Computation of gains and tax payable

Question 1

What is capital gains tax charged?

Answer 1

• is charged on gains arising on chargeable persons making chargeable disposals of chargeable assets

Question 2

Chargeable persons regarding disposals by individuals:

Answer 2

• individuals who are UK resident in the tax year in which the disposal takes place are subject to capital gains tax on their gains
• UK resident individuals are subject to UK CGT on all disposals of chargeable assets, regardless of where in the world the assets are situated
• Non-UK resident only pay UK CGT on disposal of interests in UK land

Question 3

Chargeable disposal:

Answer 3

1. sale or gift of the whole or part of an asset
2. exchange of an asset
3. loss or total destruction of an asset
4. receipts of a capital sum derived from an asset, for example:
   - compensation received for damage to an asset
   - receipts for the surrender of rights to an asset

Question 4

Exempt disposal

Answer 4

1. disposals as a result of the death of an individual
2. gifts to charities

Question 5

Chargeable assets:

Answer 5

• freehold land and buildings
• goodwill
• unquoted shares
• quoted shares
• certain types of chattels
  Chattels are tangible moveable assets (furniture, plant and machinery)

Question 6

Exempt assets:

Answer 6

• motor vehicles (include vintage cars)
• main residence
• cash
• certain types of chattels
• investment held within an ISA
• qualifying corporate bonds
• gilt-edged securities
• NS&I certificates
• foreign currency for private use
• receivables
• trading inventory
• prizes and betting winnings

Question 7

An individual is subject to capital gain tax on:

Answer 7

• the total taxable gains arising on the disposal of all assets in a tax year

Question 8

The following steps are carried out to compute the capital gains tax payable by an individual for a tax year:

Answer 8

Step1: Calculate the chargeable gain/allowable loss arising on the disposal of each chargeable asset separately
Step2: Calculate the net chargeable gains arising in tax year = chargeable gains less allowable losses
Step3: Deduct the annual exempt amount
Step4: Deduct capital losses brought forward = taxable gains
Step 5: Calculate the CGT payable for the tax year

Question 9

Pro forma - individual - step 1

Answer 9

Disposal proceeds x
Less: Allowable selling cost (x)
= Net disposal proceeds x
Less: Allowable expenditure x
Cost of acquisition x
Incidental costs of acquisition x
Additional(capital) enhancement expen. x
(x)
Chargeable gain/allowable loss x/(x)

Question 10

Allowable expenditure deductions:

Answer 10

• cost of acquisition ( purchase cost)
• expenditure on enhancing the value of the asset (improvement expenditure)
• expenditure incurred to establish, preserve or defend the taxpayer’s title to the asset
• incidental costs arising on the acquisition of the asset

Question 11

Incidental costs arising on disposal - example

Answer 11

• auctioneer’s fees, estate agent fees

Question 11

Market value is substituted for actual gross proceeds received where:

Answer 11

• the deal was not made at arm’s length (gift)
• the law assumes that it was not made at arm’s length (transfers between connected parties)

Question 12

Where an individual inherits an asset on death:

Answer 12

• the cost of acquisition = market value of the asset at the date of the death (i.e. probate value)

Question 12

Where an individual acquires an asset as a gift ( or from a sale for less than market value) :

Answer 12

• the cost of acquisition = market value of the asset at the date of the gift (or sale at undervaluation)

Question 13

Annual exempt amount for capital gains tax

Answer 13

• for 2022/23, the AEA is £12,300
• the AEA is deducted from net chargeable gains for the tax year, i.e. after current year capital losses but before capital losses brought forward
• if AEA not used in particular year, then it’s wasted

Question 13

Prof forma capital gains tax payable computation

Answer 13

Net chargeable gains for the tax year x
Less: Annual exempt amount (12,300)
= x
Less: Capital losses brought forward (x)
= Taxable gains x
CGT liability
( taxable gains x appropriate tax rate) x
Less: Payment on account re residential property disposals (x)
= CGT payable x

Question 14

What mean chargeable gain?

Answer 14

• the gain before deducting the annual exempt amount and any brought forward capital losses

Question 14

Capital losses arising on assets in the current year are set off:

Answer 14

• against chargeable gains arising in the same tax year
• to the maximum possible extent (i.e. they cannot be restricted to avoid wasting all or part of the AEA

Question 15

CGT is payable on the taxable gains arising in a tax year as follows:

Answer 15

• the rate of CGT is dependent upon the amount of taxpayer’s total taxable income (i.e. after deduction of the personal allowance) and the type of assets disposed of
• taxable gains are taxed after taxable income, but do not combine income and gains in one computation
• where taxable gains fall into the basic rate band, CGT is at 10%
• to the extent that any gains exceed the basic rate band, they are taxed at 20%
• higher rates of CGT apply to certain residential property
• if the basic rate band is extended due to gift aid donations or personal contributions, the extended basic rate band is also used to establish the rate of CGT
• any unused income tax personal allowance cannot be used to reduce taxable gains

Question 15

What means taxable gains?

Answer 15

• the gain after deduction the annual exempt amount and any brought forward capital losses

Question 15

The rates of CGT

Answer 15

Gain falling in basic rate
- normal rates 10%
- residential property rates 18%
Gain in excess of basic rate band
- normal rates 20%
- residential property rates 28%

Question 16

What should be firstly offset of AEA and capital losses in order to maximise the reliefs?

Answer 16

• they should offset firstly against residential property gains, as they are taxable at higher rates than other gains

Question 17

UK residential property disposals when should be reported to HMRC?

Answer 17

• must be reported to HM Revenue and Customs within 60 days of completion, along with a payment on account of the relevant CGT liability
• the rate of CGT is determined using an estimate of the individual’s income at the time of the disposal to estimate how much basic rate band will be remaining

Question 18

Is CGT included in the final tax return?

Answer 18

• all disposals made during a tax year (including any residential property disposals) are included in the final tax return.
  Any payment on account made is deducted from the CGT liability to reach the final amount of CGT payable.

Question 19

Payment of CGT is due?

Answer 19

• on 31 January following the tax year
  (i.e. 31 January 2024 for 2022/23)
• payments on account for UK residential property are deducted from the final liability

Question 20

Delaying disposals until the following tax year - tax saving

Answer 20

If the AEA has already been utilised in a particular tax year, delaying disposal of an asset until the following tax year will:
- allow the offset of the later year’s AEA against any gain arising
- thereby saving tax on a further £12,300
If the individual is a basic rate taxpayer, and taxable income is lower in subsequent tax year, delaying the disposal would meant that:
- more of the basic rate band would be available
- more of the resulting taxable gain could be taxed at 10% ( or 18% for residential property)

Question 21

Delaying disposals until the following tax year - cash flow advantage

Answer 21

If disposal later in the tax year can be delayed until 6 April 2023 or later:
- the gain is realised in the tax year 2023/24
- any CGT is payable one year later, by 31 January 2025