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SQE 1 > Chapter 9 -Capital gains tax & inheritance tax > Flashcards

Chapter 9 -Capital gains tax & inheritance tax Flashcards

1
Q

What is the shortcut for capital gains tax ?

A

CGT

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2
Q

What is the shortcut for business property relief ?

A

BPR

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3
Q

What is the shortcut for Inheritance tax ?

A

IHT

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4
Q

Who is liable to pay capital gains tax ?

A

Chargeable persons/entities

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5
Q

What are they doing with the capital gain tax ?

A

They are collecting it and calculating it

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6
Q

Who are the 4 chargeable people for capital gains tax ?

A

1.individuals including sold readers
2.individual partners
3.trustees
4.personal representatives

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7
Q

Who is paying corporation tax and capital gains on their income profits ?

A

Companies and corporate partners

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8
Q

What is a capital gains tax ?

A

Is a tax on an increase in an asset value during a period of ownership

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9
Q

On what is charged a capital gains tax ?

A

On a chargeable gain

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10
Q

Who is the capital gain tax charged by ?

A

By a chargeable person

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11
Q

On what is made a capital gain ?

A

On a disposal of a chargeable asset

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12
Q

What is property ? Is it a chargeable asset ?

A

Yes, property is a chargeable asset

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13
Q

What is the exception in the chargeable asset ?

A

Sterling

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14
Q

What can chargeable assets include ?

A

They can include tangible and intangible property such as land and shares

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15
Q

What are characterised as wasting assets ?

A

Plant, machinery and motor vehicles because they depreciate over time

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16
Q

How is disposal constructed for capital gain tax and what does it include?

A

Is constructed widely and includes a sale whether at full value or undervalue

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17
Q

What gives rise to Inheritance tax?

A

Death

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18
Q

What is chargeable gains?

A

The part of the gain that is liable to tax

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19
Q

What does CG stand for ?

A

Chargeable gain

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20
Q

What is exempt from chargeable gain ? (cg)

A

An individuals main home, subject to limitations under the property law and practice

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21
Q

What is exempt from Chargeable gain tax ?

A

An individual main home under the property law and practice

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22
Q

What property is then payable on chargeable gain tax ?

A

Is payable on second homes and investment properties

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23
Q

What is the main statute on Chargeable gain tax ?

A

Taxation of Chargeable gains act 1992

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24
Q

What is the tax year for chargeable gains tax ?

A

Same tax year as for the income tax

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25
Q

How does capital gain tax work over years ?

A

It builds up over a period as an asset appreciates of value

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26
Q

How is capital gains tax paid ?

A

In the genuine increase in an asset value

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27
Q

How is done the calculation for capital gains tax ?

A

Disposal value minus allowable expenditure/acquisition cost value equals = basic gain (bg)

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28
Q

At what rates is CG charged ?

A

At the appropriate gain

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29
Q

What is disposal value ?

A

This is the sale price but can be the market value in some circumstances

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30
Q

Which are the circumstances where the disposal value can be at the market value?

A

A gift
A sale at undervalue with a gift element (undervalue to the recipient)
Disposal to a connected person

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31
Q

How is a connected person defined and who does it include ?

A

Spouses and civil partners
Close relatives (parent, children, grandparents, and siblings) NOT including uncles, aunts mixes and nephews

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32
Q

Can you sell a house to your auntie, uncle at the market value ?

A

No, because they are not considered connected person

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33
Q

Which are the 3 categories of allowable expenditure ?

A

Incidental costs of acquisition
Subsequent expenditure
Incidental costs of disposal

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34
Q

Allowance expenditure is something you deduct ?

A

Yes

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35
Q

What does incidental cost of acquisition stand for ?

A

Solicitor and survey fees

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36
Q

What does Subsequent expenditure stand for ?

A

The cost of capital improvements that increase the size of the property (extension) - but it does not include the cost of repair, redecoration or replacement of items even if these make the property more valuable

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37
Q

What does incidental costs of disposal stand for ?

A

Estate agents and solicitor fees

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38
Q

What is basic gain (BG)?

A

The gain that has been made after the acquisition cost and allowable expenditure have been deducted from the disposal value but before applications of relief and exemptions

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39
Q

What is Basic gain in practice ? How you calculate it ?

A

Basic gain you calculate by adding all allowable expenditure ( making an extension and costs to sale a property or to buy a property) adding these together with the cost of the actual property bought minus all allowable expenditures equals basic gain

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40
Q

Give an example explaining basic gain

A

Property bought 100k
Legal fees to buy 3k
Extensions made 50k
Legal fees to sell 2k =155k

Sale price property 300k

BG - 300k-155k = 145K

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41
Q

If a capital loss happens, where is that going to be deducted from?

A

Deducted from gains in the tax year or carried on from future tax

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42
Q

How much chargeable gain for partners ?

