Module 2 - Capital Gains Tax

Question 1

What 3 things must there be for CGT to be due?

Answer 1

► A chargeable disposal, of
► A chargeable asset, by
► A chargeable person

Question 2

When an asset is sold what is the date of the disposal for CGT and what can this mean?

Answer 2

the date of the disposal for CGT is the date the contract becomes binding and not the date on which funds are received.

If you consider this for a second you can see the potentialproblem. Should the contract become binding today, but payment not be received for 2 years, the tax will be due before the money comes in.

This can be a consideration in contract discussions.

Question 3

Generally speaking, are disposals between spouses / civil partners CGT exempt?

Answer 3

Yes

Question 4

In relation to disposals between spouses / civil partners - what is the caveat for the disposal to be CGT free?

Answer 4

The transfer has to occur in a tax year in which the two were living together.

Question 5

Just Read

Answer 5

Where such a transfer is exempt, the receiving spouse is deemed to acquire the asset at the original purchase price when the first partner acquired the asset.

This effectively passes the gain on to the spouse who will then pay CGT on the gain over the combined period of ownership on a later disposal.

Question 6

Aside from disposals between spouses / civil partners - what other disposal will not attract CGT?

Answer 6

A disposal on death.

This is really important since it is a factor which must be considered in broader financial planning.

For instance, where someone is looking to fund for Long Term Care, they may be better advised not to touch an investment portfolio with a large Capital Gain, since this gain will be washed out on death.

Instead, other assets (even, in some cases ISAs) might be better used for this purpose.

Question 7

How is the value of a transaction for CGT purposes USUALLY determined?

Answer 7

It will usually be the price paid between the parties.

Question 8

How is the value of a transaction for CGT purposes USUALLY determined? And then what is the main exception?

Answer 8

It will usually be the price paid between the parties. The main exception to this is where the transaction is between connected persons.

Question 9

When a transaction is between connected persons, how is value determined? What is this kind of transaction called?

Answer 9

In these cases, the disposal proceeds will be the market value not the actual proceeds. This is to prevent undervalue transactions from taking place between connected persons, delaying tax take to HMRC. These transactions are known as ‘not at arms length’ transactions.

Question 10

In regards to future payments as part of a transaction - If the future sums to be paid are of a known amount, how should tax be levied?

Answer 10

These should be included in the seller’s tax return for the year of sale

Question 11

In regards to future payments as part of a transaction - If the future consideration is not a known amount, perhaps because it depends on future profits - how should tax be levied?

Answer 11

It’s necessary to consider whether the right to the income could be sold in the open market. If the future income COULD be sold (i.e. a value canbe assigned to it now), then the present value of the right should be included in the current year’s taxreturn

Question 12

In regards to future payments as part of a transaction - Where the consideration is not known and noopen market value could be assigned - how should tax be levied?

Answer 12

It will be included in the tax return in the year it is received.

Question 13

Not all assets will attract CGT. The main exemptions to consider are: (8 in total)

Answer 13

► Private motor vehicles

► NS&I Certificates and Premium Bonds – both ofthese are tax free so won’t attract either CGT orindeed income tax.

► Government bonds (gilts) and most corporate bonds owned by individuals – although income is paid on the income ‘coupon’ should trading in them resultin a gain, no CGT will be payable.

► Foreign currency for personal use outside UK.

► Gambling winnings

► ISAs – as with our NS&I products, above, these are tax free.

► Compensation or damages for injury suffered in work

► Several other more obscure ones like decorations for valour, but these are perhaps not as important as the above for exam purposes!
► Chattels
► Personal Private residence

Question 14

At what value do chattels lose their exemption to CGT?

Answer 14

£6000

Question 15

In regards to chattels - where the value (not the gain) exceeds £6,000, tax may be due, but the gain for tax purposeswill be restricted to the lower of what?

Answer 15

• The Actual Gain- 5/3 of the excess over £6000

Question 16

In this following example, Assume someone buys a vase for £4,000 and sells it later for £8,000

• what is the actual gain?
• what is 5/3 of the excess and how is it calculated?
• Which figure would be used for CGT purposes and why?

