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:

1. individuals
2. business partners, who are each treated as owning a share of partnership assets and taxed individually on the disposal of that share.
3. companies, which normally pay corporation tax, not CGT, on their chargeable gains, and
   which do not receive an annual exempt amount

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

1. the sale of the whole or part of an asset
2. the gift of the whole or part of an asset
3. the loss or destruction of the whole or part of an asset

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 tax-free uplift upon death?

Answer 9

The people entitled to receive the assets from the estate of the deceased person will acquire those assets at probate value (market value at the date of death).

This is sometimes called the tax-free uplift on death.

Question 10

What is the date of disposal?

Answer 10

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 11

Define chargeable assets?

Answer 11

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 12

List the exempt assets?

Answer 12

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 13

How is a gain or loss calculated?

Answer 13

A gain or loss is calculated by deducting allowable costs from disposal consideration.

Question 14

What is the disposal consideration?

Answer 14

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.

Question 15

What are allowable costs?

Answer 15

Allowable costs include costs of acquiring the asset and cost of enhancing its value.

Question 16

What are incidental costs?

Answer 16

From the disposal value, incidental costs of disposal can be deducted to give the net disposal consideration.

Incidental costs of disposal include legal fees, estate agents’ and auctioneers’ fees and advertising costs.

Question 17

What are allowable costs?

Answer 17

In order to calculate a gain or loss, you need to deduct allowable costs from the net disposal consideration.

Allowable costs are:

1. Acquisition cost of the asset: purchase price if bought, market value of asset if gifted, probate value if acquired on death
2. Incidental costs of acquisition such as legal fees, surveyor’s or valuer’s fees, stamp duty land tax, stamp duty
3. 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 18

What is the annual exempt amount for CGT for individuals?

Answer 18

Each individual is entitled to an annual exempt amount each tax year. For 2019/20 the annual exempt amount is £12,000.

Question 19

What is the treatment for the annual exempt amount?

Answer 19

The annual exempt amount is deducted from chargeable gains to produce gains liable to CGT,
called taxable gains..

If the annual exempt amount is unused in a year it is wasted, and cannot be used in any other tax
year.

Question 20

How are individuals taxed on their taxable gains?

Answer 20

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

Question 21

What is the rate at which taxable gains are taxed?

Answer 21

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 22

What are chattels?

Answer 22

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

Question 23

What are wasting chattels?

Answer 23

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 24

What are non-wasting chattels?

Answer 24

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 25

Are wasting chattels exempt from CGT?

Answer 25

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 26

Are non-wasting chattels chargeable to CGT?

Answer 26

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

1. 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.
2. If the asset is disposed 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 x (Gross proceeds less £6,000)

Question 27

What if the chattel is sold for less than £6,000?

Answer 27

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. This rule cannot turn a loss
into a gain, only reduce the amount of the loss to nil.

Question 28

What is the difference between chargeable gain and taxable gain?

Answer 28

Taxable gain = Chargeable gain - annual exempt amount