A

Each partner is owning a fractional share of each of the chargeable assets

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43
Q

Da n disposal of a partnership, how much is each partner making ?

A

A disposal of their fractional share in an asset

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44
Q

How to calculate basic gain in a partnership ?

A

There are two steps

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45
Q

What is step 1 of calculating basic gain ?

A

Identify the fractional share of capital gain of the partner. (Capital gains are shared equally) unless there an agreement

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46
Q

What is a second step in calculating capital gain in partnership ?

A

Calculate the gain by apportioning the relevant fractional share of the acquisition cost, disposal proceeds and allowable expenditure to the partner

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47
Q

What are gains taxed at ?

A

A fost este if 20%

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48
Q

How much is tax gained at residential property ?

A

28% rate

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49
Q

How often is capital gain tax renewed ?

A

Every year

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50
Q

What can change every year ?

A

Rates
Thresholds
Exemptions

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51
Q

What is imp to know for Sqe ?

A

The annual exemption for the curent tax year

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52
Q

When payimg capital gain tax what does apply to the individual partners?

A

relief and rates apply

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53
Q

What happens when a partner leaves?

A

They are treated as disposing of their proportionate share to the other partners

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54
Q

What happens when a new partner joins? how are they treated?

A

Each partner is treated as disposing of part of their existing share to accommodate the new partner

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55
Q

At how many rates is charged capital gain tax CGT?

A

At 4 main rates

56
Q

Where it applies the 10% rate?

A

Where business asset relief or investor relief applies

Where total taxable income and gains, do not exceed the IT basic rate band

57
Q

Where does the 20% rate apply?

A

On the amount over the threshold, where total taxable income and gains exceed the IT basic rate band (HRT)

58
Q

Where is the tax rate of 18% and 28% apply?

A

Where the property is residential property, an 8% surcharge, on the normal rate applies

59
Q

How much is charged gains by trustees and personal representatives?

A

A flat rate of 20%

60
Q

What can you assume with CGT?

A

That the Capital Gains so not arise from residential property and that business disposal relief does not apply

61
Q

How many CGT reliefs/exemptions are there?

A

9

62
Q

What does BADR stand for? (exemption)

A

Business asset disposal relief

63
Q

What does AE stand for?

A

Annual Exemption

64
Q

HOR?

A

Hold-over relief

65
Q

ROR?

A

Roll-over relief on replacement of business assets

66
Q

DR?

A

Deferral relief on reinvestment in EIS shares

67
Q

IR?

A

Investor’s relief

68
Q

RORIB?

A

Roll-over relief on incorporation of business

69
Q

Which are the last 2 reliefs/exemptions?

A

Transfer between spouses, buyback of shares

70
Q

When was BADR introduced and what was it known by?

A

6 April 2008 and was known as Entrepreneurs relief

71
Q

Where does BADR apply?

A

Where there is a qualifying business disposal

72
Q

QDB?

A

Qualifying business disposal

73
Q

How many transactions does the QBD (Qualifying business disposal) include?

A

3 types of transaction

74
Q

Which is the first type of payment for QBD?

A

The sale or gift of the whole or part of a business carried on as a sole trader or in partnership provided that the business has been owned for at least two years prior to the disposal

75
Q

What is the second type of transaction for QBD?

A

The sale or gift of shares in a company

76
Q

What are the conditions required for a second transaction for QBD?

A

The company is a trading company
the shareholdings represents at least 5% of the company’s ordinary voting shares with the right to at least 5% of the profits/assets or sale proceeds of the company
The individual is an employee or officer of the
company
These conditions have been satisfied for at least the 2 years prior to disposal

77
Q

What is the 3rd type of transaction on QBD?

A

The sale or gift assets used by such a trading company or partnership business, but owned individually by the partner or shareholder.

78
Q

When are such disposals qualify?

A

They qualify if they are associated with another qualifying disposal and involve reducing their share in the company business by at least 5%.

79
Q

What is the condition for payment 3 type?

A

The assets must have been owned for a t least 3 years and used by business throughout the previous 2 years

80
Q

Which are the gains that are taxed first?

A

BADR

81
Q

What is the limit on tax for qualifying gains?

A

1 milion will be taxed at a 10% rate

82
Q

What can be used against qualifying gains to prove tax is being paid ?

A

The annual exemption

83
Q

What is the time limit for making a claim ?

A

Before and on 31st January following the tax year of the disposal

84
Q

Who has annual exemption?

A

Each individual

85
Q

What is the amount an individual can make each year without being subject to capital gain tax?

A

£12,300 for the tax year 2021/22

86
Q

What happens to the unused AE? can you carry forward?

A

No, it cannot.

87
Q

When can the AE be used?

A

When the tax is paid, not when liability to tax is being held-over, rolled-over or deferred.

88
Q

When can the AE be used against CG?