Answer 16

• The actual gain is £4000
• The excess (over £6000) is £2000 (£8000 - £6000)
• 5/3 x £2000 = £3,333

The figure £3,333 is used, as it is the lower of the two.

Question 17

Can more than one property be exempt from CGT

Answer 17

No, only your primary residence and only where certain conditions are met.

Question 18

Can more than one property be exempt from CGT

Answer 18

No, only your primary residence and only where certain conditions are met.

Individuals with more than one home have the ability to make an election to HMRC as to which they wish to betreated in this way but if they don’t make such an election,HMRC will decide based on available evidence.

This maynot work out to give the best benefit for CGT purposes soit is worth making the election yourself in this situation.

Question 19

When electing a primary residence, how far back can the election be backdated?

Answer 19

No more than 2 years

Question 20

What may happen if the property has not been lived in for the whole period of ownership?

Answer 20

The exemption may be reduced or eliminated.

Question 21

What is the calculation to work out the exempt part of the gain in relation to a primary residence that hasn’t been occupied for entire time of ownership?

Answer 21

Total gain x (period of occupation / total period of ownership)

So, if the gain was £100,000 and the individual lived in thehouse for 8 of the 10 years of ownership, the exempt gain would be £100,000 x (8/10) or £80,000.

Question 22

In relation to part letting the main residence to someone else - how do you calculate the CG on the part that was let?

Answer 22

The part let will be exempt to the lower of:
► £40,000
► The exemption on the part occupied by the owner

If Jeff lets 1/3 of his home and lives in the rest, thensells the house for a gain of £100,000, he has made again of £33,333 on the part he lets and £66,666 onthe part he has kept for himself.

We said that the let part would be exempt to thelower of:
► £40,000, or
► The gain on the part retained.In this example, as the part retained had a gain of £66,666, the lower of the two will be £40,000.

This means that the let part will escape tax exemption because the gain was £33,333 and this is less than £40,000. If he let 2/3 and only lived in 1/3, the gain on the let part would have been £66,666 and the gain on the retained part £33,333.

In this case, the gain on the let part would only be exempt up to £33,333 (being the lower of £40,000 or the gain on the retained part).

Question 23

HMRC accepts that there will be times when someone is legitimately unable to live in their property. To take account of this, certain periods of absence will also beexempt and are therefore ignored when calculating period of occupation - what are some examples of this? There’s 7

Answer 23

► Up to one year between purchase and moving in.

► The last 9 months of ownership as long as the property was the main residence at some point (36 months for those with qualifying disabilities and long term care home residents)

.NB If you sold the property between 6 April 2014 and 6 April 2020, you get relief for the last 18 months you owned it rather than 9 months.

► Any period before 1 April 1982

► Any period of living in job related accommodation aslong they intention is to return to the property at sometime

► Any period working abroad as long as precededand followed by occupation and during which noother residence was exempt.

► Any period of up to 4 years where workingelsewhere in the UK made it impractical to live in theproperty – as long as preceded and followed byoccupation and no other property was exempt

► Periods of up to 3 years as long as preceded andfollowed by a period of occupation (and no otherproperty was exempt)

Question 24

What are the steps involved in calculating CGT?

Answer 24

► Determine the disposal proceeds, are we talking about the price paid or was the transfer not at arms length and therefore the market value needs to be used?

► Deduct the acquisition cost, what did we originally pay for it or if the transaction was not at arms-length, what was the market value used? Also, where the original purchase took place prior to 1/4/1982, for this purpose we will use the value on 31/3/1982 as a standard principle of CGT.

► Deduct any costs in arranging for the purchase or the sale and any costs of enhancements - Any costs involved in buying the asset (stamp duties, dealers costs, legal costs etc) can be deducted as can any costs of sale. Enhancement costs can be deducted but maintenance/repair costs can’t. Pre 31/3/182 acquisition and enhancement costs are ignored. Only post 31/03/182costs can be deducted.

► Offset any capital loses – apply any losses in line with the principles outlined in the section on losses, below.

