CGT C&C wider reading Flashcards
Expenditure
What is incidental expenditure?
Incidental costs are those incurred on either the purchase or sale of an asset.
Must be one of four categories:
- 1) Professional services charges - surveryor/accountant etc
- 2) conveyance costs and stamp duty or stamp duty land tax
- 3) advertising for a seller
- 4) valuation costs to show a gain.
When is market value used for a consideration? (3)
You use the market value at time of disposal when it’s open to manipulation:
- Gifts
-connected persons
- Undervalue considerations
In cases where the market value rule applies, the acquisition cost for the person who acquires the asset is the same as the disposal consideration used in the CG computation for the person who disposes of the asset.
Expenditure
What is enhancement expenditure?
Examples?
Any capital expenditure wholly and exclusively incurred on the asset for the purpose of enhancing the value of an asset. IF:
-Expenditure is still reflected in the state or nature of the asset at the time of disposal
Examples:
- Installing windows
- architect fees
- planning permission
- construction costs
- Defending the owner’s title to or rights over the asset (got sued)
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
Expenditure
What is Acquisition costs
What to remeber?
Cost to acquire the asset
Consider rebasing Finance Act 2008 and 31 march 1982 - new MV
What’s the CGT working out formula (4)
- what you receive for it (disposal consideration)
LESSS
- allowable disposal expenses (incidental costs)
*
LESS - what you paid for it (Acquisition costs)
LESS
- the cost of certain improvements to it.
(Enhancement)
= Chargebale Gains (normally charged at 20%) - Consider the AEA!
What is the Annual Exempt Allowance?
Is this for IT and CT?
What’s the CGT rates
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”
Who is not a “chargeable person”
‘chargeable persons’ means people or entities who may be liable to pay capital gains tax (CGT) if they make a chargeable gain
Includes:
Individuals
Partnership
Companies
Beneficial ownership
Trust
Personal representatives
NOT:
non-resident
Non-domicile
See Residency
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
What is not a disposalable occassion (5)
- 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.
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.
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”
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.
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
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.
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)
Date of Disposal: Why is this important?
Affects:
Deadlines for declaring the disposal
When tax owed is to be paid,
the rate of tax charged
AEA available,
whether or not the gain is indeed chargeable (eg residency).
QCB’s - When are they chargeable?
QCBs - chargeable to CT for companies and exempt for individuals.
How to consider whether CGT is to be considered? (4)
Priority is:
Chargeable to income tax?
Chargable Person
Chargeable Asset
Chargeable Occassion
0) When is there a disposal?
0.5) what does disposal include?
1) When is the date of disposal?
0) There is a disposal of an asset when there is a change in beneficial ownership (as opposed to the legal).
0.5) ‘disposal’ includes sale, exchange or gift OR PART DISPOSAL
1) Date of any contract, or
2) Conditions precedent in the contract are fulfilled.
3) Date the asset is transferred (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.
For CG purposes ‘disposal’ includes sale, exchange or gift. (s1 and s21 TCGA 1992, and CG12700+).
Legislation
What is Section 22 TCGA
Examples?
“Disposal where capital sums derived from assets”
- Compensation
- Insurance Claim
What is a negligible value claim?
Examples?
legislation?
A “deemed disposal” claim is made without an actual disposal. The claim can be made to offset capital gains by recognising a loss on the asset.
Example:
Share value has plummeted to zero in a new business. You can’t sell them so there is no “disposal”
s24(2) TCGA92
There is no time limit for making a claim. A deemed disposal can be backdated in the claim made by up to 2 years from the beginning of the tax year in which the claim is made if
What is the process for calculating Expenditure?
What is allowable expenditure for CGT? (3)
What is the exceptions list? (2)
Legislation?
The sums that can be deducted in the CG computation are given in s38 TCGA 1992. They are
* acquisition costs, including any incidental costs of acquisition
* certain enhancement expenditure
* incidental costs of disposal.
Consider if falls under the exceptions under S39(1) and S39(2) provide:
- Income tax priority test
- Capital test
TIP: for the income tax priority and capital test, imagine that the asset was in use as a fixed asset of a trade carried on by the owner and decide whether the expenditure would have been deducted in computing the income profits of the hypothetical trade.
If it would have been deducted, it cannot be allowed in calculating a chargeable gain or allowable loss on a disposal of the asset.
What is the income tax priority?
section 39(1) provides any sum which:
- has been
- or could have been
deducted in computing income or profits is not allowable as a deduction for Capital Gains Tax purposes.
