CGT

Question 1

What is Capital Gains Tax (CGT)?

Answer 1

Capital Gains Tax (CGT) is payable on chargeable gains made by a chargeable person on the disposal of chargeable assets in a tax year.

Question 2

when is CGT payable, what is the tax year?

Answer 2

The tax year runs from 6 April of one year until 5 April of the following year and is payable.

Question 3

Who are considered chargeable persons for Capital Gains Tax (CGT)?

Answer 3

• individuals
• personal representatives when they dispose of the assets of the deceased person;
• partners, when the partners dispose of a chargeable asset. Each partner is charged
  separately for their proportion of the gain; and
• trustees, on the disposal of a chargeable asset from a trust fund.

Question 4

who is exempt from paying CGT?

Answer 4

1. Companies - they pay corporation tax
2. charities are exempt.

Question 5

What is a chargeable asset?

Answer 5

‘all forms of property’, including debts,
options and incorporeal property’

Question 6

what is NOT a chargeable asset?

Answer 6

disposal of cash in sterling is NOT chargeable to CGT.

Question 7

what is the annual exemption for CGT?

Answer 7

£3000

Question 8

what is the annual exemption for trustee?

Answer 8

£1500

Question 9

what is the rate of tax payable for gains for basic rate threshold and above?

Answer 9

basic rate threshold is £37,700 - taxed at 10%
above threshold - taxed at 20%

Question 10

what are the tax rates for residential property?

Answer 10

• 14% for basic rate tax payers
• 24% for above basic rate

Question 11

what is the rate of tax on gains made by trustees and PRs?

Answer 11

Gains made by trustees and PRs are all taxed at 20%, or, for residential property, 24%.

Question 12

How does HMRC assess a gain for gifted assets?

Answer 12

For gifts, HMRC uses the asset’s market value at the time of the gift to determine the gain, as no monetary transaction occurs.

Question 13

Is CGT charged when someone dies?

Answer 13

No, there is no disposal when someone dies, so no CGT is charged.

Question 14

How are a deceased person’s assets valued for tax purposes?

Answer 14

Personal representatives (PRs) are deemed to acquire the deceased’s assets at their market value on the date of death, referred to as the probate value.

Question 15

What initial expenditures can be deducted when calculating CGT?

Answer 15

• The cost price of the asset
• Any incidental costs of acquisition, for example conveyancing fees in relation to the
  purchase of a property, or other legal fees, valuation fees and stamp duty; and
• Any expenditure wholly and exclusively incurred in providing the asset, for example, the
  cost of building a property

Question 16

What subsequent expenditures can be deducted for CGT purposes?

Answer 16

• Expenditure wholly and exclusively incurred in establishing, preserving or defending title to the asset. e.g., legal fees incurred to resolve a dispute.
• Expenditure wholly and exclusively incurred to enhance the value of the asset e.g., the cost of building an extension to a house

Question 17

What incidental costs of disposal are deductible for CGT purposes?

Answer 17

Incidental disposal costs include legal fees for the sale, estate agent’s fees, and commission.

Question 18

what ‘subsequent expenditure’ cannot be deducted?

Answer 18

The cost of normal maintenance, repairs and
insurance is not deductible

Question 19

What is rollover relief on the replacement of business assets?

Answer 19

Rollover relief allows sole traders and partners to defer paying CGT when selling qualifying business assets, provided the proceeds are reinvested in other qualifying business assets. The CGT charge is postponed until the new asset is disposed of.

Question 20

What are qualifying business assets for rollover relief?

Answer 20

• Land,
• buildings, and
• goodwill
  => used in the trade of the business (not held as investments).
• Fixed plant and machinery
• company shares are NOT qualifying business assets!

Question 21

who do qualifying business assets have to be owned by and disposed by for rollover relief to apply?

Answer 21

• A sole trader using the asset in their trade.
• A partnership using the asset in its trade.
• An individual partner, where the partnership uses the asset in its trade.
• An individual shareholder, where the asset is used in the trade of the company in which they own shares (at least 5% of voting share.)

Question 22

for rollover relief to apply, does the replacement asset have to be of the same kind?

Answer 22

NO - can be different assets as long as both the asset disposed of and the asset acquired are qualifying assets. e.g., a gain from selling qualifying goodwill can be rolled over into the purchase of qualifying buildings.

Question 23

What are the time limits for acquiring a replacement asset under rollover relief?

Answer 23

The replacement asset must be acquired within 1 year before or 3 years after the disposal of the original asset, unless HMRC grants an extended time period for the claim.

Question 24

How long does a taxpayer have to claim rollover relief after acquiring a replacement asset?

