Chapter 9 -Capital gains tax & inheritance tax Flashcards
What is the shortcut for capital gains tax ?
CGT
What is the shortcut for business property relief ?
BPR
What is the shortcut for Inheritance tax ?
IHT
Who is liable to pay capital gains tax ?
Chargeable persons/entities
What are they doing with the capital gain tax ?
They are collecting it and calculating it
Who are the 4 chargeable people for capital gains tax ?
1.individuals including sold readers
2.individual partners
3.trustees
4.personal representatives
Who is paying corporation tax and capital gains on their income profits ?
Companies and corporate partners
What is a capital gains tax ?
Is a tax on an increase in an asset value during a period of ownership
On what is charged a capital gains tax ?
On a chargeable gain
Who is the capital gain tax charged by ?
By a chargeable person
On what is made a capital gain ?
On a disposal of a chargeable asset
What is property ? Is it a chargeable asset ?
Yes, property is a chargeable asset
What is the exception in the chargeable asset ?
Sterling
What can chargeable assets include ?
They can include tangible and intangible property such as land and shares
What are characterised as wasting assets ?
Plant, machinery and motor vehicles because they depreciate over time
How is disposal constructed for capital gain tax and what does it include?
Is constructed widely and includes a sale whether at full value or undervalue
What gives rise to Inheritance tax?
Death
What is chargeable gains?
The part of the gain that is liable to tax
What does CG stand for ?
Chargeable gain
What is exempt from chargeable gain ? (cg)
An individuals main home, subject to limitations under the property law and practice
What is exempt from Chargeable gain tax ?
An individual main home under the property law and practice
What property is then payable on chargeable gain tax ?
Is payable on second homes and investment properties
What is the main statute on Chargeable gain tax ?
Taxation of Chargeable gains act 1992
What is the tax year for chargeable gains tax ?
Same tax year as for the income tax
How does capital gain tax work over years ?
It builds up over a period as an asset appreciates of value
How is capital gains tax paid ?
In the genuine increase in an asset value
How is done the calculation for capital gains tax ?
Disposal value minus allowable expenditure/acquisition cost value equals = basic gain (bg)
At what rates is CG charged ?
At the appropriate gain
What is disposal value ?
This is the sale price but can be the market value in some circumstances
Which are the circumstances where the disposal value can be at the market value?
A gift
A sale at undervalue with a gift element (undervalue to the recipient)
Disposal to a connected person
How is a connected person defined and who does it include ?
Spouses and civil partners
Close relatives (parent, children, grandparents, and siblings) NOT including uncles, aunts mixes and nephews
Can you sell a house to your auntie, uncle at the market value ?
No, because they are not considered connected person
Which are the 3 categories of allowable expenditure ?
Incidental costs of acquisition
Subsequent expenditure
Incidental costs of disposal
Allowance expenditure is something you deduct ?
Yes
What does incidental cost of acquisition stand for ?
Solicitor and survey fees
What does Subsequent expenditure stand for ?
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
What does incidental costs of disposal stand for ?
Estate agents and solicitor fees
What is basic gain (BG)?
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
What is Basic gain in practice ? How you calculate it ?
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
Give an example explaining basic gain
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
If a capital loss happens, where is that going to be deducted from?
Deducted from gains in the tax year or carried on from future tax
How much chargeable gain for partners ?
Each partner is owning a fractional share of each of the chargeable assets
Da n disposal of a partnership, how much is each partner making ?
A disposal of their fractional share in an asset
How to calculate basic gain in a partnership ?
There are two steps
What is step 1 of calculating basic gain ?
Identify the fractional share of capital gain of the partner. (Capital gains are shared equally) unless there an agreement
What is a second step in calculating capital gain in partnership ?
Calculate the gain by apportioning the relevant fractional share of the acquisition cost, disposal proceeds and allowable expenditure to the partner
What are gains taxed at ?
A fost este if 20%
How much is tax gained at residential property ?
28% rate
How often is capital gain tax renewed ?
Every year
What can change every year ?
Rates
Thresholds
Exemptions
What is imp to know for Sqe ?
The annual exemption for the curent tax year
When payimg capital gain tax what does apply to the individual partners?
relief and rates apply
What happens when a partner leaves?
They are treated as disposing of their proportionate share to the other partners
What happens when a new partner joins? how are they treated?
Each partner is treated as disposing of part of their existing share to accommodate the new partner
At how many rates is charged capital gain tax CGT?
At 4 main rates
Where it applies the 10% rate?
Where business asset relief or investor relief applies
Where total taxable income and gains, do not exceed the IT basic rate band
Where does the 20% rate apply?
On the amount over the threshold, where total taxable income and gains exceed the IT basic rate band (HRT)
Where is the tax rate of 18% and 28% apply?
Where the property is residential property, an 8% surcharge, on the normal rate applies
How much is charged gains by trustees and personal representatives?
A flat rate of 20%
What can you assume with CGT?
That the Capital Gains so not arise from residential property and that business disposal relief does not apply
How many CGT reliefs/exemptions are there?
