Cemap 1 Topic 4- UK Taxation Part II Flashcards
What is capital gains tax?
Capital gains tax (CGT) is payable on a gain made on the disposal of certain assets. Examples include:
- Personal property (worth more than a certain amount);
- Real estate or land that is not the individual’s main home;
- The individual’s main home if it has been let out or used for business, or if it is very large;
- The sale of shares, if they are not held in an ISA;
- Business assets, such as land, buildings, machinery or registered trademarks.
The tax is payable on net gains made in the tax year, after deducting any allowable capital losses that were made in the same year or carried forward from previous years.
Each individual has an annual CGT allowance, referred to as the annual exempt amount; this is the level of gains that can be made in the tax year before CGT starts to be payable.
The full CGT allowance also applies to a bare trust, trustees of a trust for a vulnerable beneficiary, and to personal representatives. A maximum of half the annual exempt amount applies to the trustees of most other types of trust. The annual exempt amount cannot be
carried forward to subsequent years if it is unused in the year to which it applies.
CGT applies to gains made since 6 April 2015 by individuals or trustees who are not UK resident on residential property located in the UK.
Gains that accrue to non‑UK residents on non‑residential property have been subject to tax since 6 April 2019.
Assets Exempt from CGT
-Main private residence
- Property as the result of death (IHT may apply)
- Ordinary private motor vehicles
- Personal belongings valued at £6000 or less
- Items of national, historic or scientific interest
gifted to the nation
- Foreign currency for personal expenditure
- Gifts and qualifying corporate bonds
- NS&I Products
- Winnings from Premium Bonds or Lottery
- ISAs
- Gains on life assurance policies
Loss made on disposal
If an individual makes a loss on disposal of an asset, the loss can generally be offset against gains made elsewhere. It must be offset first against gains in the year the loss occurred. Residual losses may then be carried forward to future years. A capital loss cannot, however, be carried back to a previous year.
Given that capital losses can be carried forward but the annual exempt amount cannot, capital losses brought forward are used only to the extent necessary to reduce gains to the level of the annual exempt amount. Residual losses are
then carried forward.
Calculating CGT
The rules relating to calculation of taxable gains include the following:
- The costs of purchase can be added to the purchase price and selling costs can be deducted from the sale price
- The cost of improvements to an asset can be treated as part of its purchase price (but costs of maintenance and repair cannot)
- Capital gains made prior to 31 March 1982 are not taxed so, for an asset acquired before that date, its value on that date must be substituted for the actual purchase price.
- CGT is charged on gains arising from disposals in the period 6 April in the current tax year to 5 April in the following year.
- It is normally payable on 31 January following the end of the tax year in which the gain is realised.
- Details of chargeable assets disposed of during the tax year must be included in an individual’s tax return
Calculating CGT liability involves the following:
1) Calculate the amount of the gain.
2) Deduct the CGT annual exempt amount
3) Deduct any losses that can be offset against the gain.
4) What remains is the taxable gain.
5) Add taxable gain to taxable income to establish what rate(s) of CGT should be paid.
6) Apply tax at appropriate rate
CGT Reliefs
- Private residence relief
Available when someone sells the property they have lived in as their main or only residence. The ‘main residence’ can be a house, flat,
houseboat, or a fixed caravan. If someone
has more than one property and shares their time between each, they may nominate the property on which they want to claim private residence relief. - Business asset disposal relief
Business owners are required to pay CGT when they sell trading businesses and shares in trading companies.
However, they can pay a lower rate of tax on gains. To claim this relief, they must own at least 5% of the ordinary share capital of the business, at least 5% of the voting rights in that company. and 5% of the distributable profits and net assets of the company. relief also applies to gains resulting from investment into unlisted companies. - Roll‑over relief
Roll‑over relief may be claimed if business assets disposed of are replaced by other business assets. This means CGT is deferred until a final disposal is made.
The replacement asset must be bought within a period of one year before and three years after the sale of the original asset. Relief can be claimed up to the lower of either the gain or the amount reinvested.
-Hold‑over relief
CGT on any gain arising on the gift of certain assets can be deferred until the recipient disposes of it.
Gains may be wholly or partly passed on to the recipient in the case of gifts (or sale at under value) of the following broad categories of assets:
- assets used by the donor in their trade or the trade of their family company or group;
- shares in the transferor’s personal company or in an unlisted trading company;
- agricultural property that would attract relief from inheritance tax;
- assets on which there is an immediate charge to inheritance tax
What is Inheritance Tax?