Answer 24

The taxpayer must claim rollover relief within 4 years from the end of the tax year in which they acquire the replacement asset, or within four years from the sale of the original asset

Question 25

What happens to the gain when rollover relief is applied?

Answer 25

The gain is deducted from the acquisition cost of the replacement asset, which lowers its cost for future CGT calculations.

Question 26

Can the annual exemption be used when claiming rollover relief?

Answer 26

No, the taxpayer loses the benefit of the annual exemption when applying for rollover relief.

Question 27

What is rollover relief on incorporation of a business?

Answer 27

Rollover relief on incorporation - an individual sells their interest in an unincorporated business to a company. The gain is rolled over into the shares received as consideration, and CGT is payable only when the shares are disposed of - payment of CGT postponed.

Question 28

What are the conditions for rollover relief to apply on incorporation?

Answer 28

• The business must be transferred as a going concern, meaning it continues as the same business under new ownership.
• The consideration must be entirely in shares issued by the company
• The business must be transferred with ALL its assets, excluding cash

Question 29

what if only part of the consideration was in shares for rollover relief on incorporation of a business?

Answer 29

If only part of the consideration was shares, for example, 25% of it, then only that percentage of the gain
could be rolled over.

Question 30

what if taxpayer retains any assets?

Answer 30

If the taxpayer retains any of the assets, for example, if they keep the business premises, then the relief
does not apply!

Question 31

Do taxpayers need to apply for rollover relief on incorporation?

Answer 31

No, rollover relief is applied automatically by HMRC unless the taxpayer chooses not to use it.

Question 32

How does the annual exemption apply when rollover relief is used on incorporation?

Answer 32

The annual exemption cannot be used before the gain is rolled over, meaning the taxpayer loses the benefit of the exemption.

Question 33

What is hold-over relief on gifts?

Answer 33

Hold-over relief allows an individual to gift certain business assets or sell them at an undervalue without paying CGT. The donee will pay tax on their own gain and the donor’s gain when they dispose of the asset.

Question 34

What types of business assets qualify for hold-over relief?

Answer 34

• Assets used in the donor’s trade or in a partnership.
• Shares in a trading company (not listed on a recognised stock exchange).
• Shares in a personal trading company where the donor owns at least 5% of the voting shares.
• Assets owned by the shareholder and used by their personal trading company.

Question 35

when does hold-over relief not apply?

Answer 35

If the donee is a company, the relief does not apply to a gift of shares.

Question 36

Who must elect to apply for hold-over relief?

Answer 36

Both the donor and the donee must elect to apply for hold-over relief.

Question 37

What is the time limit for the donor and donee to elect for hold-over relief?

Answer 37

The donor and donee must elect for the relief to apply within 4 years from the end of the tax year of the disposal.

Question 38

Can the annual exemption be applied before the gain is rolled over in hold-over relief?

Answer 38

No, the annual exemption cannot be applied before the gain is rolled over under hold-over relief.

Question 39

Can Rollover Relief and Hold-Over Relief be used together?

Answer 39

No, rollover relief on the replacement of qualifying assets cannot generally be used with hold-over relief because there is usually no gift involved.

Question 40

What is business asset disposal relief?

Answer 40

Business asset disposal relief reduces the tax rate to a flat 10% on gains made by individuals from the disposal (sale or gift) of certain assets.

Question 41

What is a qualifying business disposal for business asset disposal relief?

Answer 41

A “qualifying business disposal” occurs when an individual disposes of the whole or part of a business, and the conditions for each type of interest are met.

Question 42

What conditions must be met for a sole trader or partner to qualify for business asset disposal relief?

Answer 42

• The business or part of it must be disposed of as a going concern or after cessation of the business.
• The interest in the business must have been owned for two years before disposal or cessation.
• The disposal must be within three years of cessation.
• Only assets used in the business qualify for relief; investment assets do not.

Question 43

What are the conditions for company shares to qualify for business asset disposal relief?

Answer 43

• The company must be a trading company.
• The individual must hold at least 5% of the ordinary share capital and voting rights.
• The individual must be entitled to at least 5% of the profits or assets.
• The individual must be an employee or officer of the company.

=> These conditions must be met for 2 years before disposal or cessation of trading.

Question 44

What is the lifetime cap for business asset disposal relief?

Answer 44

The lifetime cap for business asset disposal relief is £1 million of qualifying gains. Once this threshold is reached, any gains beyond it are not eligible for the relief - and will be taxed at normal rate of 20%.

Question 45

When must the taxpayer claim business asset disposal relief?

