CGT Flashcards
What is Capital Gain Tax
Assessed on disposal of asset. Includes sale/gift/destruction of asset.
CGT will not arise if asset is disposed as part of trading or business activity.
Pro forma for calculating taxable gain for individuals
Disposal proceeds - Cost = Chargeable gain
Less annual exemption (6000)
=Taxable Gain
CGT Rates
1- 37,700:
normal rate: 10%
residential property rate: 18%
37,701+:
normal rate: 20%
residential property rate: 28%
CGT Tax bands
-Same tax bands of income tax, first they are used in income tax then remaining band is used in CGT
-Tax bands may get extended due to GPPC or GQD
How is disposal proceed calculated?
Proceeds received less costs to sell (legal, agent, commission)
What is included in cost of asset?
Purchase price xxx
Cost to purchase xxx
Improvement cost xxx
can annual exemption be carried forward?
no
can annual exemption be used against any gain?
yes. for eg. residential property is higher rate, so we will offset against this type of gain first
part disposal, how is chargeable gain calculated?
disposal proceeds less cost of disposed part
how is cost of disposed part calculated?
Total cost x (disposal proceeds/ total MV of asset (DP+ MV of remaining)
How will base cost for remaining asset be calculated?
Total cost less cost of disposed part
If i dispose a small part of my asset, will i get any relief and how will it be assessed
I will get small part disposal relief
In which gain of part disposal can be deferred uptil disposal of remaining asset
no gain will be calculated on part disposal, only the base cost of remaining asset will be adjusted by:
Cost of asset less disposal proceeds of part disposal = base cost of remaining asset
This way future gain will automatically increase
what are the conditions for small part disposal?
-Asset must be land and building
-DP of part must be less than 20% of MV of whole building
-DP of this part must be less than 20,000
-DP of all land and building disposed off in this tax year should be less than 20,000.
planning points to consider when deciding to make election of small part disposal?
in disposal year:
-band extension?
-current or brought forward capital losses?
-expectation of any future capital losses?
-annual exemption?
-consider future tax rates?
-availability of funds to pay tax?
distruction of asset/ asset lost. What will be the disposal proceeds? What if there are no proceeds? What will be the date of disposal?
for CGT purpose it is treated as a disposal
if any scrap or insurance proceeds are recieved then they will be treated as disposal proceeds
if no proceeds then loss will arise
disposal date will be when insurance proceeds are received rather than when asset is destroyed
DESTRUCTION OF ASSET if capital gain arises due to scrap and insurance proceeds, can it be deferred?
gain will be chargeable however it can be deferred if PROCEEDS REINVESTED in replacement asset within 12 months
deferral of gain will have to be elected for
if whole proceeds are reinvested then whole gain can be deferred
if partially reinvested then they will be deferred partially
if insurance/scrap proceeds are reinvested partially then the gain will be deferred partially. how will gain chargeable now be calculated?
gain chargeable now will be lower of:
-cash in hand (proceeds less reinvestment)
-total chargeable gain
when gain is deferred due to reinvestment of proceeds, how is the base cost of new asset calculated?
purchase price less deferred gain
Purchase price being used as asset is replaced
Damage of asset
treated as part disposal for CGT purposes
if any proceedsare recieved they will be considered proceeds for that part
how will gain/loss be calculated for damage of asset and can it be deferred?
gain calculation: disposal proceeds less cost of disposed part
deferral: ALMOST ALL OR NOTHING
It can be deferred if 95% or more proceeds are reinvested on restorative of asset
If less than 95% are reinvested then no deferral is available
Deferral is not mandatory, its an election
what will be the base cost after damage if gain is deferred vs its not deferred
If gain is not deferred:
Original cost less cost of damaged part + restoration costs
If gain is deferred,
Original cost less disposal proceeds + restoration costs
if against damage of asset no insurance or scrap proceeds are received?
NO CASH =JUST COST
no CGT will be assessed
base cost will be adjusted only
orginal cost + restoration cost
I am selling my land and reinvesting the proceeds in a building and some machinery, do i have any relief available?
ROLLOVER RELIEF MAY BE AVAILABLE
when business sells a qualifying asset (land&building, fixed plant&machinery, goodwill) and reinvests its proceeds in another qualifying asset (can be another type) within qualifying period (1-3 rule) then the gain on disposal can be deferred
what is the qualifying period for rollover relief
1-3 rule
1 yr before disposal date
3 yrs after disposal date
what happens to base cost of new asset when gain is deferred
base cost of new asset is adjusted
base cost: purchase price less deferred gain
is deferral mandatory?
no its an election
if full proceeds are reinvested vs if partial reinvestment
if full proceeds are reinvested, full gain will be deferred
if partially, then lower of cash in hand and gain will be chargeable now, rest can be deferred
if asset is used partially for private purpose
rollover relief will only be available on business use portion
if proceeds are being reinvested in a DEPRECIATING ASSET
rollover relief is not available rather holdover relief will be given.
depreciating asset=
Leasehold land and building less than 60 yrs
plant and machinery life less than 60 yrs (office equipment, vehicles, furniture etc)
In holdover relief, gain will be frozen, cost of new asset will not be adjusted.
Gain will be chargeable on earliest of:
-disposal of new asset
-cease of business use
-10 yrs
In holdover, gain can only be deferred ONCE.
Less favorable than rollover but if asset is depreciating then no option.
difference between rollover and holdover
in rollover:
Gain can be deferred multiple times
Gain deferred is adjusted in base cost of new asset
in holdover:
Gain can only be deferred once
Gain is frozen, base cost not adjusted
when will frozen holdover gain be chargeable?
earlier of
-when the asset is sold
-when business use is ceased
-10 yrs
what is more favorable ROLLOVER OR HOLDOVER
holdover is less favorable as gain cannot be re deferred and it gets chargeable max after 10 yrs. however in case of depreciating assets only holdover is available.
can holdover be changed to rollover?
yes if depreciating asset gets sold and proceeds are reinvested in non depreciating asset
I am disposing some shares and securities, how will CGT be assessed?
Shares are considered a normal asset and CGT is assessed normally
however
same type of shares of the same company may be bought at different dates, and when being sold, it becomes an issue to identify which ones are being sold.
Tax dept has introduced matching order rules to determine cost of shares when assessing CGT.
How did people avoid tax before matching order rules were introduced?
ppl used to sell their old shares, use their annual allowance and then buy back at the same price as disposal. long term tax was being saved as cost was updated in cool so less gain in future
matching order rules for individuals
cost will be of:
-shares purchased in same day
-shares purchased in following 30 days
-shares in share pool (avg cost)
matching order rules for companies
cost will be of:
-shares purchased in same day
-shares purchased in previous 9 days
-shares in share pool (avg cost)
why are matching order rules more relaxed for companies
no annual exemption
individuals have AE so they are more creative in tax planning
what is share pool
avg cost concept
when shares are purchased or right issue is exercised, then # of shares and cost both are updated in the pool
when bonus issue is made, only # of shares are updated
My company offered rights issue of 1 for 5, however, i didn’t exercise them, i sold the rights.
it will be considered part disposal of existing shares
gain will be calculated according to part disposal concept
Small part disposal may also be available in this case
When is small part disposal relief available for rights disposal?
Sell less, stress less!
If disposal proceeds of rights issue is less than higher of:
1- 3000
2- 5% of total value of shares
then gain on disposal of rights can be deferred against shares held. this is called small part disposal relief
