Chapter 3 – Capital Gains Tax (3 OR 4) Flashcards
What is CGT?
Tax on gains arising from the disposal of certain capital assets
Are GILTs/most corporate bonds exempt from CGT?
Are NS&I saving certificates exempt from CGT?
Is CGT payable on Chattels?
Is CGT payable on ‘wasting assets’?
Are GILTs/most corporate bonds exempt from CGT? EXEMPT
Are NS&I saving certificates exempt from CGT? EXEMPT
Is CGT payable on Chattels (personal possessions) ? EXEMPT if disposed of for less than £6000
Is CGT payable on ‘wasting assets’?
EXEMPT
What are wasting assets?
Assets with an expected life expectancy of less than 50 years
Is CGT payable on an individuals main residence?
No CGT is payable if they have lived there in full for the entire period of ownership
However, it may be payable if they have lived there for part of the ownership. For example if they lived there for 4 years of the 10 years of ownership. They will pay CGT in proportion. There are some exemptions for certain reasons for being absent
LOOK AT EXAMPLE 3.1
For CGT purposes what happens if you own multiple properties?
The person must elect what property should be treated as their main residence (and therefore gain exemptions) within 2 years of acquiring the additional property. If they don’t HMRC will decide
If you let out part of your main residence how is this treated for CGT purposes?
The part of the house that is let is liable to CGT.
If the letting is for residential use and qualifies for ‘Lettings Relief’, the gain on that part remains exempt up to the lesser of:
£40,000 (or, for joint owners, £80,000 as the exemption applies to each owner); or
The exemption on the part occupied by the owner
Properties bought with the intention of making a gain do not get the relief (ie, where they do it up to make a gain). It must be to live in as well as let out to get the relief
What are Chattels?
‘tangible movable objects’, so we are talking about items such as furniture, jewellery, antiques, stamps, books and magazines et
Chattels are assets that are exempt from CGT if the disposal proceeds do not exceed £6,000.
If the disposal does exceed £6,000 the chargeable gain is the lower of:
The actual gain;
and
5/3rds of the excess over £6,000
What does it mean to dispose of an asset?
Sell it
Transferring ownership of an asset (including gifting, either directly to an individual or into a trust)
Encashing / part encashing an asset
Receiving a capital sum as compensation for damage to assets
Receiving a capital sum under an insurance policy for damage or loss of assets
Receiving a capital sum for a surrender of rights (e.g. a cheque received from a lapsed rights issue)
A trust beneficiary becoming absolutely entitled to trust property
Where an asset is destroyed, either physically (i.e. following a fire) or legally (i.e. the liquidation of a company in which the investor owned shares)
This is likely to produce a loss but, as we will see, the recording of this loss could be useful for the investor in future
How is death treated for CGT purposes?
Does the new owner pay CGT on the acquired asset
Death is NOT deemed to be a disposal as far as CGT is concerned.
So, if someone owns an asset that is showing a gain, when they die there is no CGT to pay.
The new owner of the asset receives it at the market value at the date of death, so would only pay CGT on any increases in value from the date they inherited it.
When an asset is sold, the date of a disposal is the date the contract for sale becomes binding.
This could be before the seller receives the payment.
This leads us to the concept of ‘deferred consideration’ and its two forms:
What are they?
Ascertainable
the amount to be received is fixed
Unascertainable
the amount to be received is not fixed. This is often the case in business transactions where the total sale price can depend on certain conditions, and is known as ‘contingent consideration’.
What does it mean if a disposal is NOT at arm’s length?
Remember to be ‘at arms length’ signifies distance or impartiality
It means there is a close connection between the individual disposing of the asset and the new individual owning the asset. (close relatives, business partners etc)
If it is at arms length, it has the opposite meaning. It is basically between two individuals who are equal and no bargaining.
In the situation where a transaction is not at arms length, the market value of the asset at the time of transfer is used as opposed to the actual value paid and received. This is HMRC avoiding ‘mates-rates’
What is the no gains, no loss basis in relation to CGT?
Disposals of shares (either direct or in collective investments such as OICS) and units in unit trust have special CGT rules apply to determine the order of disposal. Explain this is further detail
There are 6 steps to calculate CGT. What are they?
