CGT 1: Chargeable Gains Arising Flashcards
What is CGT? (3)
Examples? (3)
Capital gain accrues when:
1) ‘chargeable person’ disposes of
2) a ‘chargeable asset’ on a
3) ‘chargeable occasion’.
These ‘terms’ are not found tax legislation but HMRC shorthand
CGT is used to plug in the gaps between income tax and avoidance schemes.
Introduced 6 April 1965
Shares
land
buildings
antiques
jewellery
are examples of assets that may attract a CGT liability if they are disposed of for more than they cost.
ALWAYS CONSIDER BADGES OF TRADE/NATURE OF DISPOSAL - ITSA IS HIGHER THAN CGT
What’s the CGT working out formula (4)
- what you receive for it
LESSS
- allowable disposal expenses
*
LESS - what you paid for it
LESS
- the cost of certain improvements to it.
= Chargebale Gains (normally charged at 20%) - Consider the AEA!
What if you dispose of something for less than you bought it for? (1)
You may be able to claim an allowable loss.
Key legislation for CGT? (1)
TCGA 1992 - Taxation of Chargeable Gains Act 1992.
How does CGT interact with other taxes? (5)
- Income tax: will always take priority over CGT and considered first. May fall outside of ITSA when they are not carrying on a trade
- Stamp duty: Paid by purchaser, and CGT is paid by seller. (SDLT may be deduced from the CGT once sold)
- IHT - Death is not a chargeable occasion for CGT
- Partnership - a partnership is not chargeable to CGT - individual partners are
- Corporation Tax - they pay CT and are dealt with by the office dealing with the company. May be liable to ATED
Who is chargeable to CGT? (4)
**Residency **- Chargeable to CGT when they are resident or ordinarily resident in the UK (Statutory Residence Test).
Non-Residency - If carry on a trade, profession or vocation in the UK - pay CGT on assets used in the trade.
**Non-UK Domiciled but resident **- Liable to CGT on gains arising on assets situated anywhere in the world.
In general, people who are not resident in the UK are not liable to CGT when they dispose of an asset, but there is legislation to use a temporary move as avoidance technique.
Who is Exempt from CGT? (3)
1) People who are not resident in the UK (unless trade in UK)
2) Non-domiciled
3) Companies (except ATED related CGT)
How does a customer notify CGT for gains and losses? (4)
If no SA return received, they must notify HMRC 6 months from the end of the year of assessment.
SA Record? - Notify on SA return (SA108) (include CG computations)
UK Property Owners (not main residential) - Report in 30 days after completion date
Trustees: SA905
PArtners: SA803
SA records will ask a breakdown of 3 different gains/losses categories: Listed shared/Unlisted shares/property and other
What is a trust for CGT? (2)
For CGT purposes trusts are either settlement trusts or bare trusts.
Trusts are legal arrangements where assets **are held in trust **for the benefit of beneficiaries. Trustees are responsible for administering the trust and trust assets
What is the Annual Exempt Allowance?
Was £6,000 (22/23) but as of April 2024 £3,000.
It is given as a deduction from the final figure of total chargeable gains for the tax year less allowable losses (like a personal allowance)
Gains in any tax year which do not exceed the AEA are not chargeable to CGT.
Note: This relates directly to CGT so no AEA for companies at they’re CT
Before £6,000 it was £12,300 (22/23)
AEA Restrictions (3)
- The amount is personal – it cannot be transferred between spouses or civil partners.
- Allowance can’t be carried forward: one year only
- Sets of against CGT only - no sideways relief
Who is a “Chargeable Person”?
Examples of who is
Examples of who isn’t(1)
‘chargeable persons’ means people or entities who may be liable to pay capital gains tax (CGT) if they make a chargeable gain
Once you have established that there is no charge to income tax, you must consider whether a chargeable person has:
* disposed of a ‘chargeable asset’
* on a ‘chargeable occasion’.
Who is a “chargeable person”
- Trustee (though in their capacity as a trustee via a trustee SA return). wWuld be paid out of trust funds not out of the trustee’s pocket.
Who is not a “chargeable person”:
- Charities
- Companies which are nominee’s.
What is a “Chargeable Asset” (4)
Examples?
Assets on their disposal any gain is a chargeable gain.
Examples:
UK property
non-UK property
Land Leases > 50 years
Goodwill, debts and options and other incorporeal property, created property and currency other than sterling (except where bought for personal expenditure outside the UK). However, some of these assets may be subject to special rules which apply for companies.
