CGT Flashcards
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 part disposal qualifies for small part disposal relief then what will be the tax treatment
In SPDR, 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 deducting disposal proceeds of part from the cost of total 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 within 12 MONTHS
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 received of damaged part + 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
Your client vali fabrics ltd is selling land and reinvesting the proceeds in a building and some machinery, do they 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
it is available on business assets only not investment properties
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, what relief is there? What is a depreciating asset? What will be the tax treatment?
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
CGT calculation problem for shares
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?
If disposal proceeds of rights issue is less than higher of:
1- 3000
2- 5% of total value of shares (disposal proceed + remaining shares*MV)
then gain on disposal of rights can be deferred against shares held. this is called small part disposal relief
I’m selling my business Just Brownies. And i’m also selling my shares of Unilever. Are there any reliefs available for me?
If yes what is the impact of the relief and limit? And eligiblity?
Why is this relief given
May be eligible for BADR (business asset disposal relief ) which restricts the rate of CGT to 10% irrespective of the tax bands
lifetime limit of gains which can be utilised for BADR is 1 million
It is given for rewarding risk and recognition of contribution of owner to the economy. And encourages future economic activity
Companies are not eligible for BADR
what qualifies for BADR?
B-business unincorporated ka disposal
A- assets of ceased business (till 3 yrs after cessation)
D- do saal ownership period
R- role: if shares then must be employee and own atleast 5 % (trading and personal company)
is BADR available on shares owned by employes through EMI scheme?
yes and in that case 5% shareholding ownership condition is waived
BADR consumption of basic rate band, AE and losses
BADR will consume the basic rate bands
BADR gains will be taxed first as per HMRC rules, so non elligible gains may be taxed at a higher rate
BADR will not consume AE and losses so offset those against non badr gains
is BADR available on gain on disposal of goodwill?
not if that goodwill is being sold to an individual’s own close company (friends and family company)
what is investor relief
It is to encourage investment in unlisted trading companies
also limits CGT rate to 10% irrespective of tax bands
lifetime limit is 10 million
conditions to qualify for investor relief
S.H.A.R.E
S=shares must be of unlisted company and ordinary shares and newly issued
H= holding period must be 3 yrs and disposal must take place on or after 6 april 2019
A- activity of the company must be trading
R- role of investor must be external, not employee or director
E- exclusively for individuals and exemption limit £10million
what is Paper to paper takeover and reorganisation?
this is an exchage transaction when existing shares of a SH are taken and against it new chares of a different company are given.
can happen in following situations:
-takeover
-reorganisation when company is restructuring its share capital, it buys its own shares from SH and gives. to change par value
what is Paper to paper relief? And is it mandatory
it allows that new shares can be acquired at original cost of old shares. no gain will arise at time of exchange.
Gain will be rolled over into the new shares
its not mandatory, we can also record gain and charge it.
tax implication if shares are being exchanged for both shares + cash + loan notes in p2p?
Base cost will be apportioned as per market value of consideration
shares: defer gain, new shares recorded at cost of old shares (purani cost use karlena automatically future mein gain zyaada ajayega)
cash consideration: gain related to cash consideration will be treated as immediate disposal and chargeable (unless below condition are met)
loan note consideration:
Two types:
Qualifying loan notes ( corporate bonds)
gain relating to LN consideration will be calculated but it can be deferred till disposal of QCBs.
No gain on these themselves cuz they are exempt assets
Non qualifying loan notes:
Treated as if cash is received, immediately chargeable
condition under which cash portion gain can be deferred?
-if cash proceeds are lower than, higher of:
1) 3000
2) 5% of total value of consideration
how is cash portion gain deferred?
cash portion gain will not be chargeable and deferred amount will be deducted from base cost.
since cash cannot be sold later, the deferal will be allocated to other considerations
future gain on other consideration will be increased
can paper to paper relief be disapplied?
yes
why would someone want to disapply it? (chargeable now)
-future tax rates may be high
-availability of basic rate band
-annual exemption being wasted
-BADR relief: qualified now but not for new shares (like not employee in new company, not >5% holding)
-availability of brough forward or current year losses
condition of 2 yrs ownership of BADR - does it apply during takeover?
its considered as merged for new company shares, it will include old shares ownership period as well
what happens if P2P relief is disapplied?