Step 1 - Establish the disposal proceeds (look at 3.3 if unsure)
Step 2 - Deduct the acquisition cost
Step 3 - Deduct purchasing/disposal &enhancement costs
Step 4 - Set off allowable Capital losses
Step 5 - Deduct the annual exemption
Step 6 - Calculate tax at appropriate rates
What is the difference between ‘enhancement costs’ and ‘maintenance costs’
enhancement costs - money spent to increase the value of the asset. These costs can be deducted from chargeable gain for CGT
Maintenance costs - money spent to repair/bring back the asset to its true value. These CANNOT be deducted for CGT purposes
For assets acquired before 1 April 1982, the asset’s cost is deemed to be the market value at 31 March 1982, not when the asset was acquired. True or false
True
No deductions are allowed for any additional costs of purchase or enhancement before 31 March 1982 but costs involved in selling the asset are still allowable.
Can you offset the chargeable gain against previous losses?
A loss must first be set against any taxable gains from other assets made in the same tax year.
Any residual loss value (where the loss is more than same-tax-year gains) can then be registered to be set against gains in any future tax year. (For example, if you had £5,000 in gains and £7,000 in losses in a given tax year, you would offset the $5,000 gain completely, and you would have a remaining $2,000 loss. This $2,000 loss can then be carried forward and used to offset gains in future years.)
Losses must be claimed and registered within 4years from the tax year they are made
Once claimed, losses can be carried forward indefinitely.
When off-setting losses against taxable gains in future years, the individual can choose how much of the registered losses they want to offset, which allows the individual to fully use their annual exemption
In the current tax year the annual exempt amount is £3,000 for CGT. True or false
Can you carry it forward in future years if fully or partially unused
True
The annual exempt amount is a ‘use it or lose it’ benefit. If it is not taken advantage of one tax year, any excess cannot be transferred to future tax years.
LOOK AT EXAMPLES IN 3.4
What are the CGT rates and how are they applied?
10% for any part of the taxable gain that falls up to the higher rate threshold (so, non and basic rate taxpayers).
20% for any part of the taxable gain that falls within the income tax higher rate band or above (so, higher rate and additional rate taxpayers).
Therefore, an individual with a small amount of income and a large gain could pay CGT at 10% and 20%. SEE EXAMPLE IN 3.5
There is a potential 8% ‘surcharge’ on the lower rate for non and basic rate taxpayers, and a rate of 24% for higher and additional rate tax payers, if the asset is residential property (i.e. second homes [not the principle private residence] buy to lets, holiday homes etc)
The CGT rate for gains on assets of this nature is:
18% for gains that fall in the no tax or BRT band.
24% for gains that fall in the higher rate band or above.
If an individual sells a non-exempt residential UK property, they must both report and pay CGT within HOW LONG 60 days of selling the property
60 days of selling the property
When is CGT due?
CGT is normally payable by the 31st January following the end of the tax year when the gain was made
However, for non-exempt residential UK property, it must be both reported and paid within 60 days of the completion date of the sale
What 6 reliefs are available for CGT?
Tell me about:
business asset disposal relief
Gift holdover relief
Business asset roll over relief
Incorporation relief
1) Business asset disposal relief (See example 3.7 in 3.6) -
For sale of whole or part of a business or for shares in a trading company where they have ‘qualifying interest (minimum 5% shareholding)’. Asset must be owned for 2 years. Has a lifetime gain limit of £1,000,000.
Results in CGT ALWAYS being 10% no matter amount of individuals taxable income.
2) Gift holdover relief -
Available where a gift creates an immediate IHT charge (lifetime transfers). Allows the CGT to be deferred until a later disposal. (LOOK AT 3.8)
3) Business Asset Rollover Relief -
When a business disposes of an asset and buys a new asset either 1 year before or 3 years after the disposal. It defers the CGT on the initial disposal until the newly bought asset is sold.
Useful where a business is moving to a new premises and needs to sell their old premise for example
4) 3.6.4: Incorporation Relief - rollover relief on incorporation of a business
5) 3.6.5: Reinvestment into Enterprise Investment Schemes (EIS) Shares.
Reinvest a CGT bill into EIS. Defers CGT until deposal of shares.Like business asset rollover relief, the EIS investment must be made in a period starting 1 year before and ending 3years after the disposal of the asset subject to CGT. Example of ‘reinvestment relief’
6) 3.6.6: Reinvestment into SEIS shares
Different to EIS as seen above. 50% of the reinvested gains are exempt totally and the remaining 50% of reinvested gains are chargeable to CGT
A disposal can create a CGT and IHT liability. True or false
True, such as gifts into trust.
CGT holdover relief is available in this situation
Disposals are ONLY selling assets and gifting. True or false
FALSE, it can be many things
