M9: CGT

Question 1

What amount is subject to capital gains tax for a tax year?

(CAB) (CY, AEA, B/f)

Answer 1

Chargeable gains for the current year X
- Less capital losses for the current year (X)

= Net chargeable gain for the current year X

• Less annual exempt amount (AEA) (X)/ X
• Less unused capital losses from earlier years (X)

= Taxable gain for the year X

Question 2

What causes a chargeable gain or capital loss to happen?

Answer 2

A chargeable gain or capital loss only arises when there is a:
1. chargeable person
2. making a chargeable disposal
3. of a chargeable asset.

Question 3

What are the main exempt assets?

Answer 3

 Sterling currency.
 Foreign currency for personal use.
 Decorations awarded for valour, ie war medals, unless acquired by purchase.
 Betting and lottery winnings.
 Passenger vehicles (including vintage cars).
 Wasting chattels, and non-wasting chattels in certain situations
 Disposals within an Individual Savings Account (ISA).

Question 4

How do we calculate each chargeable gain or capital loss?

Answer 4

Disposal value (eg gross sale proceeds)
- Less incidental costs of disposal

= Net sale proceeds (‘NSP’)

Less ‘Cost’:
- Acquisition cost
- Incidental costs of acquisition
- Enhancement expenditure

= Chargeable gain/(capital loss)

Ace cost*:
1. The purchase price if bought at full market value.
2. The market value at date of receipt if gifted or purchased at less than market value.
3. The probate value, ie value when inherited, if inherited from someone on their death.

Question 5

How can capital losses be used?

Answer 5

Can only be offset against gains.

Question 6

How do we deal with disposals to connected persons?

Answer 6

We use the MV at Gift date.

Question 7

When does a chargeable gain need to be reported?

Answer 7

Same time as annual person tax return

or

Within six months of the end of that tax year.
(5th OCTOBER)

Or

Notify and pay within 60 days of disposal if Residential UK property

Question 8

What is the annual exempt amount and when is it used?

Answer 8

£6,000 (on tax rates sheet)

Used to deduct amount before taxable gain figure:

FORMULA: Chargeable gain - AEA = Taxable gain

Question 9

Where would a trading loss be inserted into the CGT preforms?

Answer 9

After CY Capital losses

e.g.

Chargeable gain = X
- CY Capital losses
- TRADING LOSS FOR YEAR

= Net chargeable gain for CY

Question 10

When is no reporting required for CGT?

(2 rules)

Answer 10

1. Where an individual’s total chargeable gains (before deduction of losses) do not exceed £6,000, and
2. the proceeds received on the sale, or market value, of these assets do not exceed £50,000.

Question 11

When does capital gains tax need to be paid?

Answer 11

31st January.

or 60 days of property sale

Question 12

What are the capital gains tax rates?

Answer 12

10% up to BR limit of 50,270 (37,700)

20% after that

IF PROPERTY:
- 18% UP UNTIL BR LIMIT
- 28% AFTER LIMIT

Question 13

How are the AEA and capital losses allocated across chargeable gains in the CGT calculation?

Answer 13

Use allowance and losses against Residential property first as these are the highest rates of 18% up till BR limit of 37,700 and 28% thereafter.

NEW PROFORMA:

Type/Residental property/Other gains/ Total

Question 14

How do we treat transfers of assets (disposals) to a spouse or civil partner?

Answer 14

No Gain No Loss

• Only if there is no stipulation that the gift is reserved for original person. e.g. unconditional giving

Question 15

What happens if we only dispose of part of an asset?

+ Formula for this?

Answer 15

Only part of costs are deductible in the CGT Computation.

Formula:
£ Original cost x A/A+B

Question 16

How is the disposal of a leasehold dealt with?

Answer 16

Same as normal chargeable if lease >50yrs.

We adjust it similar to part disposal if its a short lease <50 years using formula and cost table

FORMULA:
Cost x % of lease remaining / %of lease original

or Cost x Yrs remaining/Years total when bought

Question 17

What if a lease being disposed of has a life that is not a full number of years?

Answer 17

% for lower yrs and find difference between 2 numbers x Prorate months

e.g. 32 years 6 months

32 years and 33 (90.280 - 89.354) = 0.926 x N/12

Question 18

How do we classify chattels into two sub-topics?