IHT is levied on the estates of deceased persons and is charged following an individual’s death. The tax is charged on the amount by which the value of the estate exceeds the available
nil‑rate band at the date of death.
Surviving spouses can increase their own nil‑rate band by the proportion of unused nil‑rate band from the earlier death of their spouse.
In order to prevent avoidance of tax by ‘death‑bed’ gifts or transfers, the figure on which tax is based includes not only the amount of the estate on death but also the value of any money or assets that have been given away in the seven years prior to death
*** SEE DIAGRAM IN BOOK RE NIL RATE BAND
Residence nil‑rate band
If part of the estate includes a residence that is being left to a direct descendant, then since 2017/18 an additional residence nil‑rate band has been applied.
The RNRB can be used on death against the value of a property owner’s interest in property that they occupied as a residence and where the interest in the property is bequeathed to a direct descendant. The property need not have been the individual’s main residence.
Where the RNRB is unused, in full or in part on death, the unused balance can be carried forward for use upon the death of a surviving spouse. As with the main nil‑rate band, it is the unused percentage that is carried forward rather than the unused value. For example, a married man dies and leaves his share in the residence he co‑owns with his wife to his
children. His share in the residence is valued at £125,000. The balance of his estate is left to his wife. The RNRB can be used in respect of the share of the property left to the children. Only 71.43 per cent of the RNRB has been used at
this stage (£125,000 ÷ £175,000), so 28.57 per cent is available to potentially be used on the widow’s subsequent death. Carrying forward the percentage of the RNRB unused on the first death is allowed even if the spouse of the individual died before the introduction of the RNRB.
This means that the maximum amount exempt from IHT between married couples is effectively £1m (ie £175,000 × 2RNRB and £325,000
× 2NRB).
For example, Amir dies in July 2020 leaving an estate of £1m which is made up of the house he lived in, valued at £650,000, and investments with a value of £350,000. Amir was pre‑deceased by his civil partner, Jamal, who died in 2014; he did not use any of his IHT allowances. 100 per cent of the RNRB was unused when Jamal died so a total RNRB of
£350,000 is available on his death: £175,000 in respect of Jamal and £175,000 in respect of Amir. The RNRB is used against the property, leaving £300,000 (£650,000 less £350,000) within the estate. The total remaining estate is therefore £700,000 and the NRB of £650,000, £325,000 from Jamal and £325,000 from Amir, can be offset against this to leave just £50,000 subject to IHT.
If Amir had been single and leaving his property to lineal descendants, the calculation would be £1m estate less £175,000 RNRB (deducted from the property value) and £325,000 NRB resulting in a taxable estate of £500,000.
Where the total value of the estate, less liabilities, exceeds £2m, the value of the RNRB is tapered away at a rate of £1 for every £2 in
excess.
If the RNRB is not used in full against the value of property, any unused portion cannot then be used against other assets in the estate. It can, however, be carried forward as in the example.
What is a Potentially Exempt Transfer?
IHT is also payable in certain circumstances when assets are transferred from a person’s estate during their lifetime (usually as gifts). Most gifts made during a person’s lifetime are potentially exempt transfers and are not subject to tax at the time of the transfer.
If the donor survives for seven years after making the gift, these transactions
become exempt and no tax is payable.
If the donor dies within seven years of making the gift, and the value of the estate (including the value of any gifts made in the preceding seven years) exceeds the nil‑rate band, inheritance tax becomes due.
The gifts are offset against the nil‑rate band first and, if there is any nil‑rate band left, this is offset against the remainder of the estate, the balance being subject to tax. If the value of the gifts alone exceeds the nil‑rate band, the portion of the gifts that exceeds the threshold is taxed along with the remainder of the estate.
PETs and Taper Relief
Death within Tax due on gift
1 year to 3 years of gift 100% of the tax
3–4 years of gift 80% of the tax
4–5 years of gift 60% of the tax
5–6 years of gift 40% of the tax
6–7 years of gift 20% of the tax
7+ years No tax
What is a chargeable lifetime transfer?
Some lifetime gifts- notably those to companies, other organisations and certain trusts- are not PETs but chargeable lifetime transfers, on which tax at a reduced rate is immediately due. This ‘lifetime’ tax is only payable if the value of the chargeable lifetime transfer, when added to the cumulative total of chargeable lifetime transfers over the previous seven years, exceeds the nil‑rate band at the time the transfer is made. The reduced rate of tax is only applied to the excess over the nil‑rate band. As with PETs, the full amount of tax is due if the donor dies within seven years (subject to the same taper relief)
What gifts and transfers are exempt from inheritance tax?
