CGT: Relief for individuals

Question 1

The main relief available to individuals for non-business assets are:

Answer 1

Private residence relief
- available on disposal of an individual’s private residence
Letting relief
- available on disposal of private residence after letting

Question 2

The main relief available to individuals for business assets are:

Answer 2

Business asset disposal relief
- available on disposal of certain business assets
Rollover relief
- available on sale of and reinvestment in certain business assets
Gift holdover relief
- available on gift of certain business assets
Investors’ relief
- available on disposal of certain shares

Question 3

Private residence relief applies when an individual disposes of:

Answer 3

• a dwelling house (including normally up to half a hectare of adjoining land)
• which has at some time during their ownership been their only or main private residence

Question 4

Where the relief for private residence applies?

Answer 4

• where the main residence has been occupied for either the whole or part of the period of ownership

Question 5

Where there has been a period of absence from the main residence procedure is:

Answer 5

• calculate the gain on the disposal of the property
• compute the total period of ownership
• calculate the periods of occupation
• calculate the PRR:
  GAIN X (PERIODS OF OCCUPATION/TOTAL PERIOD OF OWNERSHIP)
• deduct the PRR from the gain on the property

Question 6

Periods of deemed occupation are:

Answer 6

• the last nine months of ownership (always exempt, unconditionally as long as the dwelling has been the main residence at some point)
• up to three years of absence for any reason
• any period spent living overseas due to employment
• up to four years of absence as a result of working elsewhere in the UK

Question 7

What if main residence was used for business purpose?

Answer 7

• loses its PRR and becomes taxable
• where part of the property was used for business purposes but was also at any time used as the taxpayer’s main residence, the exemption for the last nine months applies to the whole property
• the nine month exemption does not however apply to any part of property used for business purposes throughout the whole period of ownership

Question 8

When is available letting relief?

Answer 8

• is available where an individual’s main residence is let out for residential use
• it only applies when the owner lets part of the property whilst still occupying the remainder
• if owner has a lodger who lies as a member of the owner’s family, sharing the accommodation and taking meals with them, then full PRR will be available and letting relief will not be considered

Question 9

Letting relief is the lowest of:

Answer 9

• £40,000
• the amount of the gain exempted by the normal PRR rules
• the part of the gain (still in charge) attributable to the letting period

Question 10

Business asset disposal relief operates as follow:

Answer 10

• the first £1million of gains on ‘qualifying business disposals’ is taxed at 10%, regardless of the level of the taxpayer’s income
• any gains above the £1million limit are taxed at the usual rate depending on the individual’s taxable income
• gains qualifying for BADR are set against any unused basic rate band before non-qualifying gains
• the 10% CGT rate is calculated after the deduction of allowable losses and the AEA
• taxpayer can choose to set losses and the AEA against non-qualifying gains first, in order to maximise the relief
• it is therefore helpful to keep gains which qualify for BADR separate from those which do not qualify
• relief must be claimed within 12 months of 31 January for 2022/23 - 2025
• £1 million limit is a lifetime limit which is diminished each time a claim for the relief is made

Question 11

Qualifying business disposals - the relief applies to the disposal of:

Answer 11

• the whole or a substantial part of an unincorporated trading business carried on by the individual either alone or in partnership
• assets of the individual’s or a partnership’s trading business that has now ceased
• shares; provided
  # the shares are in the individual’s personal trading company and
  # the individual is an employee of the company (part-time or full-time)

Question 12

What means an individual’s personal trading company?

Answer 12

• owns at least 5% of the ordinary shares
• which carry at least 5% of the voting rights

Question 13

Qualifying ownership period

Answer 13

• two years ownership before disposal
• if employee than longer than 2 years
• if partnership’s trading ceased then business must been owned for at least 2 years and disposal of asset must also take place within three years of the cessation of trade

Question 14

Investor relief applies to the disposal of:

Answer 14

• unlisted ordinary shares in a trading company (including AIM shares)
• subscribed (i.e. newly issued shares) on/after 17March 2016
• which have been held for a minimum period of three years starting on 6 April 2016
• by an individual that is not an employee of the company

Question 15

What is the subject to investor relief - limit

Answer 15

• a separate lifetime limit of £10 million of qualifying gains, which are taxed at 10%

Question 16

Replacement of business asset relief - Rollover relief

Answer 16

• allows the gain arising on the disposal of a qualifying business asset to be rolled over(deferred) when the sale proceeds are reinvested in a replacement qualifying business asset
• available to both individuals and companies

Question 17

Rollover relief operates as :

Answer 17

• the gain arising on the disposal of the qualifying business asset is deducted from rolled over against the acquisition cost of the replacement asset
• provided the net sale proceeds are fully reinvested, no tax is payable at the time of the disposal
• ROR effectively increases the gain arising on the disposal of the replacement asset, as its base cost is reduced by the amount of deferred gain
• gains may be ‘rolled over’ a number of times such that a tax liability will only arise when there is a disposal without replacement
• when the deferred gain crystallises, it is taxed at the appropriate CGT rate applicable at that time
  -the relief is not automatic, it must be claimed
• an individual must claim the relief within 4 years of the later of the end of the tax year in which the:
  # disposal is made and
  # replacement asset is acquired
• a disposal in the tax year 2022/23 which is reinvested in a new asset in the tax year 2023/24 requires a claim by 5 April 2028

Question 18

The main categories of assets qualifying for ROR on a disposal by an individual are:

