CGT

Question 1

CGT - General

Answer 1

Gains falling within the basic rate tax band are charged to CGT at 10% (18% for residential property gains that aren’t covered by the principal private residence exemption/carried interest).

Gains falling above the basic rate tax band are charged to CGT at 20% (28% for residential property gains that aren’t covered by the principal private residence exemption/carried interest).

The gain is added to an individual’s taxable income to establish which band it falls into.

If you don’t use your annual exempt amount you lose it.

It can’t be carried forward or shared with a spouse.

The annual exempt amount should be used in the way that minimises the tax due.

Example
Joan, a higher rate tax payer, made a gain on a buy to let property and a gain on a portfolio of shares.

The annual exempt amount should be set against gain on the buy to let property because the tax on this will be charged at 28%, whereas the tax on shares will be charged at 20%.

Question 2

Disposal of an asset - what are the main types of disposal?

Answer 2

The main types of disposal include selling, giving away and destroying an asset or the right to an asset.

Where a sale is made on a commercial basis, the sales proceeds are used for CGT.

If a disposal takes place ‘not at arm’s length’ (i.e. not on a commercial basis), the market value rather than the sale proceeds is used.

Question 3

What is a deferred consideration?

Answer 3

CGT arises on the date a contract for sale becomes binding – even if the money is received
at a later date. This is known as deferred consideration.

• Where there is an ascertainable value, i.e. a fixed amount will be paid at a later time, that amount is charged to CGT when the sale becomes binding. HMRC will refund if the sale does not go ahead or may agree to instalment payments if the money is not expected within 18 months.
• Where there is an unascertainable value, i.e. part of the sale price is not known at the sale date, the market value is used to establish the CGT due with a further calculation made when the final payment takes place. If this leads to a loss, the loss can be treated as having been made at the time of the original sale.

Question 4

What are the steps in a CGT calculation?

Answer 4

1. Determine the disposal proceeds (actual sale price or market value).
2. Deduct the acquisition cost.
3. Deduct any costs incurred in arranging the purchase and sale and any enhancement costs.

These costs may include stockbrokers’ fees, legal costs, estate agents’ fees, stamp duty, stamp duty reserve tax (SDRT) and stamp duty land tax (SDLT)

Also the cost of building an extension to a house - repairs are not allowed!

4. Set off any allowable capital losses, allocating them against gains in the way that minimises the tax due, namely by setting them against gains taxable at the highest rate first.
5. Deduct the annual exempt amount in the way that minimises the tax due.
6. Calculate the tax at the appropriate rate.

Question 5

Losses for the purposes of CGT - what are the rules?

Answer 5

• Must be set against gains in the same tax year even if it means the annual exempt amount is effectively lost
• If gains in the tax year are insufficient to absorb the loss, the excess loss can be carried forward and set against any gains (after deducting the annual exempt amount) in subsequent years until it is fully absorbed. Losses, once claimed, can be carried forward indefinitely.
• Losses have to be claimed within four years of the end of the tax year in which they arose

A loss need not be reported to HMRC unless:

• the disposal proceeds of the asset are more than four times the annual exempt amount; or
• the taxpayer wishes to set the loss off against chargeable gains; or
• both.

Question 6

When is CGT due?

Answer 6

Chargeable gains must be reported to HMRC as part of a self-assessment.

CGT is payable on 31st of January following the end of the tax year to which the gain relates.

If a disposal is being made towards the end of the tax year, it may be worth delaying it until after 5 April, because this will defer the due date for payment by a full year.

However, a payment on account of CGT must be made within 30 days of completion of a UK residential property disposal (where such a disposal is not exempt as a principal private residence).

Question 7

What is Business Asset Disposal Relief/ Entrepreneur’s Relief?

Answer 7

Can be claimed when an individual disposes of a business or a part of a business.

• For gains made on or after 11 March 2020, the relief covers the first £1m of qualifying gains that a person makes during their lifetime. TAXED @ 10%. In excess, charged at normal rates of CGT.
• In determining the rate at which an individual is charged to CGT, those gains that qualify for business asset disposal relief are set against any unused basic rate band before non- qualifying gains.

Assets must have been owned for two years before the date of disposal in order to qualify for relief.

• Business asset disposal relief is available for:

– a disposal of the whole or part of a business run as a sole trader. Relief is only available in respect of chargeable gains arising from the disposal of assets in use for the purpose of the business. This excludes chargeable gains arising from investments; and

– the disposal of shares in a trading company where an individual meets a 5% shareholding test and is also an employee or director of the company.