Exempt Assets
Examples of what is NOT a “Chargeable Asset”? (4)
Always exempt;
1) Cars
2) chattels worth no more than £6,000 (tangible, moveable property)
3) gilt-edged securities (also called loan stock)
4) Qualifying corporate bonds (QCBs).
5) Sterling (foreign is)
Examples of what MAY be exempt as a “Chargeable Asset”
Other assets may be exempt, depending on the circumstances in which they are acquired.
- medals for valour
- simple debts and life insurance policies will all be exempt in the hand of the first owner but may be chargeable assets for subsequent owners depending on the circumstances in which they were acquired
- Shares, though you’d have to sell a lot
What is a “Chargeable Occassion”?
Examples?
When a chargeable gain may accrue of disporsal/part of an asset.
1) Something is sold
2) Assets are exchanged
3) Gift is made (because gifts are not arms length)
4) Moving from personal to trading stock S161 TCGA1992
Examples of what is not a “Chargeable Occassion”
- Death of the owner of the asset.
- Spousal transfers - treated as being made on a no gain, no loss basis.
Examples what MAY be a “Chargeable Occassion”
Capital sum is derived from an asset
Loss/destruction of an asset
Negligible value claim is made.
When is the date of disposal?
- Date of any contract
- Conditions precedent in the contract are fulfilled
- if no contract, date of disposal is asset transfer date, unless specific rules apply.
The date of disposal is important because it can determine the rate of tax charged, the availability and calculation of reliefs and whether or not the gain is chargeable.
What is not a disposal date?
- the death of the owner of an asset
- a transfer of an asset between nominee (or the legal owner) and beneficial owner
- a theft of an asset
- a transfer of an asset as security for a mortgage
- share reorganisations or exchanges.
What is “consideration” for CGT?
No definition of consideration in TCG 1992
Note: Consideration does not have to be in money and could be assets
A farmer sells two fields at auction. The auction price is £50,000 and the auctioneer deducts a 3% commission before passing the cash on to the farmer. The farmer receives £48,500. But the disposal consideration used in calculating the chargeable gain is the full £50,000.
Market Values and Arms length
When is market value used?
Examples:
Disposal of an asset is not by way of ‘a bargain made at arm’s length’.
- gifts
- a transfer into a settlement by a settlor (broadly speaking the person who created the settlement)
- a distribution by a company to its shareholders
- where the consideration received cannot be valued
- where the transaction is loss of employment
What are connected people in TCG 1992
These transactions are ‘otherwise than by way of a bargain made at arm’s length’.
Connected persons include:
- Spouses and civil partners
- certain other relatives,
- trustees,
- business partners and connected companies.
What takes priority; ITSA or CGT?
ITSA! - Consideration is explained in S37 TCGA 92
CG has lower rates that ITSA
37Consideration chargeable to tax on income.
(1)There shall be excluded from the consideration for a disposal of assets taken into account in the computation of the gain any money or money’s worth charged to income tax as income of, or taken into account as a receipt in computing income or profits or gains or losses of, the person making the disposal for the purposes of the Income Tax Acts.
1)Remittance Basis: What is it
2) When are the rules not applied?
1) When you are non-domiciled you can choose to use the remittance basis. This means you’re taxed on money coming INTO the UK
2)
- Rules changed April 2017
- Remittance basis is not available if you are deemed domicile in the UK.
Before 2008/09, Anwar would not have been liable to CGT as Non-Doms were not liable for any gains overseas where the proceeds were not remitted to the UK
Election under S161(1). What is it?
Election under S161(3). What is it?
Minimises Capital Gains due.
Appropriations to and from trading stock: How does this work?
A person may acquire an asset for non-trading purposes and subsequently transfer it to trading stock. (s161(1) TCGA 1992, and CG69200+).
In such circumstances, if a sale of the asset at market value would have resulted in a chargeable gain or allowable loss, the transfer to trading stock is a deemed disposal (at market value) for CG purposes at the time that the appropriation takes place.
If, however, the taxpayer makes an election under s161(3) TCGA 1992, there will be no chargeable gain or allowable loss on the appropriation of the asset to trading stock. (s161(3) TCGA 1992, and CG69200).
Instead, the market value of the asset is then reduced or increased by the chargeable gain or allowable loss when working out the trading profits or losses for income tax.
Is Capital expenditure allowable as an expense?
Yes - Enhancement expenditure reflected in the state of the asset at disposal.
Who is the Main Beneficiary
NOT FINISHED
Chattels Exemption
6k
Rebasing
Rebasing
Assets acquired before 01/03/1982
You use the apportion
What are the standards required for CGT?
