CAPITALGAINS TAX

Question 1

CAPITALGAINS TAX

Answer 1

1. In gener-al terms, a capital gain is the proft realised when an individ-ual, 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. The proft is the diference 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

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. The same is true for person-al representatives of estates and trustees of trusts. 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

Effect of Residence

Answer 3

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. 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. 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

Exempted Assets

Answer 4

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

Question 5

Wasting Chattels

Answer 5

Wasting chattels are exempt from CGT. Wasting chattels are moveable property with a life of less than 50 years.

cars, boats, watches, and farm animals fall within this catego-
ry. 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, fne 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 sub-
ject to tax because it was sold for more than £6,000.

Question 7

Exempted Disposals

Answer 7

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

Question 8

Transfers on Death

Answer 8

A transfer of property upon the death of the property owner
is not a chargeable disposition for CGT purposes; no capital
gains or losses will arise for the deceased. The person who
takes the property by will or through intestacy takes it at mar-ket 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) pro-
bate 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

Collection of Tax

Answer 10

1. CGT is generally due and payable in full on 31 January follow-ing 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 com-
   pletion.

Question 11

CALCULATION OF GAINS

Answer 11

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

Question 12

Proceeds of Sale

Answer 12

To calculate the proceeds of sale, we start with the price that was paid. 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. From this, we may deduct incidental costs of
disposal, including legal fees, valuation fees, and any adver-
tising costs.

Question 13

Costs of Acquisition

Answer 13

Similarly, the costs of acquiring an asset will include allow-
able costs and expenses. These include the actual cost of
acquiring the asset in the frst place. In addition to this, we
can include any associated expenses such as legal fees,
commissions, and stamp duty land tax.

a.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.
b.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
2. Enterprise Investment Scheme
   Reinvestment Relief

Question 15

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. 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. 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

3. 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. 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. 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 may count as deemed occupation for PRR Relief purposes-deemed occupation

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

The last nine months of ownership are always treated as a period of deemed occupation, regardless of whether
the taxpayer was living there. 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

Periods Between Actual Occupation

Answer 18

There are three periods of absence that can qualify as
deemed occupation if they come between actual occu-
pation (that is, they are preceded and followed by actual occupation):
*Any period of absence** for any reason whatsoever up
to three** years.
*Where the owner is abroad by reason of his** employ-
ment. This period is unlimited**.
*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

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:
*All or part of a trading business carried on as a** sole trader or in partnership** for at least two years before
disposal;
*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 **two years before disposal; and
*Assets owned and used by the individual’s personal
trading company or trading partnership in the two years ** before disposal.
A disposal of an asset in isolation will not qualify unless it is within the above provisions.

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

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.mThe 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

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
(defned above);
*Shares in an unquoted trading company;
*Shares in the transferor’s personal company; and
*Assets that qualify for agricultural property relief

Question 22

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 pro-
   ceeds of sale are reinvested in other qualifying assets.
2. The reinvestment must be within one year before, or three 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 sub-
   tracting 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 individ-
ual 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 one year prior to the gain being made,
or in the three years after it is made. The deferred gain will
become chargeable when the EIS shares are sold.

XAMPLE
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

Incorporation Relief.

Answer 24

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

Question 25

Annual Exempt Amount

Answer 25

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). The Annual Exempt Amount is
similar to the Personal Allowance for income tax, in that the
frst £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 frst and apply BADR’s 10% rate after that.

Question 26

Rates of CGT

Answer 26

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. 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%. 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. The unused basic
rate band is the amount of basic rate band remaining after an individual’s income has been taxed.

Question 27

Gains from Residential Property

Answer 27

If a gain arises on the disposal of residential property, the
10% and 20% rates increase to 18% and 28%, respectively.
The increased rates apply to gains on both UK and overseas
residential property. 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 benefcial way to minimise the tax payable. 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

Automatic Offset
Losses

Answer 29

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. The Annual Exempt Amount is
deducted after relief for current year capital losses. Taxpay-
ers 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 Annu-
al 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

Although capital losses must be set of against gains in the
same year, taxpayers can deduct losses in the most bene-
fcial way to minimise tax liability. 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 ofset against gains taxed at higher rates in priority. So, losses should be allocated to gains in respect of resi-
dential property in priority, and then against other gains not
eligible for Business Asset Disposal Relief.

Question 31

Excess Loss May Be Carried Forward

Answer 31

If capital losses in the year exceed gains in the year, the ex-
cess loss is carried forward to reduce capital gains in future
years. The chargeable gains in the year will be nil and the
Annual Exempt Amount will be lost. If the annual exemption
is not used, it cannot be carried forward or transferred to
another person. It is simply wasted.

Capital losses brought forward are also allocated against gains in the most benefcial 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.