A

When the rate of tax would be higher in order to save tax

89
Q

To whom is available a HOR?

A

Is available to an individual who disposes of a business asset by way of gift (or at undervalue if there is a gift element) provided both parties elect for it to apply

90
Q

Why is the election very important?

A

The transferee agress to take on teh transferor’s tax liability. It must be made within 4 years from the end of tax year in which the disposal was made

91
Q

Why cannot AE. or BADR can’t be used in conjunction with HOR?

A

Because the gain is being help-over so tax is not being paid.

92
Q

Which can be applied on the subsequent disposal of the asset?

A

AE and BADR

93
Q

What is the effect of ROR?

A

Is to postpone the potential payment of CGT until the replacement asset is sold.

94
Q

When is ROR available?

A

When qualifying business asset QBA is sold and the proceeds of sale are then used to buy another QBS, usually within one year before or 3 years after the sale of the original asset.

95
Q

What does QBA stand for?

A

Qualifying business asset

96
Q

What do QBS include?

A

Assests used in a trade (buildings,lands)

97
Q

Are the Company shares qualifying assets?

A

Company shares are NOT qualifying assets

98
Q

Can AE or BADR used in conjunction with ROR?

A

No

99
Q

Why does AE and BADR cannot be used in conjunction with ROR?

A

Because the gain is being rolled over so tax is not being paid

100
Q

When can ROR must be claimed?

A

Within 4 years from the end of the tax year in which the replacement asset was aquired

101
Q

What does DR stand for?

A

Deferral relief

102
Q

What is the effect of the Deferral relief?

A

Is to postpone the potential payment of CGT until Enterprise Investment Scheme shares are sold

103
Q

What does EIS stand for?

A

Enterprise Investment Sheme

104
Q

When is DR available?

A

Following a disposal of any asset by an individual who then reinvests the proceeds of sale in buying EIS shares within one year before or within 3 years after the sale of the original asset

105
Q

What does EIS offer?

A

EIS offers tax relief to individual investors who buy new shares in a company, whose shares are part of the scheme.

106
Q

Can AE and BADR be used in conjunction with DR? Why?

A

No because the gain is being deferred, so tax is not being paid.

107
Q

What can BADR and AE do instead?

A

Can be applied on the subsequent disposal of the asset.

108
Q

What does IR stand for?

A

Investor’s Relief

109
Q

How does IR work?

A

Same as BADR

110
Q

What can IR can be used for?

A

For gain made on the disposal of qualifying shares in unlisted trading companies

111
Q

Do shares need to be fully paid?

A

Yes

112
Q

For how long do the shares must have been held by the investor?

A

For at least 3 years from 6 April 2026

113
Q

What happens to the IR. because of the time restriction?

A

IR will become more important over time

114
Q

What is the percentage that applies to the gain?

A

A special rate of 10% applies to the gain

115
Q

What does RORIB stand for?

A

Roll over relief on incorporation of a business

116
Q

To what does RORIB apply?

A

To postpone the potential payment of GT when an unincorporated business is incorporated

117
Q

What is the rationale behind RORIB?

A

Is to encourage businesses to expand

118
Q

Where does RORIB applies?

A

Applies where there is a transfer of a business as a going concern with all of its assets (cash is ignored). It applies to the extent that the business is transferred in consideration of shares

119
Q

How does RORIB works?

A

Same as ROR

120
Q

Can BADR and AE be used in conjunction with RORIB?

A

No

121
Q

How are the transfer between sposes to be made?

A

With no gain or loss

122
Q

What happens to the liability of tax?

A

Is deferred until the eventual disposal of the item

123
Q

What does buyback o shares involve?

A

The payment of IT by the shareholder, as the consideration os taxed as a dividend.

124
Q

Are there any circumstances where CGT will be payable?

A

Yes

125
Q

When are the situations when CGT is payable?

A

The company is unlisted trading company
The buyback is to benefit the trade
The shares have been owned for at least 5 years
The shareholding must be reduced by at least 25% to a max of 30% of the company’s shares

126
Q

What is CGT part of?

A

Is part of the self-assessment sheme

127
Q

By when is CGT payable?

A

By 31st Jan following the end of the tax year

128
Q

When does tax needs to be paid where CGT is payable ?

A

Within 30 days of the completion of the sale of a residential property

129
Q

When paying CGT are instalment options available?

A

Yes

130
Q

What rule applies to CGT?

A

The general anti-avoidance rule and HMRC may make adjustments to liability when required

131
Q

Business property relief provides relief from?

A

From Inheritance tax

132
Q

What does death give rise to?

A

To a charge for inheritance tax

133
Q

On what value does the personal representative acquire property?

A

On the market value

134
Q

What does it need to happen for a relief to apply?

A

The assets must have been owned for at least 2 years or be replacement for assets within a combined period of ownership of more than 2 years

135
Q
A

SQE 1 (12 decks)

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