K7.1 Chargeable persons, assets and occasions. Demonstrate your understanding of when a chargeable gain arises. Explain the exemptions which apply to capital gains tax. Explain how a customer notifies gains and losses.
K7.2 Calculating a gain or loss. Demonstrate your understanding of the main considerations when calculating a gain or loss on a capital disposal. Describe the term ‘consideration’ and explain when that has been received for capital gains tax purposes.
K7.3 Company capital gains. Outline the key differences between individuals and companies in relation to capital gains tax
General
What are the differences between calculating:
- an allowable capital gain and
- an allowaable capital loss
Losses on the disposal of chargeable assets are calculated in exactly the same way as gains.
An individual’s allowable losses are set against chargeable gains to arrive at the overall liability for CGT for a tax year.
How to let HMRC know a Capital loss has occurred?
When does HMRC “Agree”?
SA return or, if they are not required to complete a return, by writing to HMRC.
The time-limit for notifying losses is 4 years from the end of the tax year when the asset was disposed of.
2) At end of enquiry or the enquiry window closes.
(before 1 April 2010 the time limit was 5 years from 31 January)
If not within time limits we would then “agree” or open “discovery”
General
What happens to losses on exempt Capital Gains?
What happens to losses if non-resident?
Can’t be claimed - it’s Exempt!
ITSA - Where is the supplementary Capital Gains summary page
Capital Gains summary page (SA108).
CGT: Allowing Losses for Reliefs
- What are the rules for Capital Gains Loss Relief? (2)
- Any special rules for loss relief? (1)
**1) **After a claim is made (via SA or letter), they can be organised in this order:
- Sideways against other Chargeable gains, then…
-When you do this calculation, you ignore the annual exempt amount (AEA). eXPENSES HAVE TO BE USED IN FULL BEFORE AEA - Carry Foward - CAN PART SHARE LOSSES TO CONSIDER AEA
**2) **Carry Back Losses - cannot usually be carried back but there are some exceptions. Eg. Death in tax year in which an individual has died.
LIKE CARRY FORWARD, YOU CAN CONSIDER AEA AMOUNTS AND DO PARTIAL AMOUNTS
- There are other exceptions but not covered in the material
ORDER: IN YEAR LOSSES, AEA, THEN CARRIED FORWARD
Section 2(2)(a) TCGA92 sets out how relief is to be given for a loss arising in the tax year, and how any surplus losses for that year can be relieved.
Can you choose to use AEA first before expenses
No you cannot partially claim losses and offset the rest. This might create a loss position that can be carried forward
Example
Donald’s CG computation for the year 2018/19 is as follows. The AEA for the year is £11,700.
Gain on sale of painting £25,000
Loss on sale of development land (£20,000)
Loss on sale of uncut diamond (£9,000)
Gain on sale of shares £7,800
Total chargeable gains £32,800
Less total allowable losses (£29,000)
Net gains chargeable to CGT £3,800
This means that, of his £11,700 AEA, he only uses £3,800, which completely covers his net gains.
He cannot choose to set off only £21,100 of his losses (to bring the net gains down to £11,700 which would then be covered by the AEA) and carry the remainder forward.
Clogged Losses
What are clogged losses? (1)
What happens to the losses? (2)
What amount is used as consideration amount?
Any restrictions?
1) A loss made on a disposal to a connected person.
The loss relief that is available is heavily restricted Market value is used as the consideration
Only exception is rules relating to selttements for educational purposes
Can’t have these losses. These losses can only be used against other gains/losses from the same connected party
When there is a disposal to a connected person, you use market value as the consideration.
What is consideration?
INCOMPLETE
1) When would you be Deemed Domicile? (1)
2) What does this mean? (1)
-1)
You will be deemed domicile if you were born in the UK with UK domicile of origin and UK resident in 2020 to 2021 tax year,
**or **
you have been UK resident for at least 15 of the previous 20 tax years and UK resident in 2020 to 2021 tax year.
-2) You can’t use the remittance basis
Loss Relief
1) Losses set off on Death
Death is not a chargeable occasion HOWEVER for CGT purposes, it is possible for an individual to have incurred allowable losses in the tax year in which they died.
These losses are:
1) Carried sideways to other CG in year
then….
2) Carried backwards against chargeable gains arising in the 3 tax years preceding the year of death.
Example, where an individual died in 2018/19 the losses can be set off backwards
2018/19
Loss (£9,000)
AEA £11,700
Chargeable gain after annual exemption £0
Allowable loss (£9,000)
Chargeable to CGT £0
Trade Losses and Cross Tax Loss Relief
1) Can trade/employment losses be carried against Capital losses in the tax year?
