CAPITALGAINS TAX

Question 1

3

CAPITALGAINS TAX

Answer 1

1. In gener-al terms, a capital gain is the profit realised when an individual, a partnership, or a company disposes of a capital asset. Capital assets include almost every kind of property (such as land, buildings, antiques, and shares of a company) although there are some assets which are specifcally exempt
2. Taxable disposals (dispositions) may include the sale or gift of an asset, trading one asset for another asset, or even the destruction of an asset if insurance proceeds are received.
3. The profit is the difference between the sale price (or fair market value) of the asset when disposed and the costs of acquiring the asset (including the costs of capital improvements made to the asset).

Question 2

Individuals and Partners vs. Companies

Answer 2

1. Individuals (including partners in a business partnership) pay tax on capital gains at a rate lower than the tax rate on their savings and non-savings income.
2. The same is true for personal representatives of estates and trustees of trusts.
3. Compa-nies, on the other hand, do not pay CGT; instead, capital gains made by companies are taxed at the company tax rate

Question 3

3

Effect of Residence

Answer 3

1. If an individual is resident in the UK, the basic rule is that they are chargeable to CGT on the disposal of any chargeable assets they own, regardless of where in the world the asset was situated.
2. Generally, individuals who are not resident in the UK do not pay CGT even if they sell an asset that is situated in the UK.
3. The main exception to this is that non-UK residents are chargeable to CGT if they dispose of interests in** UK land**, whether residential or commercial.

Question 4

2

Exempted Assets

Answer 4

a.Wasting Chattels
b.Non-Wasting Assets Worth Less than £6,000

Question 5

3

Wasting Chattels

Answer 5

1. Wasting chattels are exempt from CGT. Wasting chattels are moveable property with a life of less than 50 years.
2. Cars, boats, watches, and farm animals fall within this category.
   3.Machinery not used in business falls within this category as well, but gains on machinery used in business are taxable.

Question 6

Non-Wasting Assets Worth Less than £6,000

Answer 6

If a chattel is not a wasting one (that is, a chattel with a useful life of more than 50 years, such as jewellery, fine art, and antiques), a gain on its disposal is exempt if at the time of the disposition the chattel was worth less than £6,000.

EXAMPLE
A man buys two unrelated paintings at an auction. Ten years later, he sells one of the paintings for £5,000, realising a
£4,000 gain. At the same time, he sells the second painting for £7,500, realising a £2,500 gain. The £4,000 gain is not subject to tax because the painting was sold for less than
£6,000, but the £2,500 gain on the second painting is subject to tax because it was sold for more than £6,000.

Question 7

3

Exempted Disposals

Answer 7

a.Transfers on Death
b. Transfer Between Spouses
c.Transfers to Charities

Question 8

3

Transfers on Death

Answer 8

1. A transfer of property upon the death of the property owner is not a chargeable disposition for CGT purposes;
2. no capital gains or losses will arise for the deceased.
3. The person who takes the property by will or through intestacy takes it at market value at the date of death (known as** ‘probate value’**). We often say that when assets pass on death, there is a CGT-free uplift to probate value. On the other hand, the (uplifted) probate value is used to determine whether the estate is subject to inheritance tax.

Question 9

Transfer Between Spouses

Answer 9

Spouses can transfer assets freely between them, without
incurring a charge to CGT. The recipient spouse is deemed
to have acquired the asset at the same cost as the donor
spouse.

Question 10

2

Collection of Tax

Answer 10

1. CGT is generally due and payable in full on 31 January following the year in which the gain was made.
2. However, for disposals of UK residential property, any CGT due must be reported and paid within 60 days of completion.

Question 11

CALCULATION OF GAINS

Answer 11

The method of calculating the capital gain on assets disposed of is straightforward: proceeds of sale (or market value) - costs of acquisition = capital gain.

Question 12

3

Proceeds of Sale

Answer 12

1. To calculate the proceeds of sale, we start with the price that was paid.
2. However, if an asset is disposed of by gift or the transaction is with a ‘connected person’ (that is, someone close to the person disposing of the asset), we use market value instead.
3. From this, we may deduct** incidental costs** of disposal, including legal fees, valuation fees, and any advertising costs.

Question 13

4

Costs of Acquisition

Answer 13

1. Similarly, the costs of acquiring an asset will include allowable costs and expenses. These include the actual cost of acquiring the asset in the first place.
2. In addition to this, we can include any associated expenses such as legal fees, commissions, and stamp duty land tax.
3. Cost of Enhancements Deductible
   Any expenditure which enhances the value of the asset is also deductible provided the enhancement is still part of the asset when it is sold/disposed of.
4. Costs Relating to Title
   In addition, any costs incurred by the owner in preserving, establishing, or defending their title to an asset are also deductible. This will include, for example, any legal fees incurred in a boundary dispute with a neighbour over a piece of land.

