Chapter 3 - Capital Gain Tax (CGT) Flashcards
Ben died in August, leaving a shareholding in a private company to his son Adam.The shareholding was valued on Ben’s death for inheritance tax purposes. If Adam subsequently sells the shares, the acquisition cost for capital gains tax purposes will be the:
а.
market value of the shares at the time of acquisition.
b.original purchase cost of the shares.
C.value placed on the shares for inheritance tax purposes.
d.market value of the shares the day before his death.
C.value placed on the shares for inheritance tax purposes.
A valuation for CT is not always the same as a valuation for IHT. For CT, it is the asset that is valued, whereas for IHT the relevant value is the loss to the estate. For example, the value of private company shares may be very low for CT purposes if they are a small proportion of the equity, but giving them away could result in a substantial reduction in the seller’s estate if the gift results in loss of control of the company. This gives the shares a much higher value for IHT purposes. However, if an asset has been valued for IT purposes on the death of an individual, the same value must be used for CGT purposes, i.e. for the beneficiary’s acquisition cost.
Gerald is the sole trustee of an interest in possession trust and disposes of some shares in 2023/24, realising a taxable gain of £10,000. At what rate will capital gains tax be payable?
A. 20%.
B. 28%
C. 45%
D. 18%
A. 20%
Disposals made by the trustees
Any disposals made by the trustees during the life of the trust are chargeable in accordance with the usual rules and taxable at the rate of 20% (unless the asset in question is a residential property that is not the main residence of a beneficiary, in which case the rate is 28%).
On the death of the life tenant
When the life tenant of a pre-22 March 2006 trust dies, the assets within the trust are revalued at the market value as at the date of death. This means there is no CG charge on the trustees for any increase in value between acquisition of the asset and death of the life tenant, so any such gains escape tax completely.
When an asset is sold, the date of the disposal for capital gains tax purposes is the date that the:
a. transaction physically occurred.
b. contract for sale becomes binding.
c. sale was agreed
d. money physically changed hands.
b. contract for sale becomes binding.
When an asset is sold, the date of the disposal is the date the contract for sale becomes binding, which could be before the seller receives payment. For example, the date of disposal on the sale of land is the date of the contract for sale, even if payment might not be received for several months. If the buyer defaults and the seller takes back the land, the disposal is treated as null and void, and no tax is due.
Ashay has made a number of gains in the 2023/24 tax year. £35,000 on the disposal of his primary UK residence, £20,000 on his share portfolio and £14,000 on the sale of directly held corporate bonds. He is a higher-rate taxpayer and has no losses available to offset. How much capital gains tax will he pay?
а.£1,400.
b.£12,600.
c.£2,800.
d.£5,600.
c.£2,800
Some disposals are exempt from CT, either because the assets themselves are exempt assets or because the gain is wholly relieved from tax. There is little practical difference between the two reasons. When a disposal is exempt, no allowable loss can be claimed.
The following are the main exempt disposals, including capital sums derived from assets:
• an individual’s private residence;
• private motor vehicles;
• NS&I savings certificates and premium bonds;
• government and most corporate bonds, and government-guaranteed securities, owned by individuals;
Shares only ones to pay CGT on so
£20k - £6k (annual allowance) x 20% =
Amir, a higher-rate taxpayer, made a capital gain of £40,000 following the sale of a second residential property in August 2023. He has no other gains or losses to take. into account. How much will Amir’s capital gains tax liability be and when must it be paid?
a. £9,520 by 31 January 2025.
b. £9,520 and a payment on account must be made within 60 days from the completion date.
c. £5,040 on 31 January 2025 and £5,040 on 31 July 2025.
d. £9,520 and this full amount must be paid within 60 days from exchange of contract.
b. £9,520 and a payment on account must be made within 60 days from the completion date.
a payment on account of CT must be made within 60 days of completion of a UK residential property disposal (where such a disposal is not exempt as a private residence).
This is done by making an online property report.
£40k - £6k(annual exemption) x 28% as it’s property
If Anya sells a second home to her son James for the same price as she paid for it in. an attempt to avoid capital gains tax [CGT], what would be the position?
a. This is an effective tax planning tool and should result in a significant reduction in CGT for both Anya and James.
b. The market value of the house will be used as consideration for CT purposes, as the disposal is not a sale made on a fully commercial basis
c James will acquire the property at Anya’s purchase price so will pay CGT on disposal at Anya’s rate of CGT.
d.This is an effective tax planning tool, provided the sale price is within 20% of the market value.
b. The market value of the house will be used as consideration for CT purposes, as the disposal is not a sale made on a fully commercial basis
A disposal not at arm’s length can occur in two main circumstances:
- Any disposal between individuals with a close connection, such as father and daughter, is a disposal not at arm’s length and market value is used instead of the actual proceeds, if any. This applies to both sales and gifts.
- Market value can also be used instead of the actual sale price in disposals between unconnected parties, e.g. on a deliberate sale at an undervalue or a gift between friends.
Lisa and Craig, who are married, transferred the couple’s holiday cottage into Lisa’s sole name when they separated earlier this month. What rate of capital gains tax, if any, would be paid at the time of the transfer on any gain on the cottage whilst it was in Craig’s name?
a.18%.
b.28%
c. There will be no capital gains tax payable.
d.20%.
c. There will be no capital gains tax payable.
A disposal by one spouse to the other does not give rise to a chargeable gain. But when the asset is ultimately disposed of, the eventual tax liability is calculated by reference to the first spouse’s acquisition cost.
• A disposal between spouses is a ‘no gain, no loss’ disposal.
• In this way, the first spouse’s gain is passed on to the other spouse.