► Deduct the annual exemption – in 2022/23, this being £12,300, and

► Apply the right tax rate(s) – for most assets this will mean 10% for a basic rate taxpayer or 20% for a higher or additional rate taxpayer. However, where the gain is from residential property, an 8% surcharge will apply. We will look at this in more depth shortly

Question 25

What is the calculation to work out the exempt part of the gain in relation to a primary residence that hasn’t been occupied for entire time of ownership?

Answer 25

Total gain x (period of occupation / total period of ownership)

So, if the gain was £100,000 and the individual lived in the house for 8 of the 10 years of ownership, the exempt gain would be £100,000 x (8/10) or £80,000.

Question 26

JUST READ

Answer 26

In most cases, where an asset is sold, the sale will be for the whole of the asset in question. This is not always the case for land, where a section of a larger piece of land may be sold.

In this case, determining the acquisition (base) cost to be used for the part sold can be complex. To assist, the following formula is applied:

Acquisition cost of part sold = (Sale proceeds of part sold / Current value of whole asset) x Original cost of whole asset.

Where, current value of whole asset = proceeds of part sold + market value of part retained. So, where the part sold was sold for £10,000 and the original cost of the whole asset was £7,000 while the part kept is worth £15,000, the calculation is:

Acquisition cost = (£10,000 /£25,000) x £7,000
Giving a base cost of the part sold of £2,800.

Question 27

Can losses in most cases be offset against gains to reduce the amount of tax due on those gains?

Answer 27

Yes but there are rules

► Where losses from the same year are used, these are offset in full against gains in the current year, even where this reduces the gain to below the level of the annual exemption.

► Losses unused may be carried forward indefinitely– as long as they are claimed within 4 years of the end of the tax year in which they fall. So, losses in 2022/23must be claimed by 5/4/2027

► Where losses are carried forward, only sufficient loss need be used in a given year to reduce the level of gains to the annual exemption level. So, with a gain of £15,000 in the current year, carried forward losses of £2,700 would be enough to reduce the gain to the annual exemption and any remaining losses can be carried forward again

► Once losses are offset, the annual exemption is deducted and the resulting figure is taxable. So, to take an example,

Cheryl buys a house for£100,000 incurring costs of £2,500 in the process, then sells it for £180,000 incurring costs of £6,000. She has losses of £17,000 carried forward from previous years, her calculation will be:
Disposal Proceeds £180,000
Less cost of acquisition (£100,000)
Less costs of buying and selling (£8,500)
Gain £ 71,500
Less carried forward losses (£ 17,000)
Less annual allowance (£ 12,300)
Chargeable gain £42,200

Cheryl’s gain is £42,200 and this will be added to her income in the current year, on top of all other incomes, to establish what rate of CGT is due.

Question 28

How much is the surcharge on a residential property?

Answer 28

8% - so basic rate = 18% or higher = 28%

Where an individual has gain from both residential property and other sources in the same year - they are allowed to offset their annual allowance again residential property in order to reduce the overall rate of tax due.

Question 29

What is the annual exemption for individuals for CGT?

Answer 29

22/23 = £12,300

Question 30

How long must and individual have owned a business before qualifying for Business Asset Disposal Relief ?

Answer 30

2 Years

Question 31

In order to qualify for business asset disposal relief businesses must satisfy a number of tests, broadly based around the 20% rule - which is?

Answer 31

• no more than 20% of the business assets should be non-trading e.g. investments.
• no more than 20% of the income should be derived from non-trading activities etc.

Because of this rule, it can be damaging for the company to hold too much value in cash as this is not regarded as a trading asset and could prevent the owner from claiming the relief.

Question 32

When is relief available on share disposal in a trading company?

Answer 32

Where the person is an employee or director of that company and meets the 5% shareholding test.

Question 33

What is Business Asset Disposal Relief?

Answer 33

Where an individual sells or disposes of part of a business they have owned for at least 2 years before the disposal is made. Business Asset Disposal Relief may be available. This has the effect of bringing down the tax from 20% to 10% on lifetime gains of up to £1,000,000 and so can have an effective overall value of £100,000. It doesn’t matter if these gains fall into the higher rate band. Any gains in excess of the £1,000,000 limit are taxed under normal CGT rules and rates.

Question 34

What happened from April 2016 to the entrepreneurs relief?