9
What does BADR stand for? (exemption)
Business asset disposal relief
What does AE stand for?
Annual Exemption
HOR?
Hold-over relief
ROR?
Roll-over relief on replacement of business assets
DR?
Deferral relief on reinvestment in EIS shares
IR?
Investor’s relief
RORIB?
Roll-over relief on incorporation of business
Which are the last 2 reliefs/exemptions?
Transfer between spouses, buyback of shares
When was BADR introduced and what was it known by?
6 April 2008 and was known as Entrepreneurs relief
Where does BADR apply?
Where there is a qualifying business disposal
QDB?
Qualifying business disposal
How many transactions does the QBD (Qualifying business disposal) include?
3 types of transaction
Which is the first type of payment for QBD?
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
What is the second type of transaction for QBD?
The sale or gift of shares in a company
What are the conditions required for a second transaction for QBD?
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
What is the 3rd type of transaction on QBD?
The sale or gift assets used by such a trading company or partnership business, but owned individually by the partner or shareholder.
When are such disposals qualify?
They qualify if they are associated with another qualifying disposal and involve reducing their share in the company business by at least 5%.
What is the condition for payment 3 type?
The assets must have been owned for a t least 3 years and used by business throughout the previous 2 years
Which are the gains that are taxed first?
BADR
What is the limit on tax for qualifying gains?
1 milion will be taxed at a 10% rate
What can be used against qualifying gains to prove tax is being paid ?
The annual exemption
What is the time limit for making a claim ?
Before and on 31st January following the tax year of the disposal
Who has annual exemption?
Each individual
What is the amount an individual can make each year without being subject to capital gain tax?
£12,300 for the tax year 2021/22
What happens to the unused AE? can you carry forward?
No, it cannot.
When can the AE be used?
When the tax is paid, not when liability to tax is being held-over, rolled-over or deferred.
When can the AE be used against CG?
When the rate of tax would be higher in order to save tax
To whom is available a HOR?
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
Why is the election very important?
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
Why cannot AE. or BADR can’t be used in conjunction with HOR?
Because the gain is being help-over so tax is not being paid.
Which can be applied on the subsequent disposal of the asset?
AE and BADR
What is the effect of ROR?
Is to postpone the potential payment of CGT until the replacement asset is sold.
When is ROR available?
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.
What does QBA stand for?
Qualifying business asset
What do QBS include?
Assests used in a trade (buildings,lands)
Are the Company shares qualifying assets?
Company shares are NOT qualifying assets
Can AE or BADR used in conjunction with ROR?
No
Why does AE and BADR cannot be used in conjunction with ROR?
Because the gain is being rolled over so tax is not being paid
When can ROR must be claimed?
Within 4 years from the end of the tax year in which the replacement asset was aquired
What does DR stand for?
Deferral relief
What is the effect of the Deferral relief?
Is to postpone the potential payment of CGT until Enterprise Investment Scheme shares are sold
What does EIS stand for?
Enterprise Investment Sheme
When is DR available?
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
What does EIS offer?
EIS offers tax relief to individual investors who buy new shares in a company, whose shares are part of the scheme.
Can AE and BADR be used in conjunction with DR? Why?
No because the gain is being deferred, so tax is not being paid.
What can BADR and AE do instead?
Can be applied on the subsequent disposal of the asset.
What does IR stand for?
Investor’s Relief
How does IR work?
Same as BADR
What can IR can be used for?
For gain made on the disposal of qualifying shares in unlisted trading companies
Do shares need to be fully paid?
Yes
For how long do the shares must have been held by the investor?
For at least 3 years from 6 April 2026
What happens to the IR. because of the time restriction?
IR will become more important over time
What is the percentage that applies to the gain?
A special rate of 10% applies to the gain
What does RORIB stand for?
Roll over relief on incorporation of a business
To what does RORIB apply?
To postpone the potential payment of GT when an unincorporated business is incorporated
What is the rationale behind RORIB?
Is to encourage businesses to expand
Where does RORIB applies?
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
How does RORIB works?
Same as ROR
Can BADR and AE be used in conjunction with RORIB?
No
How are the transfer between sposes to be made?
With no gain or loss
What happens to the liability of tax?
Is deferred until the eventual disposal of the item
What does buyback o shares involve?
The payment of IT by the shareholder, as the consideration os taxed as a dividend.
Are there any circumstances where CGT will be payable?
Yes
When are the situations when CGT is payable?
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
What is CGT part of?
Is part of the self-assessment sheme
By when is CGT payable?
By 31st Jan following the end of the tax year
When does tax needs to be paid where CGT is payable ?
Within 30 days of the completion of the sale of a residential property
When paying CGT are instalment options available?
Yes
What rule applies to CGT?
The general anti-avoidance rule and HMRC may make adjustments to liability when required
Business property relief provides relief from?
From Inheritance tax
What does death give rise to?
To a charge for inheritance tax
On what value does the personal representative acquire property?
On the market value
What does it need to happen for a relief to apply?
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