There are a number of important exemptions from inheritance tax:
- Transfers between spouses both during their lifetime and on death, provided that the receiving spouse is UK domiciled;
- Small gifts of up to £250 (cash or value) per recipient in each tax year;
- Donations to charity, to political parties and to the nation;
- Wedding gifts of up to £1,000 (increased to £5,000 for gifts from parents or £2,500 from grandparents);
- Gifts that are made on a regular basis out of income and which do not affect the donor’s standard of living;
- Up to £3,000 per tax year for gifts not covered by other exemptions. Any part of the £3,000 that is not used in a given tax year can be carried forward for one tax year, but no further.
VAT
Value added tax (VAT) is an indirect tax levied on the sale of most goods and the supply of most services in the UK.
Some goods and services are exempt from VAT, including certain financial transactions such as loans and insurance.
The supply of health and education services is exempt, as are e‑books, and a number of related goods and services are currently zero‑rated. Zero‑rated goods and services are subject to VAT but the rate of tax applied is currently 0 per cent. Zero‑rated items include food, books, children’s clothes, domestic water supply and medicines. Domestic heating is charged at a reduced rate.
Businesses, including the self‑employed, are required to register for VAT if their annual turnover is above a certain figure. Businesses with turnover below this figure can choose to register for VAT if they wish.
An advantage of registering is that VAT paid out on business expenses can be reclaimed.
Two disadvantages are:
- The fact that the firm’s goods or services are more expensive to customers (by the amount of the VAT that the firm must charge);
- The additional administration involved in collecting, accounting for and paying VAT.
Stamp Duty and Stamp Duty reserve Tax
Certain transactions, notably purchases of securities and of land, are liable to stamp duty. Stamp duty is a tax imposed on the documents that give effect to the transaction. For example, conveyances of property or stock transfer forms.
Stamp duty is payable on paper documents that transfer the ownership of financial assets, such as shares and bearer instruments over a certain amount. It is important to ensure that the documents are stamped by HMRC within the
permitted time period.
Stamp duty reserve tax (SDRT) is charged on transfers that are completed electronically. If the transaction is carried out through CREST, which is an electronic settlement and registration system, SDRT is deducted automatically and passed to HMRC. For other transactions, the buyer has to notify HMRC and
make the payment.
There are some exemptions from stamp duty and stamp duty reserve tax. For example, it is not chargeable on transactions in eligible securities on the London Stock Exchange’s AIM and High Growth Segment. No stamp duty is
payable on a transfer of shares in a property authorised investment fund (PAIF) and there is no stamp duty reserve tax payable on surrenders of units.
Real Estate Investment Trusts (REITs), on the other hand, pay stamp duty or stamp duty reserve tax at the usual rates.
Stamp duty land tax
SDLT is paid by the purchaser of property and there are different rates of SDLT which apply to different portions of the purchase price.
For certain types of purchaser, including corporate bodies, different purchase price thresholds and SDLT rates apply.
For residential purchases, a supplementary rate applies where the purchase means that the purchaser will own more than one residential property.
Note: SDLT does not apply to the purchase of properties in Scotland or Wales, which are subject to Land and Buildings Transaction Tax (LBTT) and Land Transaction Tax (LTT)
STAMP DUTY LAND TAX RELIEF FOR FIRST‑TIME BUYERS
First‑time buyers can claim a discount (relief), which is tapered depending on the price of the residential property. For properties below a certain amount, first‑time buyers will not be liable for any SDLT and for properties in excess of a certain amount, the relief is not applicable.
The relief was extended to qualifying shared‑ownership property purchasers in the 2018 Budget.
Corporation tax
Corporation tax is paid by limited companies on their profits. It is also payable by clubs, societies and associations, trade associations and
housing associations, and by co‑operatives.
It is not paid by conventional business partnerships or limited liability partnerships, or by self‑employed individuals: these are all subject to income tax.
Companies are taxed on all their profits arising in a given accounting period, which is normally their financial year. Companies resident in the
UK pay corporation tax on their worldwide profits, whereas companies resident elsewhere
pay only on their profits from their UK‑based business.
For companies with profits up to a set threshold, corporation tax is normally due nine months
after the end of the relevant accounting period. For those with profits over the threshold, corporation tax is due in quarterly instalments beginning approximately halfway through the accounting period.