Question 14

RELIEFS

Answer 14

1. Private Residence Relief
2. Business Asset Disposal Relief
3. Hold Over (Gift) Relief
4. Replacement of Business Assets Relief
5. Incorporation Relief
6. Enterprise Investment Scheme
7. Reinvestment Relief

Question 15

4

Private Residence Relief

Answer 15

1.Private Residence (‘PRR’) Relief exempts all or part of a gain which arises on a property which an individual has used as their home.
gain × (period of occupation of property ÷ period of ownership)
2. If the taxpayer has lived in the property as their home throughout the whole period of ownership, 100% of the gain is exempt and no gain is chargeable.
3. For most taxpayers, therefore, a capital gain made on the sale of their home will be completely exempt, as it will be wholly covered by PRR Relief.
4. A gain will arise only if the taxpayer has been absent from the property at some point during their period of own-
ership. Even then, some or all of those periods of absence

Question 16

Deemed Occupation

Answer 16

A taxpayer will be deemed to have been living in their
residence—even if that is not true in fact—in the following
circumstances:
1. Last Nine Months of Ownership
2. Periods Between Actual Occupation

Question 17

last 9 month occupation
deemed occupation

Answer 17

1. The last** nine months** of ownership are always treated as a period of deemed occupation, regardless of whether the taxpayer was living there.
2. The only condition for this to apply is that the taxpayer must have occupied the property as their home at some time.
   EXAMPLE
   Henry homeowner purchased a home in January 2010. In January 2020, he moved out of the home and into his
   girlfriend’s fat in London. He has recently decided to sell his home. In calculating his PRR Relief, Henry will be able to claim the 120 months he actually lived in the home plus the last nine months before the sale.

Question 18

3

Periods Between Actual Occupation

Answer 18

There are three periods of absence that can qualify as deemed occupation if they come between actual occupation (that is, they are preceded and followed by actual occupation):
1. Any period of absence** for any reason whatsoever up to three** years.
2. Where the owner is abroad by reason of his** employment. This period is unlimited**.
3. Where the owner was absent from the property due to working elsewhere—either as an employee or as a self-employed trader. However, this period of deemed occupation is limited to a maximum of four years.

These three periods of deemed occupation can apply cumulatively . This means that a longer period of ab-
sence may qualify as deemed occupation, as certain periods can be added together.

Question 19

5

Business Asset Disposal Relief

Answer 19

Business Asset Disposal Relief is available on gains made by individuals on the sale or gift of certain business assets, including:
1. All or part of a trading business carried on as a** sole trader or in partnership** for at least** 2 years** before disposal;

2. Shares in a trading company if the individual owns at least** 5% **of the ordinary voting shares of the company (in other words, it is their ‘personal company’) and was an officer or employee of the company for **2 years **before disposal; and

3.** Assets** owned and used by the individual’s personal trading company or trading partnership in the** 2 years ** before disposal.

4. A disposal of an asset in isolation will not qualify unless it is within the above provisions.
5. Amount of Relief
   A claim for Business Asset Disposal Relief means CGT is paid at just 10% on qualifying gains. There is a lifetime limit of** £1 million** of qualifying gains.

Question 20

5

Hold Over (Gift) Relief

Answer 20

1. Gift relief enables an individual to give away certain types of business assets without paying CGT.
2. This is achieved through a joint election by donor and donee.
3. The gain other-wise chargeable on the donor is deferred.
4. When the donee disposes of the asset, they will be charged to CGT not only on their own gain but also the donor’s** deferred gain as well**.
5. This is accomplished by calculating the donor’s gain (market value - acquisition cost) and subtracting it from the donee’s acquisition cost (market value) to arrive at the donee’s base cost, which will be used to calculate the donee’s gain upon
   when the donee disposes of the asset.

Question 21

4

Qualifying Assets for Gift Relief

Answer 21

*Assets used for the purposes of a trade or profession carried on by the transferor or their personal company
(defined above);
*Shares in an unquoted trading company;
*Shares in the transferor’s personal company; and
*Assets that qualify for agricultural property relief

Question 22

2

Replacement of Business Assets Relief

Replacement of Business Assets (Roll-over) Relief is the only one also available to companies, deferring a charge to corpo-ration tax on a gain.

Answer 22

1. Replacement of Business Assets (Roll-over) Relief enables a
   sole trader or** partner** to defer the gain—and thus payment of CGT—on the disposal of qualifying business assets (including land, buildings, and plant and machinery), provided the proceeds of sale are reinvested in other qualifying assets.
2. The reinvestment must be within** 1 year before**, or 3 years after, the asset is sold. Full relief is available only if all the proceeds are reinvested, otherwise any proceeds retained will become chargeable.
3. The charge to CGT is deferred until the disposal of the new asset. This is accomplished by subtracting the gain from the acquisition cost of the new asset.