TIP: for the income tax priority and capital test, imagine that the asset was in use as a fixed asset of a trade carried on by the owner and decide whether the expenditure would have been deducted in computing the income profits of the hypothetical trade.
If it would have been deducted, it cannot be allowed in calculating a chargeable gain or allowable loss on a disposal of the asset.
Expenses
What are Incidental Costs
Examples (3)
NOT COMPLETE
There are four categories of incidental costs allowable under S38(2) TCGA1992.
- Legal expenses
- Surveyor’s fees
- Estate agent’s charges are allowable as incidental costs.
What’s Rebasing?
If you dispose of an asset that you have owned continuously since 31 March 1982, your gain or loss will be calculated as if you had bought the asset on 31 March 1982 for its market value at that date. (s35(2) TCGA 1992).
With effect from 6 April 2008 all assets held on 31 March 1982 will be rebased.
This means that if you dispose of an asset that you have owned continuously since 31 March 1982, your gain or loss will be calculated as if you had bought the asset on 31 March 1982 for its market value at that date. (s35(2) TCGA 1992).
Any March 1982 valuation takes account of all pre-March 1982 expenditure and costs, such as cost of acquisition and enhancement expenditure, so there is no further allowance for these. This means that if a March 1982 valuation is used in place of cost there will be no incidental costs of acquisition.
That concludes this learning guide, we will now review the main points.
Allowable Expenditure: What are the tests, and what are the 3 types of allowable expenditure?
S39 gives the exceptions (tests)
S38 gives the allowable deductions:
1) Acquisition
2) Enhancement
3) Incidental
Capital Test
What’s the purpose?
It ensures only capital expenditure is deductible for capital gains tax purposes.
eg. adding a gate is an enhancement (S38) and is capital. repairing the gate is not.
Stops double-deduction of expenditure for ITSA and ensures only capital expenditure are deductible
TIP:
You have to imagine that the asset was in use as a fixed asset of a trade carried on by the owner and decide whether the expenditure would have been deducted in computing the income profits of the hypothetical trade. If it would have been deducted, it cannot be allowed in calculating a chargeable gain or allowable loss on a disposal of the asset.
Who must report within 30 days?
From 6 April 2015, CGT was extended to non-UK resident individuals, trustees and certain companies who dispose of UK residential property. A difference is that they must make a return to HMRC of their gain within 30 days of completion of the disposal even if they have no tax to pay or have made a loss and in most cases CGT is due and payable at the same time.
For UK property disposals by a UK resident that’s not their main home, for example buy-to-let properties or inherited property, made on or after the 6 April 2020, the customer has 30 days after the completion date to report and pay any Capital Gains Tax that may be due on the disposal. They will need to create a ‘Capital Gains Tax on UK Property Account’ before they can report and pay the tax using this service.
What to consider about non-residents in CGT
NOT DONE
Non-resident persons who carry on a trade, profession or vocation in the UK through a branch or agency or, in the case of a company, through a permanent establishment, are chargeable to CGT, or in the case of companies to CT, on gains accruing on the disposal of assets situated in the UK if they are used or held
* in or for the purposes of the trade at or before the time when the chargeable gain accrued
* for the purposes of the branch or agency or permanent establishment at or before that time.
What is remittance basis? NOT DONE
9.5 To use the remittance basis for your foreign income and foreign gains you must be UK resident and be either:
not domiciled in the UK
for years up to 2012 to 2013, not ordinarily resident in the UK — in this case:
you can use the remittance basis for foreign income
you cannot use it for foreign gains unless you’re also not domiciled in the UK
You cannot use the remittance basis if you’re deemed domiciled under the changes brought in from 6 April 2017.
From 2008/09 UK resident non-domiciled individuals are liable to CGT on gains accruing on disposals of assets situated anywhere in the world unless they successfully make a claim for the remittance basis to apply.
How does the remittance basis work?
9.7 When you’re eligible and choose to use the remittance basis, you will be liable to UK tax on:
all of your UK income and gains as they arise or accrue each year
your foreign income and gains if and when you bring (remit) them to the UK, including any property which derives from those income and gains
No gain / no loss - what is it?
Examples?
A number of disposals are treated as if they give rise to neither a gain nor a loss to the transferor, even though they are chargeable occasions.
Any consideration paid or received is ignored. These disposals include
- transfers of assets between spouses and civil partners
- transfers of assets between companies in the same group
- gifts to charities.
What can CT do to CG gain/losses?
What can ITSA do to CG gain/losses NOT COMPLETE
- Companies can set losses from trading and UK property businesses against total profits chargeable to corporation tax, such as profits from all sources including chargeable gains. Section 37 and section 62 CTA 2010)