ALL considerations will be chargeable now. Cherry picking not allowed.
additional conditions for P2P relief
both of the following conditions must be satisfied: 25% genuine
-25%: takeover or reorganization is a public offer or if private offer then atleast 25% of company’s share capital should be exchanged
-GENUINE: transaction must be for genuine commercial reasons rather than tax avoidance
GIFT HOLDOVER RELIEF
Gift of an asset is treated as a disposal at market value for CGT purpose
we can choose to defer this gain
By reducing donee’s base cost
Donee will pay CGT when disposing asset in future
how is deferral done in gift
gain will be transferred to donee
base cost for donee=
market value less gift relief (original cost of asset)
cost will be reduced so when donee disposes in future, gain will be higher
conditions for gift holdover relief
all of the following conditions must be satisfied: D.U.R.A
-D-donor & donee both have to submit a joint election for it
-U-UK resident: donor and donee both must be UK resident at time of gift
R-residency for donee: it is mandatory for donee to maintain UK residency for atleast 6 yrs after gift is received otherwiese gift relief will be withdrawn and gain will be chargeable
A-allowed gift: must be one of the allowed gifts
what are allowed gifts
Gift must be one of the following items:
B.U.S.H
B-business that is unincorporated
U-unquoted shares
S-Significant shareholding in quoted companies (5%)
H-haw! IHT le tou lia
- asset which qualifies for APR in IHT
-asset which is immediately chargeable for IHT (CLT) eg. when making gift to trust, deferal is allowed so u dont get double taxed
how much % of gain can be deferred in gift holdover relief?
100% gain is deferred if all conditions are met for GHR and the gift is given for free
what if donor has charged some money from donee?
it will be considered partial gift
gift relief will be available for gift element of the transaction
gift element = market value less amount paid by donee
chargeable now: gain less gift element
can we defer partial gain of gift relief? Why would someone want to claim partial deferral
no the Full gain must be deferredt
May want to cuz of unused annual exemptions and losses
tax planning for gift relief
charge consideration from donee
reduce gift element
it will automatically reduce gift relief
if a business is being gifted (unicorporated, unquoted shares or 5% quoted shares) and that entity owns non business assets like investment property
gift relief will be restricted to business assets portion only. gain will be proportioned, and non business % will be chargeable now.
gift relief = chargeable gain * business assets / total chargeable assets
what happens if gift relief is disapplied
donor will pay CGT
base cost for donee will be MV
why would anyone disapply gift relief
donor tax rates are lower:
-donor may be getting BADR, donee may not be elligible
-donor may be a basic rate taxpayer and donee higher
-donor has annual exemptions and losses
what is incorporation relief
transfer from unincorporated business to a company
gain can be deferred through incorporation relief
what conditions need to be satisfied for incorporation relief?
G.A.S
G-going concern: business shud be transferred as going concern
-A-all assets except cash should be transferred
S-shares. -consideration from company should be in form of shares
how will gain be deferred through incorporation relief?
it will be deferred against base cost of shares
market value of shares
less deferred gain
=base cost
if consideration received includes non share consideration
then incorporation relief will only be available on share consideration portion
incorporation relief = gain * share consideration / total consideration
can we partially claim Incorporation relief? (in case i have unused losses, exemption etc)
no all gain must be deferred
tax planning idea: take some non shares consideration from company
if an individual has low tax rate at time of transfer of business to company (BADR, losses, basic rate band) as compared to tax rate expected at time of disposal of shares
then its better to disapply IR and make gain chargeable at time of transfer
BADR available on transfer of business from unincorporated to incorporated?
yes if 2 yrs ownership period is completed.
can also be available on subsequent disposal of shares if individual is an employee, owns atleast 5% and ownership period is 2 years
shares acquired through incorporation situation have a relaxation in 2 yrs ownership requirement, previous shares ownership period will be merged
what situations are exempt from CGT?
-exempt party transfer (between spouse/civil partner, asset will be transferred at cost)
-exempt asset transfer
-assets transferred at death. value of transfer will be at MV (aka probate value)
what assets are exempt from CGT?
CIVIC CH
-Cash
-Inventory (assessed in trading income) or debtors
-VCT Shares
I-I have QCBS/ prize bondsss
-Cars
-Chattels (tangible and movable asset) having cost and DP both below 6000 pounds
what are the conditions of qualifying corporate bonds
They are loan notes issued by a company and
PC 3C
P-Pound sterling: The bond must be denominated in pound sterling
C-Convertible: It should not be convertible to any other currency or shares.