• This provision can be used when one spouse:
has used the annual exempt amount and the other has not;. has losses that can be set against gains; or
- will pay CGT at a lower rate than the other.
Fred and Helen own a second property in joint names as tenants in common with 60% and 40% shares respectively. When the property is sold:
a.Fred will declare 60% of the gain and Helen 40% of the gain but these can both be reduced by their individual annual exempt amounts.
b the gain is divided equally between them, and then they can each deduct their individual annual exempt amounts.
c Fred can only use 60% of any carried forward losses he has available.
d.any gains made will be taxed at the tax rate of the higher earner.
a.Fred will declare 60% of the gain and Helen 40% of the gain but these can both be reduced by their individual annual exempt amounts.
When spouses dispose of a jointly held asset, each spouse is taxable on the gain on their own share of the asset. For example, if the husband owns 20% and the wife owns 80%, the husband is taxable on 20% of the gain. Property held jointly is always treated as owned in equal shares unless the ownership is as tenants in common in declared unequal shares.
Brenda has made the following gains in the 2023/24 tax year. £18,000 in her ISA, £15,000 on the sale of an investment trust, £7,000 on the sale of her car and £3,000
on the sale of her UK Government gilts. If she has no losses or reliefs available, how much of her gains will be subject to capital gains tax?
a.16,000.
b.£9,000.
c.£12,000.
d.£15,000
b.£9,000.
Some disposals are exempt from CT, either because the assets themselves are exempt assets or because the gain is wholly relieved from tax. There is little practical difference between the two reasons. When a disposal is exempt, no allowable loss can be claimed.
Only the £15k is taxable, minus the £6k allowance is £9k
Howard, an additional-rate taxpayer, owns unit trust investments. In August 2023 he makes a loss of £12,000, and then in December 2023 he makes a gain of £35,000.
No other gains or losses were made in 2023/24 and he has no losses available to carry forward from earlier years. What is the highest amount of capital gains tax that Howard will have to pay in 2023/24?
a. £8,120.
b.£4,760.
C.£3,400.
d.£5,800.
d.£5,800
The CT calculation consists of a series of steps:
- Determine the disposal proceeds (actual sale price or market value).
- Deduct the acquisition cost.
- Deduct any costs incurred in arranging the purchase and sale and any enhancement costs.
- 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.
- Deduct the annual exempt amount in the way that minimises the tax due.
- Calculate the tax at the appropriate rate.
Not sure why but the loss isn’t offset able I don’t think as it would be £35k - £6k annual allowance = £29k
£29k x 0.2 ( additional cgt tax rate)
Paul is currently a basic-rate taxpayer. He is about to surrender an onshore assurance bond as well as making a share disposal. In both cases he is realising some gains. How do these two gains finally interact in determining his tax liability?
A. The capital gain is added to his gross income and then the chargeable gain, top sliced, is added.
B. The capital gain is added to his gross income and then the chargeable gain, without top slicing, is added.
c. The chargeable gain, top sliced, is added to his gross income and then the capital gain is added.
D. The chargeable gain, without top slicing, is added to his gross income and then the capital gain is added.
c. The chargeable gain, top sliced, is added to his gross income and then the capital gain is added.
The CGT calculation consists of a series of steps:
Pre
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.
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.
An investment portfolio with an acquisition value of £220,000 was subsequently disposed of for - £248,000, without incurring a Capital Gains Tax liability. This was because
A. the disposal was made by trustees.
B. Inheritance Tax had already been paid on the acquisition value.
C. the portfolio consisted totally of gilts and Venture Capital Trust shares purchased at issue.
D. the portfolio consisted totally of Real Estate Investment Trust shares.
C. the portfolio consisted totally of gilts and Venture Capital Trust shares purchased at issue.
Some disposals are exempt from CGT, either because the assets themselves are exempt assets or because the gain is wholly relieved from tax. There is little practical difference between the two reasons. When a disposal is exempt, no allowable loss can be claimed.
Bernard made a £14,000 loss on a disposal in this tax year whereas his wife Betty made a substantial gain. What is he permitted to do with this gain
Correct. Losses cannot be transferred between spouses. If a loss cannot be used in the tax year in which it occurs, it can be carried forward to use against gains in future tax years. When a loss from a previous tax year is brought forward, it only needs to be used to the extent that it brings the gain down to the annual exempt amount. Any excess can be carried forward again to a future tax year. - Chapter 3, Section D4, Learning Outcome 1.3
Mr Sloane has created six discretionary trusts over his lifetime, one of which has made a gain of £10,000 on the sale of an investment. What is the annual exempt amount for Capital Gains Tax that can be used against this gain?
A. £6,000
В. £3,000
C. £600
D. £100
C. £600
The maximum CGT annual exempt amount (AEA) for most trusts is ½ of the ordinary CGT AEA, i.e. £6,000/2 = £3,000. If more than one trust exists, the AEA can be shared between them, down to a minimum of 1/5th. Mr Sloane can therefore use an AEA of £600, i.e. 1/5th of £3,000. - Chapter 3, Section 11D, Learning Outcome 1.3
Val bought a necklace for £1,000 over 5 years ago and has recently sold it for £8,000. What is the chargeable gain for Capital Gains Tax purposes?
A. £8,000
B. £7,000
C. £3,333
D. £2,000
C. £3,333
This is an example of where we might only need to do part of a tax calculation to arrive at the answer. In this instance, we’re only looking to identify the chargeable gain, not the actual tax due.
As Val’s necklace was sold for £8,000 the chattels rule applies. This is where the chargeable gain for CCT purposes cannot exceed five-thirds of the excess over £6,000.
£8,000 - £6,000 = £2,000
£2,000 x 5/3 = £3,333.33.
The actual gain of £7,000 is therefore ignored because this is higher.
