Chapter 9 - Capital gains tax - individuals

Question 1

How can a capital gains tax arise?

Answer 1

A capital gain may arise on the disposal of a capital asset such as land, shares or a work of art.

Usually, if the asset has increased in value since it was acquired, there will be a chargeable gain on its disposal.

Question 2

How can an allowable loss on disposal arise?

Answer 2

If the asset has fallen in value, there will be an allowable loss on its disposal.

Question 3

What is the first step in deciding whether there is a chargeable gain or allowable loss?

Answer 3

The first step in deciding whether there is a chargeable gain or allowable loss is to ascertain whether a chargeable person has made a chargeable disposal of a chargeable asset.

Question 4

What does chargeable persons include?

Answer 4

Chargeable persons include:
* Individuals
* Business partners
* Trustees
* Companies

Question 5

Which persons are exempt from CGT?

Answer 5

These include registered charities and friendly societies, local authorities, registered pension schemes, investment trusts and approved scientific research associations.

Question 6

What do chargeable disposals include?

Answer 6

Chargeable disposals include:
* the sale of the whole or part of an asset
* the gift of the whole or part of an asset
* the loss or destruction of the whole or part of an asset
* appropriations to trading stock (deemed to take place at market value)

Question 7

What do exempt disposals include?

Answer 7

Exempt disposals include gifts to charities, art galleries, museums and similar institutions, provided that the asset is used for the purposes of the institution.

Question 8

Is death a disposal for CGT purposes?

Answer 8

Death is not a disposal for capital gains tax purposes and so no CGT applies on death

Question 9

What is the date of disposal?

Answer 9

The date of disposal is the date when the contract for sale is made. If the contract is conditional, the date of disposal is the date when all conditions are satisfied. The date legal title passes, or physical possession is obtained, or payment is made, is irrelevant.

Question 10

Define chargeable assets?

Answer 10

Chargeable assets are defined as all capital assets except those which are specifically exempt from CGT.

Chargeable assets include both tangible assets (such as land, furniture, works of art) and intangible assets (such as the goodwill of a business, shares, leases).

Question 11

What are the exempt assets to CGT

Answer 11

• Legal tender (ie, cash)
• Motor cars (including vintage and classic cars)
• Most wasting chattels
• Chattels which are not wasting chattels, if acquisition cost and gross disposal consideration do not exceed £6,000
• Gilt-edged securities (such as Exchequer Stock or Treasury Stock)
• National Savings Certificates and premium bonds
• Shares and investments held in an Individual Savings Account (ISA)

Question 12

Outline the pro-forma used in capital gains computations

Answer 12

Question 13

What is the disposal proceeds (considerations) for capital disposals? What two scenarios must we consider?

Answer 13

The disposal proceeds (considerations) for capital disposals is the amount deemed to be the disposal value:
* If the asset is sold in a commercial transaction, ie, sold at arm’s length, the disposal consideration is the gross sale proceeds.
* If the asset is not sold at arm’s length, for example the asset is gifted, the disposal consideration is the market value of the asset at the time it was gifted.

Question 14

What are incidental costs of disposal for capital disposals?

Answer 14

Incidental costs of disposal include legal fees, estate agents’ and auctioneers’ fees and advertising cost - costs incurred directly in relation to disposing of the asset

Question 15

What are allowable costs for capital disposals?

Answer 15

Allowable costs include:
* Acquisition cost of the asset: ‘cost’ of acquiring the asset - purchase price if bought, market value of asset if gifted, probate value if acquired on death
* Incidental costs of acquisition: costs assocaited with acquiring the asset such as legal fees, surveyor’s or valuer’s fees, stamp duty land tax, stamp duty
* Enhancement expenditure: capital costs of additions and improvements to the asset reflected in the value of the asset at the date of disposal, such as extensions, planning permission and architects’ fees for extensions

Question 16

What is the annual exempt amount for CGT for individuals?

Answer 16

Each individual is entitled to an annual exempt amount each tax year. For 2023/24 the annual exempt amount is £6,000.

Question 17

What is meant by chargeable gains and taxable gains with regards to capital gains tax?

Answer 17

Chargeable gains is the gain on the disposal of a capital asset before deducting annual exemption allowance.
Taxable gain is the gain on disposal after deducting for annual exemption allowance - it is the amount liable to capital gains tax

Question 18

How are individuals taxed on their taxable gains?

Answer 18

Individuals are taxed on their taxable gains separately from their taxable income.

Question 19

What is the rate at which taxable gains are taxed?

Answer 19

Taxable gains are taxed at the rate of 10% or 20% depending on the level of the individual’s taxable income.

The rate of CGT is 20% if the individual is a higher or additional rate taxpayer.

If the individual is a basic rate taxpayer then CGT is payable at 10% on an amount of taxable gains up to the amount of the individual’s unused basic rate band and at 20% on the excess.

Question 20

What are chattels?

Answer 20

A chattel is an item of tangible moveable property, and specifically does not include goodwill, shares or leases.

Question 21

What are wasting chattels?

Answer 21

A chattel is a wasting chattel if it has a predictable life at the date of disposal not exceeding 50 years.

Examples include caravans, boats, and computers and animals. Plant and machinery are always treated as having a useful life of less than 50 years.

Question 22

What are non-wasting chattels?

Answer 22

A non-wasting chattel is one with a predictable life at the date of disposal of more than 50 years.

Examples include antiques, jewellery and works of art.

Question 23

Are wasting chattels exempt from CGT?

Answer 23

Wasting chattels are usually exempt from CGT so there will be no chargeable gain or allowable loss on disposal.

