Chapter 3 - Capital Gains Tax Flashcards
Capital Gains Tax - 6 Step Process
- Establish disposal proceeds
- Deduct acquisition costs / selling costs / costs of enchantments
- Deduct current year losses
- Deduct previous year losses down to annual exempt amount
- Deduct annual exempt amount
- Add gain to taxable income to determine CGT rate
- Net gains within basic rate tax band - taxed at 10% (18% for residential property otherwise exempt)
- Net gains in excess of basic rate tax band - taxed at 20% ( 28% for residential property otherwise exempt)
CGT planning
Making PP contributions / gift aid payments extends basic rate tax band, meaning more of a capital gain could fall into the basic rate
Expenses of a sole trader / partner are deductible, meaning more of a gain could fall into the basic rate
CGT rates are generally lower than income tax rates, growth funds may be more attractive than income funds for higher / additional rate taxpayers
Disposal
- Transfer of ownership or derivation of capital sum from asset
- Trading transactions not subject to CGT, but capital disposals are
- Indicators of Trading:
o Period of ownership
o Quantity purchased
o Motive
o Financing of transaction o Frequency of transactions - Deferred consideration
o Ascertainable - amount received on disposal is fixed
o Unascertainable - amount to be received on disposal is not fixed
o Contingent consideration -payable only if certain conditions are satisfied - Date of disposal is the date the contract for sale becomes binding
- Disposal proceeds usually sale proceeds
- But, if disposal not at arm’s length - market value used
- Death - no liability to CGT
- CGT valuation is not the same as IHT valuation
- If disposal is chargeable to inheritance tax, then CGT holdover relief can generally beclaimed
Shares
- Identification Rules
o Acquisitions on same day
o Acquisitions within following 30 days (to avoid bed and breakfasting)
o Acquisitions in the share pool - Bonus/Scrip Issue
o Treated as if acquired on same day - Rights Issue
o Added to share pool - Scrip Dividend
o Treated as if new acquisitions
Employee Share Schemes
- Shares acquired through share option schemes usually produce larger gains as they have a lower base cost
- Where shares under both approved and unapproved schemes are acquired on the same day and some of them are disposed of, can elect that shares acquired other than under the approved scheme are treated as being disposed of first
Wasting Assets / Chattels
- Wasting assets (less than 50 years life), exempt
- Chattels - if value doesn’t exceed £6,000 (if above £6,000, then gain cannot exceed 5/3 of excess)
For example if a ring costing £1,000 is sold for £7,800, the chargeable gain cannot exceed £3,000 ((£7,800 - £6,000) x 5/3) = £3,000. Therefore the chargeable gain is £3,000 and not £6,800
Part Disposals
Acquisition cost apportioned (A / A+B ) x original cost
A = proceeds of part disposal
B = market value of part retained
Spouses / Civil partners
- Spouse/civil partner transfers do not give rise to CGT liability - (no gain/no loss transfer)
- Liability is transferred to receiving spouse/civil partner when they come to dispose of the asset in the future
- If assets held jointly then taxable on own share (can help with tax planning as use both annual exempt amounts)
Private Residence Exemption
- Part of gain taxable for periods of non-residence
- Multiple homes -elect to determine which house to be treated as main residence
- If part of the property is let and the landlord is in shared occupancy, then special exemption (lettings relief) - gain arising on part that is let is reduced by lowest of:
o £40,000, up to £80,000 gain attributable for couple
o Amount of gain exempt because house is main residence
o Gain attributable to the let part or period of letting - Intention of purchase - cannot use exemption if gain occurred on property purchased wholly with intent to make a gain
Pre-82 Acquisitions
- Use market value at 31/03/82
Holdover Relief
- Hold over gain on disposal by way of a gift
- Main categories are transfers chargeable to IHT and disposals of trading assets
- If holdover relief claimed - no CGT payable at time of gift (acquisition cost reduced by amount of heldover gain)
- Holdover relief not available for transfers of assets into trust where settlor has an interest
- Clawback period starts immediately after the transfer and ends six years after the end of the year of assessment
Available on gifts of trading assets:
- An asset used in the trade of the donor or by the donors personal company
- Shares and Securities of trading companies provided that
1. the shares or securities are not quoted on a recognised stock exchange or
2. the donor holds at least 5% of the voting rights in the company
Business Asset Disposal Relief (Entrepreneurs relief)
- Claimed on disposal of a business (or part disposal), only available on capital gains from disposals of assets used within business
- Relief available for disposals of shares in business (if 5% shareholding and employee or director) or share in partnership
o For employees / directors must have 5% shareholding entitling them to 5% of voting rights plus- 5% of firm’s distributable profits and assets on wind up or
- 5% of proceeds on disposal of firm’s ordinary shares
- First £1m qualifying gains made during lifetime gains taxed at 10% for gains made on or after 11 March 2022
- Need to own assets for at least 2 years
Investors’ Relief
- Extension of business asset disposal relief to include external investors in unlisted trading companies
- Same 10% rate - separate £10m limit.
- Conditions:
o shares newly issued
o issued post 16 March 2016
o held for 3 years commencing on/after 6 April 16
Business Rollover Relief
- Can claim relief if sell assets used in the business and buy other assets for the business
- Relief defers gain until disposal of new assets
- New assets must be bought in s period starting one year before and ending three years after the disposal of the old assets
Incorporation Rollover Relief
- Relief available where unincorporated business is transferred to a limited company in exchange for new shares in that company
- Relief effectively defers gain until shares are disposed of (by deducting gain from issue price of shares thus lowering base cost)