Question 8

What is Investors relief?

Answer 8

Investors’ relief extends business asset disposal relief to long-term external investors in unlisted trading companies.

Offers same 10% tax rate as business asset disposal relief + has own separate £10m lifetime limit (compared to the business asset disposal relief lifetime limit of £1m).

• The shares must be issued by the company after 16 March 2016.
• Shares must be held for a continuous period of three years, starting on or after 6 April 2016, before relief will be available.
• With certain exceptions (such as being an unremunerated director) the investor must not be an employee or a director of the company whilst owning the shares.

Question 9

What is Holdover relief?

Answer 9

Individuals can hold over the gain on disposals of certain assets by way of a gift. The main categories that qualify are transfers chargeable to IHT and disposals of trading assets including certain private company shares.

If holdover relief is claimed, no CGT is payable at the time of the gift, but the acquisition cost to the donee is reduced by the amount of the held-over gain. This increases the amount of any gain made by the donee on a subsequent disposal.

Relief is given only if donor and donee jointly claim it (except where the transfer is to a trust, when only the donor makes the claim).

Holdover relief is available on gifts of trading assets. A trading asset is:

• an asset used in the trade of the donor or by the donor’s personal company
• shares and securities of trading companies, provided that:

– the shares or securities are not quoted on a recognised stock exchange; or
– the donor holds at least 5% of the voting rights in the company.

Holdover relief is not available for transfers of assets to a trust in which a settlor has an interest!

Question 10

What is Business Rollover Relief?

Answer 10

Businesses, both companies and unincorporated, can claim business rollover relief if they sell assets used in the business and buy other assets for the business.

• The business must be trading.
• The assets sold must have been used for trading purposes.
• The sale price must be reinvested in new assets for use in the trade.
• The new assets must be bought in a period starting one year before and ending three years after the disposal of the old assets.

The relief defers the gain until the disposal of the new assets (further postponement is then possible if another qualifying asset is acquired).

Question 11

Rollover relief on incorporation of a business

Answer 11

Rollover relief is available where an unincorporated business is transferred to a limited company in exchange for new shares in that company.

Usually, such a transfer would be treated as a disposal at market value. In this case, however, relief is given by deducting the gain from the issue price of the shares.

Gain is deferred until the disposal of the shares.

Question 12

Reinvesting into an EIS - whats the benefit?

Answer 12

Relief is available where gains are reinvested into enterprise investment scheme (EIS) shares.

• The relief may be claimed on any disposal of assets if the gain is invested in shares that qualify under the EIS. To qualify, the investment must be made in the period starting twelve months before and ending three years after the disposal subject to CGT.
• The gain on the original disposal is deferred until the disposal of the EIS shares.
• Investment in EIS shares may qualify for 30% income tax relief, though the conditions for income tax relief are slightly different. Depending on the type of asset disposed of, a taxpayer can get 10%, 18%, 20% or 28% CGT relief, as well as the 30% income tax relief, on the reinvestment.
• The gain on the original asset is only deferred, not exempted. It will crystallise on the disposal of the EIS shares. At that point, the original gain will be taxable, although any subsequent gain on the EIS shares is usually exempt. If the EIS shares are held until death, the original gain will never be taxed.
• If the original deferred gain would have qualified for business asset disposal relief (entrepreneurs), then this relief will still be available when the gain ultimately becomes taxable.

Question 13

Reinvestment into seed enterprise investment scheme shares - whats the benefit?

Answer 13

Partial exemption is available where gains are reinvested into seed enterprise investment scheme (SEIS) shares that qualify for income tax relief.

• The relief differs from that given for EIS shares in that reinvested gains are not deferred. Instead, 50% of reinvested gains are exempt. The other 50% of reinvested gains are chargeable to CGT.
• Relief is restricted to a limit of £100,000 of gains reinvested in each tax year.

Question 14

CGT Planning - how to minimise the CGT due?

