Chapter 8: Calculating capital gains tax

Question 1

When do individuals pay capital gains tax?

Answer 1

When they dispose of assets.

For there to be a capital gain there must have been a:
-chargeable disposal by a
-chargeable person of a
-chargeable asset

Question 2

Chargeable disposal

Answer 2

Chargeable disposal occurs on:
-sale of an asset
-gift of an asset
-when as asset is lost or destroyed

Gifts on death are exempt from capital gains tax as this falls under inheritance tax rules

The person receiving the gift will take on the asset with a value of the market value at the time of receiving the asset

Gifts to charities are exempt and gifts to a spouse also are exempt

Question 3

Chargeable person

Answer 3

An individual resident in the UK will be chargeable to capital gains tax in the UK on their worldwide assets

Question 4

Chargeable assets

Answer 4

Everything is chargeable unless exempt:

Exempt items:

-cars
-Principle private residence (individuals home)
-Wasting chattle (life of under 50 years)
-non-wasting chattle bought and sold for under £6000
-Stocks in ISAs

Question 5

Calculating the chargeable gain or loss

Answer 5

Gross proceeds (or market value)
Less: incidental costs of sale
Net proceeds
Less Cost:
-Original purchase price
-Enhancement expenditure
-Incidental costs

Total cost
Chargeable gain/(loss)

Question 6

Gross proceeds

Answer 6

Normally the sale value or the market value if the disposal is a gift or sold to a connected party

Question 7

Incidental costs of sale

Answer 7

Costs incurred which were necessary for the sale to take place such as advertising, estate agents fees, auctioneers fees etc

Question 8

Enhancement expenditure

Answer 8

Capital expenditure that increases the value of the asset and is intact at the date of disposal. For example, extension added to the property disposed of.

Question 9

Chargeable gain

Answer 9

This is the gain after deducting all the allowable expenses from the net proceeds

Question 10

Unutilised element of the basic rate band

Answer 10

Unutilised element of the basic rate band will be taxed at 10% - 10% in ref material

Question 11

Annual exempt amount

Answer 11

In ref material
£12300

Question 12

Losses

Answer 12

If sold for less than cost, allowable loss rather than a chargeable gain

Where multiple assets are sold in one tax year the current losses must be offset in full against current year gains

If there is an overall net loss for the tax year, then this can be carried forward to future tax years to offset against future gains.

If there are brought forward losses, then reduce gains down to exempt amount

Question 13

Part disposal

Answer 13

Part disposal cost = original cost x (a/a+b)

a=Market value of part disposed of (gross proceeds)
b= market value of remainder of asset

Question 14

Disposed to a connected person

Answer 14

disposals to connected parties must be at market value - even if gross proceeds are lower

If a loss is made on disposal to connected party then it can ONLY be utilized against gains to the SAME connected party

Question 15

Connected person

Answer 15

2 generations up and down

for example UP - parents & spouses / civil partners and grandparents and spouses / civil partners .

down 2 - children and spouses / civil partners and grandchildren and spouses / civil partners

1 generation to the side

for example - brothers and sisters & civil partners

Question 16

Disposal to spouse / civil partner

Answer 16

deemed to be no gain/no loss

each has an annual exempt amount - useful for tax planning

Question 17

Tax planning

Answer 17

Transfer assets between spouces at no gain no loss to ensure:
-both annual exempt amounts are being used
-the partner with the lowest rate of tax pays the tax
-capital losses of either partner are fully utilised wherever possible

Reduce tax liability by:
-delay the sale of an asset until the following tax year