Chapter 3 – Capital Gains Tax (3 OR 4)

Question 1

What is CGT?

Answer 1

Tax on gains arising from the disposal of certain capital assets

Question 2

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’?

Answer 2

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

Question 3

What are wasting assets?

Answer 3

Assets with an expected life expectancy of less than 50 years

Question 4

Is CGT payable on an individuals main residence?

Answer 4

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

Question 5

For CGT purposes what happens if you own multiple properties?

Answer 5

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

Question 6

If you let out part of your main residence how is this treated for CGT purposes?

Answer 6

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

Question 7

What are Chattels?

Answer 7

‘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

Question 8

What does it mean to dispose of an asset?

Answer 8

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

Question 9

How is death treated for CGT purposes?

Does the new owner pay CGT on the acquired asset

Answer 9

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.

Question 10

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?

Answer 10

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’.

Question 11

What does it mean if a disposal is NOT at arm’s length?

Remember to be ‘at arms length’ signifies distance or impartiality

Answer 11

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’

Question 12

What is the no gains, no loss basis in relation to CGT?

Question 13

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

Question 14

There are 6 steps to calculate CGT. What are they?

Answer 14

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

Question 15

What is the difference between ‘enhancement costs’ and ‘maintenance costs’

Answer 15

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

Question 16

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

Answer 16

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.

Question 17

Can you offset the chargeable gain against previous losses?

Answer 17

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

Question 18

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

Answer 18

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

Question 19

What are the CGT rates and how are they applied?

Answer 19

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.

Question 20

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

Answer 20

60 days of selling the property

Question 21

When is CGT due?

Answer 21

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

Question 22

What 6 reliefs are available for CGT?

Tell me about:

business asset disposal relief

Gift holdover relief

Business asset roll over relief

Incorporation relief

Answer 22

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

Question 23

A disposal can create a CGT and IHT liability. True or false

Answer 23

True, such as gifts into trust.

CGT holdover relief is available in this situation

Question 24

Disposals are ONLY selling assets and gifting. True or false

Answer 24

FALSE, it can be many things

Question 25

Brad is a higher rate taxpayer and disposes of a personal share-holding in a Public Ltd company for £40,000 in the current tax year. The portfolio was transferred to him 5 years ago by his wife when it was valued at £15,000. They were purchased 13 years ago for a total cost of £20,000. The stockbroker fees were £150 and the commission for selling the shares is £500. He has no other capital gains or losses in the tax year (or carried forward). Calculate what CGT would be due as a result of the disposal.

£4,000

£3,270

£2,670

£1,410

Answer 25

£3,270

The proceeds amount to £40,000. The acquisition cost is the one applying to Brad’s wife, so £20,000 (‘no gain, no loss’ look in book if unsure). The purchase and sale costs amount to £650, making a net gain of £19,350. The annual exempt amount is still available to Brad. That is a further £3,000 deduction = £16,350. The £16,350 taxable gain is then all taxed at 20%, as Brad is a high rate taxpayer, resulting in a CGT liability of £3,270.

Question 26

Ernie has unused registered capital losses of £12,000 carried forward from 2012/13. In the current tax year, he disposed of the following assets:

• In July 2024, he sold some shares and realised a gain of £15,000
• In August 2024, he sold some other, unrelated, shares at a loss of £2,500
• In November 2024, he sold a portfolio of gilts, making a gain of £8,100

After making the most tax-efficient use of the registered losses, how much, if any, of the losses should be carried forward to 2025/26? Assume that Ernie makes no further disposals in 2024/25.

£12,000

£5,500

£2,500

None

Answer 26

£2,500

The gilts are exempt assets for CGT purposes, and can be ignored.

The losses made on the shares must be offset in full against gains made in the same year, resulting in a net gain of £12,500. Ernie should use just enough of his carried forward losses to bring the gain down to £3,000, the value of his annual exempt amount. He would therefore have no CGT to pay, and the maximum amount of losses to carry forward to future tax years. Using £9,500 (£12,500 net gain - £3,000) of his previous losses means that he can continue to carry forward a further £2,500 to 2025/26.

Question 27

Richard, a higher-rate taxpayer, has already used his Capital Gains Tax (CGT) annual exemption in the current tax year.

If he claims business asset disposal relief on a £42,000 gain made selling a qualifying holiday home in September 2024, how much tax will he save compared with the normal CGT rules?

None

£3,360

£4,480

£5,880

Answer 27

£5,880

The difference between the ‘standard’ CGT rate for a high rate taxpayer when disposing of residential property (24%) and for business asset disposal relief (10%) is 14%. The amount saved is therefore £42,000 x 14% = £5,880.

Question 28

An investment portfolio with a book value of £140,000 was subsequently disposed of for £165,000, without incurring a Capital Gains Tax liability. This was because…

the portfolio contained ISAs and VCTs only

the portfolio had previously been transferred by a spouse

the portfolio contained real estate investment trust (REIT) shares only

the portfolio formed part of trust assets

Answer 28

ISAs and VCTs are always exempt from CGT on disposal, regardless of the holding period.

(Did you remember that VCTs were on the list of assets that are exempt from CGT that we included in section 3.2.1? If not, don’t worry. We will cover VCTs in much more detail in chapter 10.)

Inter-spouse transfers do not generate a CGT liability at the time, but one could be invoked on subsequent disposal.

REITs are fully liable to CGT (see more in chapter 10).

Placing assets into trust does not protect them from a CGT liability on disposal (see more in chapter 11).

Question 29

Raksha has owned a property for 12 years, the first 6 years of which were as her principal private residence. The property was rented out for the last 6 years. On the sale of the property, she has made a gain of £60,000. How much of this gain will be subject to Capital Gains Tax, if any?

Nil

£22,500

£26,250

£30,000

Answer 29

£26,250

Raksha’s period of occupation plus the last 9 months of ownership (as it was her main residence at some point) are exempt from CGT = 81 months. 81 ÷ 144 (months) = 56.25% of the gain is exempt, meaning 43.75% is non-exempt. £60,000 gain x 43.75% = £26,250

Remember 9 month rule!