Question 23

Enterprise Investment Scheme
Reinvestment Relief

Answer 23

To encourage investment in small companies, an individual can defer payment of CGT on any chargeable gain by** investing in shares in a qualifying unquoted trading company** (known as an Enterprise Investment Scheme—or ‘EIS’—com-
pany), either up to 1 year prior to the gain being made, or in the 3 years after it is made. The deferred gain will become chargeable when the EIS shares are sold.

EXAMPLE
Warren makes a chargeable gain of £60,000 on the sale of a painting. He invests £50,000 in EIS company shares three months later. Warren can claim EIS reinvestment relief and defer up to £50,000 of the gain on the painting. This will be ‘frozen’ until he disposes of the EIS shares in the future.

Question 24

4

Incorporation Relief.

Answer 24

1. Incorporation Relief is another deferral mechanism.
2. It applies when an individual transfers their** business or partnership interest** as a going concern to a company.
3. Gain from the transfer is deferred by subtracting the gain from the acquisition cost of the company shares the transferor receives in exchange for the business interest transferred.
4. The gain will be taxed when the transferor disposes of the shares.

Question 25

2

Annual Exempt Amount

Answer 25

1. Every individual has an Annual Exempt Amount for CGT. The amount is £6,000 for 2023/24 (but this amount can change from year-to-year and so would most likely be provided in
   a question if it is needed).
2. The Annual Exempt Amount is
   similar to the Personal Allowance for income tax, in that the first £6,000 of capital gains in the year are exempt and not chargeable to CGT. Therefore, to arrive at taxable gains, we take chargeable gains remaining after all reliefs (other than Business Asset Disposal Relief, ‘BADR’) and deduct £6,000. If BADR is available, we deduct the annual exempt amount first and apply BADR’s 10% rate after that.

Question 26

4

Rates of CGT

Answer 26

1. The rate of CGT on taxable gains depends on the level of an individual’s taxable income and the nature of the asset being disposed.
2. Generally, if an individual pays income tax at the higher or dividend upper rates (or additional rates) on
   their income, then the rate of CGT is 20%.
3. Otherwise, gains are generally taxed at a rate of 10% to the extent that they
   do not exceed the individual’s unused income tax basic rate band; and at 20% to the extent that they exceed the amount of the unused basic income tax rate band.
4. The unused basic rate band is the amount of basic rate band remaining after an individual’s income has been taxed.

Question 27

4

Gains from Residential Property

Answer 27

1. If a gain arises on the disposal of residential property, the 10% and 20% rates increase to** 18% and 28%**, respectively.
2. The increased rates apply to gains on both UK and overseas residential property.
3. If an individual has both gains that do not relate to residential property and residential property gains, the Annual Exempt Amount can be allocated in the most beneficial way to minimise the tax payable.
4. Therefore, the exemption should be set against residential property gains in priority, as these would otherwise be taxed at a high-er rate.

Question 28

Losses
A taxpayer will set capital losses against capital gains. Capital losses reduce capital gains. They are not normally set against the taxpayer’s income.

Answer 28

a.Automatic Offset
b.Most Tax Effcient Use Allowed
c.Excess Loss May Be Carried Forward

Question 29

3

Automatic Offset
Losses

Answer 29

1. Capital losses must be set of against capital gains in the same tax year. This is automatic. For example, if a taxpayer makes a gain of £5,000 on one asset, and a capital loss of £1,000 on another asset, these must be netted of to give net gains in the year of £4,000.
2. The Annual Exempt Amount is deducted after relief for current year capital losses.
3. Taxpayers cannot ask HMRC to cover their gains by their Annual Exempt Amount and leave the losses to be used in another year.

EXAMPLE
Anne sold an antique vase on 6 June 2023, giving rise to a gain of £20,000. She also sold a plot of land on 31 August 2023 giving rise to a loss of £50,000. Because the loss exceeds the gain for the year, Anne’s gain will be completely negated, and she will not owe any CGT. Anne’s CGT Annual Exempt Amount will be lost. This makes a diference in how much loss can be carried forward, as will be discussed further below.

Question 30

Most Tax Effcient Use Allowed
Losses

Answer 30

1. Although capital losses must be set of against gains in the same year, taxpayers can deduct losses in the most benefcial way to minimise tax liability.
2. If an individual has capital gains which are charged to tax at diferent rates, for example because one gain relates to a residential property, losses
   should be offset against gains taxed at higher rates in priority. So, losses should be allocated to gains in respect of residential property in priority, and then against other gains not eligible for Business Asset Disposal Relief.

Question 31

4

Excess Loss May Be Carried Forward

Answer 31

1. If capital losses in the year** exceed** gains in the year, the excess loss is carried forward to reduce capital gains in future years.
2. The chargeable gains in the year will be nil and the Annual Exempt Amount will be lost.
3. If the annual exemption is not used, it cannot be carried forward or transferred to another person. It is simply wasted.
4. Capital losses brought forward are also allocated against gains in the most beneficial manner if there are gains charged to tax at diferent rates. They are deducted** after the Annual Exempt Amount**, unlike with current year capital losses, such that the Annual Exempt Amount is not wasted.