Answer 18

1. Wasting <50yrs useful life
2. Non-wasting >50yrs useful life

Question 19

How are the disposal of chattels treated for tax purposes?

Answer 19

First decide:
1. Whether or not the chattel is wasting.
2. The level of the gross proceeds and cost of the asset.

1. Exempt the chargeable gain or ignore the capital loss where gross proceeds do not exceed £6,000 and cost is below £6,000.
2. Restrict a capital loss arising on any asset with proceeds below £6,000 by deeming the gross proceeds to be £6,000.
3. limit a chargeable gain arising on any chattel with gross proceeds above £6,000 to 5/3  (gross proceeds – £6,000)*.
4. apply the usual rules for chargeable gains and capital losses where gross proceeds exceed £6,000 and cost is at least £6,000.

Question 20

What is a chattel?

Answer 20

A chattel is tangible moveable property (an asset which can be seen, touched and moved) and has special chargeable gains rules attaching to it.

Question 21

What does case law say about chattels?

Answer 21

Anything with moving parts is always WASTING chattel.

Question 22

How do we know which shares have been sold?

(Identification rules)

Answer 22

Disposed off in the following order:

1. Shares acquired on the same day as the disposal;
2. Shares acquired within the following 30 days (earliest first) to combat tax avoidance;
3. Shares acquired before the date of sale (using a “pooling” technique).

Question 23

What if an individual has received shares via a bonus or rights issue?

Answer 23

Bonus issue: Free shares so there’s no cost, shares increase though

Rights issue: More shares and more money as its usually offered to existing shareholders to buy below MV for these rights.

Question 24

What are the three types of CGT relief?

Answer 24

1. Private residence relief (PRR)
2. Gift relief
3. Business Asset Disposal Relief (BADR)

Question 25

Does an individual have to pay tax when they dispose of their home?

(PRR Formula)

Answer 25

As long as they have lived in the house throughout and there isn’t empty periods then its not chargeable.

If absent:
- Calculate gain and deduct PRR for the relevant period(s) of occupation.

FORMULA PRR: (Period of occupation / Period of ownership) x chargeable gain

Question 26

What does period of occupation mean?

Answer 26

Period of occupation = Actual + Deemed

Actual occupation = (Actually lived there)

+ Deemed occupation = According to rules can use e.g. 9 months after

Question 27

What periods of absence can be treated as periods of occupation?

Answer 27

ON TAX SHEETS

• Up to 3 yrs any reason
• Any period working abroad as employee
• 4 years working in UK self-employed or employed
• Final 9 months of ownership

Question 28

What is gift relief?

Answer 28

Gift relief is a way that chargeable gains arising when certain types of assets are gifted (or sold for less than their market value) can be deferred.

Question 29

What can gift relief only be used on?

Answer 29

Gift relief will only be available to defer chargeable gains on ASSETS USED IN A TRADE.

Gains on assets held as investments do not qualify for gift relief.

Question 30

How does gift relief work?

Answer 30

It defers the chargeable gain by the difference between the MV of the asset and the price paid.

E.g. a £100,000 MV Asset is gifted and bought for 50k by recipient. There is a £50,000 chargeable gain but Gift relief means it is reduced to Nil until it is later disposed of and then added back on.

Question 31

What is the time limit for a joint claim on gift relief?

Answer 31

The joint claim must be made within four years of the end of the year of the disposal, ie by 5 April 2028 for gifts in 2023/24.

Question 32

What happens if the disposal is not an outright gift, when it comes to gift relief?

Answer 32

Then it becomes a partial consideration where we record the excess proceeds received over the cost amount as the chargeable gain for the owner.

As they received cash in hand they are expected to pay some now.

Question 33

What is Business Asset Disposal Relief (BADR)?.

Answer 33

Individual sells or gifts a qualifying business asset available for owners who have owned the business for 24 months through to the period of selling.

Question 34

What is the time limit for claiming BADR?

Answer 34

Must be made within 12 months of 31st January following the tax year of the disposal.

i.e. Disposal in Mar 24 = April 24 Tax year date. 12 months after 31st January 2025 therefore must be made by 31st January 2026.

Question 35

What are the rates for BADR relief and lifetime limit?

Answer 35

Any gains which qualify for BADR will be taxed at a preferential 10% rate regardless of the level of taxable income.

This applies to the first £1 million of gains lifetime allowance.