Answer 14

To minimise the CGT due an individual might be able to:
• Use annual exempt amount to realise tax-free profits of up to £12,300
• Realise losses to reduce CGT payable
• Plan the disposal date of their assets to ensure they use the CGT annual exempt amount each year / when they’ll pay tax at a lower rate
• Split asset (if possible) to sell before and after end of tax year to benefit from 2 x AEA
• Ensure they keep a record of all costs involved in buying and selling an asset so these can be deducted from the gain
• Report and use losses from both the current and previous tax years
• Use exemptions (ISAs) and reliefs (EIS deferral, SEIS 50% exempt) where available
• Invest in income producing assets where these would produce a more tax favourable outcome
• Transfer assets (losses or gains) between spouses where one pays tax at a higher rate than another – must be outright & unconditional, disposal should not be made immediately after transfer or HMRC may disregard it

Question 15

What is the capital gains tax rate for trusts?

Answer 15

The tax due on trust gains is 20% unless the asset in question is residential property that is not the principal private residence of a beneficiary, in which case the rate is 28%. The standard rate band of up to £1,000 applies only to income.

Question 16

CGT & Bare Trusts - whose liable?

Answer 16

Gift into trust is a disposal – holdover relief available if business asset.

Any capital gains under a bare trust or a nominee arrangement are generally treated as those of the beneficiary so liable to any tax due at their marginal rate.

A trust may dispose of assets by selling them or transferring them to a beneficiary.

There is no disposal for CGT on a transfer of the asset to a beneficiary if the beneficiary is already absolutely entitled (i.e. under a bare trust).

Question 17

CGT & Trusts for vulnerable beneficiaries - whose liable for tax?

Answer 17

A trust that is subject to the special treatment due to trusts for the vulnerable is essentially taxable on gains at the rate(s) applicable to the beneficiary.

Trustees of these trusts are now charged the amount of CGT that would be due if the gains were assessed on the beneficiary or beneficiaries, which is based at a rate of 10% on investment gains and 18% on property gains (or 20%/28% if the beneficiary’s income and gains take them into the higher rate of tax).

Question 18

CGT & Interest in Possession Trusts - whose liable?

Answer 18

Disposal by the trustees;

• If during life of the trust - charged at 20% unless residential property that isn’t PPR of a beneficiary

On death of the life tenant;

• Life tenant of pre-22 March 2006 trust dies, assets within trust revalued at market rate on death.
• NO CGT on death between acquisition cost + asset value on death - this escapes CGT
• NOT applicable if holdover relief was claimed by the settlor when transferring assets into the trust. ON death of life tenant, the held-over gain becomes chargeable to CGT

Same rules apply for certain life interest trusts established on death or after 22 March 2006;

o The same rules apply to immediate post death interest trusts, trusts for bereaved minors, the death before 18 of a beneficiary under an ’18 -25’ trust and trusts for the vulnerable and disabled trusts.

o For all trusts created on or after 22 March, there is generally no uplift on the death of a life tenant.

Question 19

CGT & Accumulation and Maintenance Trusts - whose liable?

Answer 19

When a beneficiary becomes absolutely entitled to trust assets, usually on reaching a specified age, the trustees are regarded as making a disposal of the assets at market value.

The trustees may be able to hold over gains. This will depend on whether the asset transferred is a business asset or whether there is a potential IHT charge at the time of the transfer.

No hold over is available if the beneficiary had a prior right to the income.

If the calculations result in capital losses rather than capital gains, these losses can be transferred (subject to certain restrictions) to beneficiaries to set against their own future capital gains.

Question 20

CGT & Discretionary Trusts - whose liable?

Answer 20

Gift into trust is a disposal – CGT may be payable by the Settlor although holdover relief is available on all assets unless it is a settlor-interested trust. Trustees then acquire the asset at the Settlor’s base cost.

These trusts are taxed under the relevant property trust tax regime.
• This applies whether or not the assets are business assets or family company shares.
• Although there is no CGT charge on the settlor if holdover relief is claimed, there may be an IHT charge if the nil rate band is exceeded.
• Holdover relief cannot be claimed on transfers to a trust that is settlor-interested.
• Gifts into trust that are not initially settlor-interested (and thus qualify for holdover relief), but subsequently become such within six years of the end of the tax year in which the gifts are made, cause any holdover relief to be withdrawn.

The trustees are liable to CGT on trust gains at 20%, unless the asset in question is residential property that is not the principal private residence of a beneficiary, in which case the rate is 28%.

If assets are transferred to a beneficiary, this is treated as a disposal at market value by the trustees:

• where this results in gains, tax can be deferred, as these gains can always be held over;
• or where this results in capital losses, the losses can be transferred to the beneficiary

Question 21

What is the capital gains tax position on trusts where the settlor retains an interest?

