 69

What is prudent lotting?

Answer 69

The act of lotting or separating property to achieve best price in the market.

Question 70

Reliefs for CGT?

Answer 70

Roll over relief PRR Business Asset Disposal Relief

Question 71

Exemptions for CGT?

Answer 71

ISAs or PEPs UK government gilts and Premium Bonds betting, lottery or pools winnings marriage gifts

Question 72

What are the assumptions for IHT Market Value?

Answer 72

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)

Question 73

Any changes to SDLT?

Answer 73

April 2025. Nil rate band reduced from £250,000 to £125,000. First time buyer relief reduced from £425,000 to £300,000.

Question 74

What are the taxes in UKVGPA 15

Answer 74

IHT, CGT, SDLT, ATED, & Residential Property Developer Tax

Question 75

What rate of tax was payable on Muswell Hill

Answer 75

8% - PET 6years into 7y.

Question 76

What happened in Nellie Wight case?

Question 77

What improvements are allowed for CGT?

Answer 77

Allowable expenditure - deductions in CGT. Difference between improvements and repairs. Cannot deduct for restoring something to original state eg. paint job). But would for extension/signficant improvements etc.

Question 78

What other ways do people try to avoid inheritance tax?

Answer 78

Gift with reservation. Eg. Parents transferring the rights to the child but still living there. Tax still paid on inheritance.

Question 79

What is hope value?

Answer 79

A currently unachieved value linked to a future more valuable use or development.