Answer 18

• goodwill
• land and buildings
• fixed plant and machinery
  Both the old and the replacement assets must be qualifying business assets which are used in the trade

Question 19

The replacement assets must be acquired within a period:

Answer 19

• beginning one year before, and
• ending three years after the date of sale of the old asset

Question 20

Where there is partial reinvestment of the proceeds, part of the gain is chargeable at the time of the disposal. The gain that is chargeable (cannot be rolled over) is the lower of:

Answer 20

• the amount of the proceeds not reinvested
• the full gain

Question 21

ROR is modified where the new asset is a depreciating asset:

Answer 21

• the deferred gain is not deducted from the cost of the replacement asset
• the deferred gain is just ‘frozen’ and becomes chargeable on the earliest of the three events above
• when the deferred gain crystalises, it is taxed at the appropriate CGT rate applicable at that time
• if prior to the deferred gain crystallising, a non-depreciating asset is bought, then the original deferred gain can now be rolled over

Question 22

What is a depreciating asset?

Answer 22

• is a wasting asset (i.e. with a predictable life of 50 years or less), or an asset that will become a wasting asset within ten years

Question 23

If the replacement asset acquired is a depreciating asset, the gain cannot be rolled over. Instead, it is deferred until the earliest of the following three events:

Answer 23

• disposal of replacement asset
• the replacement asset ceases to be used for the purposes of the trade
• ten years from the date of acquisition of the replacement asset

Question 24

Gift of business assets - gift holder relief what is it?

Answer 24

• is a chargeable disposal, which gives rise to a capital gains tax liability for the donor
• however, the doner has not received any funds with which to pay the tax
• relief allows the gain arising on the gift of qualifying business assets to be held over (i.e. deferred) until the asset is eventually sold by the donee

Question 25

The gift holder relief is only available for:

Answer 25

• qualifying business assets
• gifts by individuals

Question 26

The relief operates as follows:

Answer 26

Donor
- normal capital gain is calculated using market value as proceeds
- the gain is not chargeable on the donor; it is deferred against the base cost of the asset acquired by the donee
Donee
- acquisition cost = deemed to be market value at the date of gift
- base cost = acquisition cost less the gain deferred by the donor
Both the donor and the donee must make a joint claim for the relief
For 2022/23 gifts, the claim must be made by 5April 2027

Question 27

On the subsequent sale of the asset by the donee: gift holder relief

Answer 27

• the base cost is compared with the sale proceeds received to calculate the chargeable gain
• the chargeable gain is taxed at the appropriate rate of CGT applicable when the donee disposes of the asset
• assuming the rates of CGT remain unchanged, the gain will be taxed at:
  # 10% if the disposal qualifies for BADR from the donee’s point of view or
  # usual rates depending on the level of the donee’s taxable income in the year of disposal and the type of asset

Question 28

The main categories of qualifying asset for gift relief:

Answer 28

Assets used in the trade of:
- the donor (i.e. where the donor is a sole trader)
- the donor’s personal company
Unquoted shares and securities of any trading company
Quoted shares or securities of the individual donor’s personal trading company

Question 29

The outright gift of a qualifying asset results in:

Answer 29

• no chargeable gain arising on the donor at the time of the gift
• a higher gain arising on the donee on the subsequent disposal of the asset be the donee
• the gain being taxed at the appropriate rate depending on:
  # the availability of the donee’s AEA
  # the availability of BADR or IR from the donee’s point of view or, if not available
  # the level of the donee’s taxable income in that tax year

Question 30

The donor may choose not to claim gift relief in order to:

Answer 30

• crystallise a gain and utilise their AEA or a brought forward loss, and/or
• claim BADR or IR
• ensure the gain is taxed at 0% or 10% now rather than potentially at a higher rate later

Question 31

For sales at an undervalue the relief is modified as follows: gift relief

Answer 31

• any proceeds received that exceed the original cost of the asset gifted are chargeable to CGT on the donor at the date of the gift
• the rest of the gain may be deferred (held over).

Question 32

Assets not used wholly for trade purposes, the gift relief is restricted where either:

Answer 32

• only part of an asset is used for trading purposes
• an asset is used for trading purposes for only part of the donor’s period of ownership

Question 33

Where the assets being gifted are shares; the gain eligible to be held over is restricted if:

Answer 33

• the shares are in the donor’s personal company - whether quoted or unquoted
• the company owns chargeable non-business assets

Question 34

Shares in a personal trading company - gifted - calculation

Answer 34

Total gain x ( Market value of chargeable business assets/ Market value of chargeable assets
- for unquoted shares - the restriction does not apply ; full relief is available
- for quoted shares - Gift relief is not available at all

Question 35

What is a chargeable asset?

Answer 35

• is one that, if sold, would give rise to a chargeable gain or an allowable loss (i.e. capital assets that are chargeable).
• cars are exempts so excluded
• inventory, receivables, cash… are also excluded as they are not capital assets and therefore not chargeable

Question 36

What is a chargeable business asset?

Answer 36

• defined as chargeable asset that is used for the purposes of a trade
• excludes shares, securities or other assets owned by the business held for investment purposes

Question 37

Chargeable gain on shares regarding gift relief restrictrions

Answer 37

• a chargeable gain will arise at the time of the gift on the donor as not all of the gain can be deferred
• the chargeable gain will be taxed on the donor at 0%, 10% or 20% depending on:
• the availability of the donor’s AEA
• the availability of BADR or IR from the donor’s point of view and, if not available
• the level of the donor’s taxable income in that tax year