Answer 34

It was extended to long term holdings of unlisted companies.

Providing an additional tax break over and above those available by investing in structured schemes like EIS and SEIS. (Enterprise Investment Scheme & Seed Enterprise Investment Scheme - which are gov schemes)

This is part of the government’s initiative to encourage private equity investment.

Question 35

What are the 4 main reliefs associated with CGT?

Answer 35

• Business Asset Disposal Relief (bft & redmill)
• Holdover Relief (bft & redmill)
• Business Rollover Relief (bft & red)
• Reinvestment into EIS or SEIS shares (bft & redmill)-
• Investors Relief (bft)
• Incorporation Rollover Relief (bft)

Question 36

What is Business Asset Rollover Relief?

Answer 36

This relief allows for gains on sale of assets used in the business, where replacement assets are purchased. The gain is then rolled over until the sale of the new asset.

Question 37

What is Holdover Relief?

Answer 37

You may be able to claim Gift Hold-Over Relief if you give away business assets (including certain shares) or sell them for less than they’re worth to help the buyer. Gift Hold-Over Relief means:- you do not pay Capital Gains Tax when you give away the assets - the person you give them to pays Capital Gains tax (if any is due) when they sell (or ‘dispose of’) them Tax is not usually payable on gifts to your husband, wife, civil partner or a charity.

Question 38

What is the eligibility criteria for hold-over relief?

• If you’re giving away business assets
• if you’re giving away shares

Answer 38

If you’re giving away business assets
You must:
- be a sole trader or business partner, or have at least 5% of voting rights in a company (known as your ‘personal company’)
- use the assets in your business or personal company You can usually get partial relief if you used the assets only partly for your business

.If you’re giving away shares they must be in a company that’s either:

• not listed on any recognised stock exchange
• your personal company, The company’s main activities must be in trading, for example providing goods or services, rather than non-trading activities like investment.

Question 39

What is “Reinvestment into EIS Shares”?

Answer 39

If a gain is re-invested into qualifying EIS shares, the tax on the gain of the original disposal is deferred until the disposal of EIS shares. Also, the gain on the EIS shares is tax-free - CGT is only due on the original gain.

Question 40

What is “Reinvestment into SEIS Shares”?

Answer 40

Where investing in Seed Enterprise Investment Schemes, the hold over rules work slightly differently in that 50% of any rolled over gain is entirely exempt. So a £100,000 gain rolled over into SEIS will attract CGT now on £50,000 and the other £50,000 will escape CGT entirely, thus giving a higher rate taxpayer a £10,000 tax break (£50,000 x 20%). All subject to a limit of £100,000 per tax year.** Providing they also qualify for income tax relief (according to BrandFT)

Question 41

What is Investors Relief?

Answer 41

• Basically an extension of business asset disposal relief to include external investors in unlisted trading companies.
• Same 10% Rate
• Separate limit of £10m

Question 42

What is Incorporation Rollover Relief?

Answer 42

Relief available where an unincorporated business is transferred to a limited company in exchange for new shares in that company. Relief effectively defers gain until shares are disposed of (by deducting gain from price of shares thus lowering base cost)

Question 43

What are the conditions for Investors Relief?

Answer 43

• Shares Newly Issued
• Issued post 16 March 2016
• Held for 3 Years Commencing on/after 6 April 2016

Question 44

How is CGT reported?

Answer 44

Via a self-assessment to HMRC

Question 45

When is GCT usually payable?

Answer 45

31/01 following end of tax year

Except for residential property sales, where payment on account is due within 60 days of completion for properties not exempt.

Question 46

What does holdover relief apply to?

Answer 46

Transfers chargeable to IHT and disposals of trading assets

Question 47

Where shares are sold, the purchase price will be matched against:

Answer 47

► Any purchases of the same share on the same day

► Any purchases of the same share in the following 30 days (if resident in the UK)

► The average purchase price of all remaining shares in the ‘share pool’ of the same type of shares

► Shares purchased more than 30 days after the sale.

This rule was introduced to prevent people from artificially using their CGT allowance by selling shares and then buying them back straight away. Now, to realise a gain the individual would have to sell, wait 30 days and then buy back.