However, if the asset has been used solely in a business and the owner has, or could have, claimed capital allowances on the asset, it will be treated as a non-wasting chattel.

Question 24

Are non-wasting chattels chargeable to CGT?

Answer 24

Non-wasting chattels are generally chargeable to CGT, subject to some special rules.

Question 25

Outline the special rules for calculating the chargeable gains of non-wasting chattels

Answer 25

• If the asset is disposed of for gross disposal proceeds of £6,000 or less and acquired for £6,000 or less, it is exempt.
• If the asset is disposed of for gross disposal proceeds of more than £6,000 and the acquisition cost is £6,000 or less, there is marginal relief for the gain. The gain cannot exceed: 5/3 × (Gross proceeds less £6,000)
• If the chattel is sold for less than £6,000 and the disposal would result in a loss, the loss is restricted by assuming that the gross disposal proceeds were £6,000.
• If the asset is disposed of for gross disposal proceeds of more than £6,000 and the acquisition cost is more than £6,000 then the disposal is calculated in the normal way

Question 26

What is meant by a ‘set’ of nonwasting chattels?

Answer 26

Chattels form a ‘set’ when similar or complementary items are worth more together than separately,

For example a pair of paintings by the same artist.

Question 27

What two scenarios concerning ‘sets’ of non-wasting chattels are we concerned with?

Answer 27

• Part disposal from a set of non-wasting chattels
• Disposals from a set of non-wasting chattels to connected persons

Question 28

What happens when there is a part disposal from a set of non-wasting chattels with regards to calculating the chargeable gain?

Answer 28

If an asset from a ‘set’ is disposed of, a proportion of the cost for the set needs to be allocated to the part being disposed of. This proportion of cost is then used in the capital gains calculation

Question 29

What is the formula used to determine the factor from which cost apportionment of the set cost can be determined?

Answer 29

x = A / A+B

Where: x = the cost apportionment factor of the set, A = value of part disposed (gross proceeds), B = current market value of part retained,

Question 30

Outline the method for determing the chargeable gains arising from the part-disposal of an asset

Answer 30

1. Determine the gross proceeds from the part-disposal, the acquisition cost of the set and the current market value of the part of the set retained
2. Plug these numbers into the equation A/A+B where A is gross proceeds and B is current market value of part retained to obtain the cost apportionment factor
3. Multiply this factor by the acquisition cost of the set to obtain the apportioned cost of the part of the set being sold
4. Consider the £6,000 rules as to which method of calculation to use to calculate the chargeable gains - use the appropriate one
5. The remaining cost of the set is the original acqusisition cost of the set subtract the apportioned cost of the sold part

Question 31

What happens when there are disposals from a set of non-wasting chattels to connected persons with regards to calculating the chargeable gain?

Answer 31

There are special rules where two or more assets forming part of a set of chattels owned by the same person are disposed of to:
* the same person
* persons acting in concert
* persons connected with each other (ie. relatives including in-laws, and business partners)

The disposals are computed separately using the part disposal rules above but treated as one disposal for the £6,000 rules

Question 32

Outline the method for determing the chargeable gains arising from the part-disposals from a set of non-wasting chattels to connected persons

Answer 32

1. Determine the gross proceeds from each part-disposal, the acquisition cost of the set and the market value of the part of the set retained after each part-disposal
2. For the first disposal, plug these numbers into the equation A/A+B where A is gross proceeds of the first part disposal and B is the current market value of part retained to obtain the cost apportionment factor
3. Multiply this factor by the acquisition cost of the set to obtain the apportioned cost of the first part of the set being sold
4. The remaining cost of the set is the original acqusisition cost of the set subtract the apportioned cost of the sold part
5. For each disposal, deduct the acquisition cost from the gross disposal proceeds to obtain the ‘normal’ chargeable gain for each disposal
6. For the set as a whole, add up the total sale proceeds and deduct the original acquisition cost of the set, to get the ‘normal’ chargeable gains for the entire set
7. Consider the £6,000 rules as to which method of calcualtion to use to calculate the chargeable gains - use the appropriate one

FINISH

Question 33

Outline the method for calculating the chargeable gains/allowable losses and taxable gains from the disposal of non-set capital assets

Answer 33

1. First determine which of the £6,000 rule applies
2. IF COST & PROCEEDS < £6000: The disposal is exempt from CGT
3. IF COST & PROCEEDS > £6000: Write out the pro-forma for capital gains computations. Determine the proceeds of the assets disposal. Deduct any incidental costs associated with the disposal to get the net disposal proceeds. Deduct any allowable costs (acquisition cost, incidental costs of acquisition, enhancement expenditure). This will give the chargeable gains. Deduct annual allowance to give taxable gains.
4. IF ONLY COST > £6,000: Write out the pro-forma for capital gains computations. Assume the proceeds of the assets disposal to be £6,000. Deduct any incidental costs associated with the disposal to get the net disposal proceeds. Deduct any allowable costs (acquisition cost, incidental costs of acquisition, enhancement expenditure). This will give the chargeable gains. Deduct annual allowance to give taxable gains.
5. IF GROSS PROCEEDS > £6,000: Write out the pro-forma for capital gains computations. Determine the proceeds of the assets disposal. Deduct any incidental costs associated with the disposal to get the net disposal proceeds. Deduct any allowable costs (acquisition cost, incidental costs of acquisition, enhancement expenditure). Compare this value to the 5/3(GP-6000) computation, the lower of the two will be the chargeable gains. Deduct annual allowance to give taxable gains.