Answer 45

The taxpayer must claim business asset disposal relief by the first anniversary of the 31 January following the tax year in which the qualifying disposal was made.

Question 46

What happens to Business Asset Disposal Relief (BADR) when rollover relief or hold-over relief is used?

Answer 46

Business Asset Disposal Relief cannot apply to gains that are rolled over on the replacement of qualifying assets or held over on the gift of business assets. The annual exemption also cannot be used on such gains

Question 47

What are “wasting assets” and their CGT exemption status?

Answer 47

Wasting assets are assets with a predictable life of less than 50 years, such as most consumer goods. They are generally exempt from CGT. However, assets like antiques, which increase in value, are not wasting assets.

Question 48

When is tangible moveable property exempt from CGT under the wasting asset rule?

Answer 48

Tangible moveable property, such as antiques, is exempt from CGT if the consideration for its disposal is £6,000 or less.

Question 49

when is PRR used?

Answer 49

Any gains made by individuals who dispose of a dwelling house, including grounds of up to half a hectare, are exempt from CGT under private residence relief, if they have occupied the dwelling house as their only or main residence through their period of ownership. - The last 9 months of ownership are ignored.

Question 50

Are damages for personal injury subject to CGT?

Answer 50

No, damages for personal injury are exempt from CGT.

Question 51

What happens if a taxpayer’s CGT losses exceed their overall CGT gains in a tax year?

Answer 51

Of the taxpayer’s losses exceed their gains, the losses can be set off against the gains, wiping out the CGT liability for that year. BUT - taxpayer loses the use of their annual exemption, as it cannot be carried forward to future years.

Question 52

What happens if there are unabsorbed CGT losses after setting them against the current year’s gains?

Answer 52

Any unabsorbed losses can be carried forward to future tax years and used to reduce future gains, subject to the annual exemption limits. These losses can be carried forward indefinitely.

Question 53

What is a “part disposal” in the context of CGT?

Answer 53

A “part disposal” happens when only part of an asset (e.g., land) is sold. The original cost and subsequent expenditures must be apportioned between the part sold and the part retained.

Question 54

How do you calculate the cost of the part of the land that was sold?

Answer 54

The proportion of the land sold is calculated based on its value compared to the total value. In the example, the sold land is worth £100,000 out of a total of £400,000, so it is 1/4 of the total value. Therefore, 1/4 of the original purchase cost (£200,000) is £50,000.

Question 55

What happens when one spouse or civil partner disposes of an asset to the other?

Answer 55

There is NO CGT payable between spouses!

Question 56

What happens when the recipient of an asset (from a spouse or civil partner) disposes of it later?

Answer 56

The recipient will pay CGT on any gain they have made, plus any gain the transferring spouse or civil partner made during their ownership.

Question 57

How can inter-spouse transfers be beneficial if one spouse is taxed at a higher rate than the other?

Answer 57

The transfer allows the spouse with the lower tax rate to pay the CGT, potentially saving money on tax.

Question 58

How is CGT applied when a partnership disposes of an asset?

Answer 58

Each partner is treated as making a separate disposal of part of the asset and pays a proportion of the CGT based on their ownership percentage

Question 59

When is Capital Gains Tax (CGT) typically payable?

Answer 59

CGT is generally payable on or before 31 January following the end of the tax year, or 30 days from the making of an assessment, whichever is later.

Question 60

Is it ever possible to pay CGT in installments?

Answer 60

Yes,
- where the disposal was a gift, and
- the qualifying asset is land,
- a controlling shareholding in any company, or any shareholding in an unquoted company.
=> the conditions for hold-over relief must not be met.

Question 61

What is the purpose of Business Property Relief (BPR)?

Answer 61

BPR reduces the value of “relevant business property” for Inheritance Tax (IHT) purposes, helping reduce IHT liability when transferring or inheriting business assets

Question 62

What percentage relief is available under Business Property Relief (BPR)?

Answer 62

100% Relief: For certain business properties, meaning no IHT is due.
50% Relief: For other business properties, reducing IHT by half.

Question 63

What types of assets qualify for 100% BPR?

Answer 63

• A business or interest in a business (e.g., a partnership share).
• Shares in unlisted companies (not listed on a recognized stock exchange).
• Only the value related to business/trading activities qualifies for this relief

Question 64

What types of assets qualify for 50% BPR?

Answer 64

• Shares in listed companies (if the transferor had voting control of the company).
• Land, buildings, machinery, or plant owned personally but used by a business the transferor controls.

Question 65

Does BPR apply to sales under a contract?

Answer 65

No, BPR does not apply if a business or shares are sold under a binding contract. However, it can apply to options to sell.