1) Yes. **High risk compliance area. **
In certain circumstances excess trade or employment losses can be set against chargeable gains. Where a claim for relief is made, the excess losses are treated as allowable losses of the tax year in which the losses arose or the previous tax year.
Targetted Anti- Avoidance Rules (TAAR) - Will have to check if there is a genuine economic loss. These are applied to Companies and Individuals
Loss Relief
1) Can losses on Shares be carried against trading income?
1) Yes, but complex conditions for relief and high risk compliance area.
If OK, then can be offset again:
* the tax year in which the allowable loss arose, or
* the previous tax year, or
* both
Are losses given before or after AEA?
Losses are given before the AEA (the threshold up to which an individual is not liable to pay CGT on net chargeable gains).
Part Disposal
Part-Disposal:
1) What is it?
2) What are some examples?
2) Examples include:
- Sale of part of a piece of land
- Grant of lease by the owner of the freehold (eg. Flat)
- Capital sum derived from an asset, such as compensation received for damage to an asset
“Disposal of asset” also includes part-disposal in CGT
Example
Peter has a property which comprises a shop with a flat above. He decides to grant a long lease on the flat.
This is considered a part disposal. Peter has disposed of part of his interest in the land but has retained the freehold.
Part Dispsal
Part-Disposal Expenses: What are the 3 categories for costs?
Formulas?
- Expenditure relating to the asset as a whole - Apportionment required
- Expenditure relating solely to the part that has been retained - Not allowable
- Expenditure relating solely to the part of the asset that has been disposed of - Allowable
Formula for apportionment:
A = Disposal consideration,
B = market value for remained
Expenditure x A/(A+B) = allowable expenditure
Apportionment formula looks complicate, but in essence you find an apportionment between the value of the part of the asset sold, and value of the part of the asset kept. Find the percentage, then apportion the expense
EG. Expenses is £500 and apportionment required
£75,000 part asset sold (sale value of part-asset sold)
£25,000 part asset retained (market Value)
= split of 75% expense
£500*0.75 =£375 allowable. £125 retained.
Chatteks
What are Chattels? (3)
when are they chargeable to CG’s?** (see review)**
1) Assets which are forms of property which are both tangible and movable
* tangible (something physical that can be touched)
and
* **movable **(something that can be moved from place to place).
2) Gains/loses arising on the disposal of chattels that are wasting assets are not normally liable to CGT
iS IT A MACHINE? - ALL PLANT AND MACHINEY ARE WASTING ASSETS AND THEREFORE CHATTELS
The treatment of chattels for CG purposes generally differs from that of other assets
‘Chattels’ might sound old-fashioned but it is a word that is still in use, and for legal purposes it has a very specific meaning.
Excludes intangible assets and non-movable - Eg. Property or intellectual property
1) what do Chattels include? (3)
2) What do Chattels exclude? (3)
3) Why wouldn’t a washing machine be liable to CG/CL? (2)
1) Includes: Everything a person owns which are physical and capable of being moved
2) Excludes: Land, building, Intellectual Property (can’t be moved)
3) most disposals involving chattels are covered by either: * the exemption for certain wasting assets, or the chattels exemption.
Clearly, as chattels are forms of property they are assets for CG purposes, however, most disposals involving chattels are covered by either:
* the exemption for certain wasting assets
* the chattels exemption.
What are wasting assets? (1)
Examples? (4)
What to always consider in wasting assets?
1) Assets that has a predictable life of 50 years or less - predictable life means “useful”
2) Horses, washing machines, televisions and computers, plant and machinery
3) Always consider the assets FUNCTION.
Chattels are often (but not always) wasting assets. A teapot would be a wasting asset, however if an antique teapot then whis would not; you have to look at the FUNCTION. Note however, an antique clock would be classed as a machie asn
All animals are treated as wasting assets, even valuable animals like racehorses. Because a racehorse is a chattel and a wasting asset, neither a chargeable gain nor an allowable loss will arise on a disposal by its owner.
What is the Chattel Exemption
When to apply?
1) A special rule when you sell a chattel
2) S262 TCGA92
3) Applied when NOT a wasting asset, or wasting asset used in a trade and attracted CA’s
4) If >£3000 (£6,000) and make a gain then this consideration is exempt and there is no CG charge.
NOTE - this also applies to losses and needsd to be looked at again. Chattel exemption is useful so that losses cannot be created by applying a £6,0000
1) What’s the CGT rate for Residential Properties?
2) What’s the usual rate for jewellery?