Answer 21

• capital gains are taxed on the trustees at the trust rate of 20%, unless the asset in question is residential property that is not the PPR of a beneficiary, in which case the rate is 28%.
• The settlor has an interest if they are a beneficiary in any way or enjoy a benefit deriving directly, or indirectly, from property in the trust.

Question 22

Chattels and wasting assets

Answer 22

Chattels (i.e. tangible, movable property) are completely exempt from CGT if the value at disposal does not exceed £6,000. This limit applies per person where a married couple jointly own a chattel.

Where the disposal proceeds exceed £6,000, the chargeable gain cannot exceed five-thirds of the excess over £6,000. For example, if a ring costing £1,000 is sold for £7,800, the chargeable gain cannot exceed £3,000 ((£7,800 – £6,000) × 5 ÷ 3). Therefore, the chargeable gain is £3,000, rather than the ‘actual’ gain of £6,800.

Tangible movable property, which is a wasting asset (i.e. with an expected life of less than 50 years, such as a yacht), is completely exempt from CGT.

However, this exemption does not apply to plant and machinery used in a business where capital allowances have been claimed – but note that motor cars are always exempt regardless of business use.

Question 23

What is Principle Private Residence Relief + when might it not be applicable (PPR sandwich rules)?

Answer 23

Someone’s principal private residence (PPR) is exempt from CGT on sale and there are special rules about periods of absence which can be ignored and periods of absence that mean part of the sale proceeds are taxable.

You can ignore:

1. Up to a year between buying the property and actually living in it (may be extended to 2 years in exceptional circumstances)
2. Any period before 1st April 1982
3. Any period up to 3 years provided it was preceded by and followed by periods of residence AND no other property qualified as PPR (think of this as the PPR
   sandwich*)
4. The last 18 months of ownership provided the property had qualified as PPR at some point (unless the sale is in respect of someone going into care OR contracts were exchanged before 6 April 2014 with completion before 6 April 2015 when the last 36 months of ownership can be ignored)
5. Periods of up to 4 years in total if absence was due to employment elsewhere in the UK - PPR sandwich rules*
6. Any period whilst working abroad – PPR sandwich rules*
7. Any period living in job related accommodation with an intention to return to the PPR

Calculation is as follows;

Total gain x Period of occupation/ Total period of ownership = Chargeable gain

Question 24

What is letting relief/ exemption?

Answer 24

Letting exemption where part of a property is let as residential accommodation and the other part is the owner’s main residence:

• For letting relief to be available, the owner must be in shared occupancy with the tenant – there is no exemption where the whole property is let.
• If letting relief is available, the gain on the let part of the property is exempt up to the lesser of £40,000 and the exemption on the part occupied by the owner.
• Each owner is entitled to a residential letting exemption of up to £40,000, so where a couple own a property jointly, up to £80,000 of gain attributable to residential letting is exempt (subject to meeting the shared ownership condition).

Question 25

How to calculate part disposals for CGT purposes?

Answer 25

A/ A+B x original cost

In this formula;

A = proceeds of the part disposed of 
B = market value of the part retained.

• Expenditure that relates wholly to the part disposed of is deductible in full.
• Expenditure that relates wholly to the part retained is not deductible.
• Expenditure relating to both parts is deductible using the apportionment formula.

Question 26

What are the share identification rules?

Answer 26

Special rules exist for calculating chargeable gains on shares of the same type and class acquired at different times. The rules are needed to match acquisitions with disposals.

Disposals of shares, or units in unit trusts, are identified with acquisitions in the following order:

1. Acquisitions on the same day.
2. Acquisitions within the following 30 days.
3. Acquisitions in the share pool. This aggregates all acquisitions except those made on the same day or the following 30 days.

Pool question may well come up.

First acquisition x price + second acquisition x price/ total shares purchased = average price

Use average price

Question 27

Explain the different types of shares and what the CGT implications might be?

Answer 27

• Bonus (scrip) issues – treated as if acquired on same day as original shareholding with no extra acquisition cost
• Rights issues – existing shareholders subscribe for more shares. New shares plus any acquisition cost added to share pool.
• Scrip (stock) dividends – dividend paid in shares rather than cash. Treated as new acquisitions.
• Employee share schemes - shares acquired through approved share option schemes usually produce larger gains as they have a lower base cost than gains on unapproved schemes. An election can be made so that these larger gains can be taken later than any smaller gains on unapproved schemes where an employee acquires shares under both approved and unapproved schemes on the same day.