3- must be acquired after 13 March 1984.
Commercial loan: The bond should be a normal commercial loan with a normal interest rate.
interaction between CGT and IHT
sale of asset
gift of asset at death
lifetime gift of asset
Sale of asset: CGT yes, IHT no
Gift of asset at death: IHT yes, CGT no
Gift of asset during lifetime: IHT yes (PET, CLT), CGT yes (gift relief may be available)
i have a personally owned asset that i let my business use for free!
if i sell this asset can i get BADR on it?
all the following must be satisfied:
B - Business sale must qualify for BADR.
U - Use: Asset must be Used by the business for at least 2 years.
R - Rent-free use is required (no BADR on rented proportion).
P - Asset must be sold PART of the business.
how is disposal of rights (patent, copyright, mining, lease, exploration etc) assessed in CGT
more than 50 yrs: treated as disposal, normal CGT (DP-cost)
less than 50 yrs:
DP less net book value
lease rights disposal less than 50 yrs
instead of number of years, adjustment percentages will be used which will be given in exam already
\adjusted cost: cost x % for remaining yrs on disposal / % for yrs remaining on purchase
32 yrs lease was bought for 50,000
after 22 years, it was disposed for 30,000
% for 10 years: 49.65%
% for 32 years: 89.354%
DP= 30,000
less cost:
50,000* 49.65%/89.354%
=27,783
Gain= 2217
what is private residence relief
-gain on selling main residence can get exempted
however ownership period will get apportioned .
gain is exempt for the period you occupied it
non occupancy portion will be taxed
is Private residence relief available for other residential properties except for main residence?
no, for those CGT rates are higher
what can be declared as main residence?
-house
-caravan connected to electric and gas
-empty plot of land connected with main residence can also be included as part of residence up to 0.5 acre
-only 1 MR at a time
two types of period of occupation
1) actual (short routine absences are ignored)
2) deemed period of occupation: absent for long time (months and yrs) but tax dept will assume property is occupied for relief purpose
deemed period of occuptation (relief)
9 3 4 ABROAD
9:
DPO: Last 9 months before disposal.
Condition: Property must have been occupied for at least 30 days during ownership.
3:
DPO: 3 years of absence (for any reason)
Condition: Property must have been occupied for at least 30 days before and after this period. (sandwich)
4:
DPO: 4 years of absence for employment/self-employment within the UK.
Condition: Property must have been occupied for at least 30 days before and after this period. (sandwich)
ABROAD:
DPO: Any period of absence abroad for employment reasons.
Condition:
Property must have been occupied for at least 30 days before and after this period. (sandwich)
when is actual period of occupation requirmenet after deemed period (to complete sandwich) WAIVED?
if employee cannot return to property due to employment reasons
what is letting relief and what is the purpose of it
if someone rents out a part of their main residence, Private residence relief wont be available on it.
but letting relief will be available., reducing CGT on rental portion.
CAP the letting relief
letting relief will be lower of three amounts:
C- chargeable gain relating to that letting part (if letting part is already getting exempt from Deemed period of occupation, then it will already be covered in PRR)
A- Amount of PRR (total)
P- Pounds £40,000 fixed cap).
does letting relief exempt or defer chargeable gain
EXEMPT
is letting relief available if whole property is let out?
no
are any of PRR exemptions available for letting portion?
last 9 months exemption will be available on letting portion also if letting portion was actually occupied for atleast 30 days during entire ownership period
agar pehle din se let out hua wa then not available
if business is done on part of main residence, will PPR we available?
PPR will not be available on that portion
-last 9 months exemption will be available IF that business portion also if that portion was actually occupied for atleast 30 days during entire ownership period
agar pehle din se business use ho then 9 months exemption not available
PPR implications if a non UK resident has a main residence in UK
PPR WILL ONLY BE AVAILABLE IF
P or R for 90
P=Presence in the UK of self or spouse(must have UK residency for that year).
OR
R = Residence of self or spouse (must live in the property for 90 days in that fiscal year).
Either self or spouse
if a UK resident person has a non UK main residence then PPR will be available?
PPR WILL ONLY BE AVAILABLE IF
PR for 90
P=Presence in that country (must have that country residency for that year).
OR
R = Residence (must live in the property for 90 days in that fiscal year).
PR of spouse is also ok