1) 18/28% - AEA’s are against the property first
2) 20%
You would use your AEA against the property amout first to lower liabilities
Capital Allowances: What are the Special CGT rules for this?
Wasting asset exemption will kick in
Losses are restricted by the Balancing Charge/Balancing Allowance.
You can’t gain from Gain/Loss twice
CGT Special Rules to know (4)
- Capital Allowances
- Chattels
- Temporary non-residents who leave the UK and return <5 years and disposed of assets whilst non-resident
- Exempt Assets - Cars (no CGT allowable)
Part-Disposals
What are the 3 occassions that disposal rules need not apply?
1) Part compensation for damage to an asset to repair/restore assets to original state.
2) Where considerations received for small part disposal of land and does not exceed 20% of market value of the land or 20,000
3) Land sold and is recognisably separate from the rest of the land.
Non-wasting Chattels
1) What is a non-wasting Chattel? Why do I care?
2) Examples?
If a Chattel is NOT a wasting asset, disposing of it may result if CG or loss. Gains and losses on such items are often within the CG charge.
Special rule
- Antiques
- non-sterling coins
- ornaments
- stamps
- books and magazines
- militaria
- models and toys
How to follow:
Was is > or < 6000?
If <6000 then exempt.
If >6000 then 5/3 formula applied OR usual chargeable gain
Then test the calculations and see which is lower tax rate.
Note: You would still use the AEA after, so if JUST over
5/3 Chattel formula
What is the 5/3 formula?
It is effectively a relief and different way of calculating Chargeable Gains. Very helpful for when disposal of chattel is just over >£6000.
5/3 x (consideration - £6,000)
NOTE: THIS CALCULATION IS ONLY FOR CHATTELS. IF NOT CHATTEL THEN DON’T USE THIS FORMULA
What is a “set”?
What’s to stop selling of “sets” of assets individually?
Special rules in place to stop splitting of single transactions.
- To the same person, or
- To a number of other peipole who are acting together, or who are connected persons.
A set is if they are similar and complementary
and
Their value taken together is greataer than their total individual value
Chattel - TBC
Am I a chattel? Am I not?
Antique clock
Painting
Residential house
Horse
No gain, no loss - This will be tested on
No gain no loss - when is this used?
loss on chattels which is £6,000 or less
Chattel list
is it a chargeable person
Is it a chargeable Occassion?
Is it a chargeable Asset
Is it a Chattel? Is it tangible? Is it moveable?
Is it a machine/Plant?
If a chattel, is it a wasting asset? If so, exempt
Gains/loses arising on the disposal of chattels that are wasting assets are not normally liable to CGT
CGT Rates
10
18 - basic rate band
20 - Standard higher rate
28 - higher rate (residential property)
FLASHCARDS TO MAKE
Expenses and income tax priority test
STATEMENT OF PRACTICE D1
PART DISPOSAL EXCEPTIONS -SMALL DISPOSALS @ 20% HOLIDING OR <20K
Difference between a set and collection
Private Residence Relief
What is PRR’s purpose? (2)
When may Private Residence relief be available? (2)
To allow a person to replace their existing home with another home of similar value.
This is by ensuring that the proceeds of sale of the old home are not diminished by a charge to Capital Gains Tax
May be available on:
1) disposal, part-disposal or deemed disposal of a dwelling-house occupied by an individual as their only or main residence.
2) Dispose of land occupied and enjoyed with that residence as its garden or grounds
- outline the conditions for private residence relief
- explain the meaning of ‘residence’ for private residence relief
- explain the meaning of ‘grounds’ for private residence relief
- identify which periods of absence can be deemed to be periods of residence when working out private residence relief
- calculate the chargeable gain when part of a dwelling-house has been used for trade or business purposes
- outline the relief due when an owner has let their residence as residential accommodation.
Private Residence Relief
what conditions have to be met for PRR to be claimed? (4)
What happens if conditions are partially met?
1)
Throughout the period that the individual owned the house, it was their only home.
* The individual actually used the house as their home all the time that he or she owned it.
* Throughout the period that the individual owned the house, they did not use it for any purpose other than as a home for themselves, or their family, and no more than one lodger.
* The house and its garden or grounds do not exceed ½ hectare (5,000 square metres, about 1¼ acres).
2)
If these conditions are partially met some private residence relief may be available to reduce the amount of any CGT payable
Flastcard Creation ideas
What are some key elements of PRR
Conditions for PRR
Partially meeting PRR conditions
What is a residence - more than one building caselaw
2 main reasons for restricting PRR - 1) not main residence, and 2) not used as residence through period of ownership
Key
