Section 3 - Capital Gains Tax Flashcards
CGT Calculation - 6-Step Process
- Establish disposal proceeds
- Deduct Acquisition costs/ selling costs/ cost of enhancements
- Deduct current year losses
- Deduct previous year losses down to annual exempt amount
- Deduct annual exempt amount
- Add gain to taxable income to determine CGT rate
Net gains within basic rate tax band - taxed at 10% (18% for residential property not otherwise exempt)
net gains in excess of basic rate tax band - taxed at 20% (28% for residential property not otherwise exempt)
CGT Planning
Making personal pension / gift aid payments extends basic rate tax band -> more capital gains can fall into basic rate
Expenses of sole traders/partners are deductible -> more capital gains can fall into basic rate
CGT rates are generally lower than income tax rates
- therefore, growth funds may be more attractive than income funds for higher/additional rate taxpayers
CGT Disposal
Transfer of ownership or derivation of capital sum from asset
Trading transactions aren’t subject to CGT, but capital disposals are
Indicators of Trading:
- Period of ownership
- Quantity purchased
- Motive
- Financing of transaction
- Frequency of transactions
Deferred Consideration (sale proceeds):
- Ascertainable - amount received on disposal is fixed
- Unascertainable - amount received on disposal is not fixed
- Contingent consideration - payable only if certain conditions are satisfied
Disposal proceeds are usually the sale proceeds
- however, if ‘disposal not at arm’s length’ (transaction between close family members) market value is used
No CGT liability on death
CGT valuation is not the same as IHT valuation
- For CGT, it is the asset that is valued, whereas for IHT the relevant value is the loss to the estate.
- If disposal is chargeable to IHT, then CGT holdover relief can generally be claimed
Shares - Same type and class but acquired at different times
Special rules exist for calculating chargeable gains on shares of the same type and class acquired at different times. The rules are needed to match acquisitions with disposals.
Identification Rules:
Disposal of shares are identified with acquisitions in the following order:
- Acquisitions on same day
- Acquisitions within following 30 days
- Acquisitions in the share pool
Bonus/Scrip Issue:
- Treated as if acquired on same day
Rights Issue:
- Added to share pool
Scrip Dividend:
- Treated as if new acquisitions
Employee Share Schemes
Shares acquired through share option schemes usually produce larger gains as they have a lower base cost
Where shares under both approved and unapproved schemes are acquired on the same day and some of them are disposed of:
- you can elect that shares acquired other than under approved scheme are treated as being disposed of first
Wasting Assets / Chattels (Personal Possessions)
Wasting assets are assets that become less valuable over time. They do not have a predicted life exceeding 50 years.
- Exempt from CGT
Chattels (Personal Possessions):
- exempt from CGT if disposal value doesn’t exceed £6,000
- If disposal value does exceed £6,000
Wasting Assets / Chattels (Personal Possessions)
Wasting assets are assets that become less valuable over time. They do not have a predicted life exceeding 50 years.
- Exempt from CGT
Chattels (Personal Possessions):
- exempt from CGT if disposal value doesn’t exceed £6,000
- If disposal value does exceed £6,000, then chargeable gain can’t exceed 5/3 of excess
- e.g. ring costs £1,000. It is sold for £7,800. (£7,800 - £6,000) x 5/3 = £3,000. The chargeable gain will be £3,000 instead of actual gain £6,800.
Part Disposals
Acquisition cost apportioned
A/(A+B) x Original Cost
A = proceeds of part disposal
B = market value of part retained
CGT - Spouses/Civil Partners
Spouse/Civil Partner transfers do not give rise to CGT liability
Liability is transferred to receiving spouse/civil partner when they come to dispose of the asset in the future
If assets held jointly then taxable on own share
- this can help with tax planning as you can use both annual exempt amounts
CGT Exemptions
- Principal Private Residence
- Private motor vehicles
- National Saving Certificates and Premium Bonds
- Gov. and Corporate Bonds (owned by individuals)
CGT - Private Residence
You don’t pay CGT when you sell your home if all of the following apply:
- you have one home and you’ve lived in it as your main home for all the time you’ve owned it
- you have not let part of it out (doesn’t include having a lodger)
- you have not used a part of your home exclusively for business purposes
- the grounds, including all buildings, are less than 5,000 square metres (just over an acre) in total
- you did not buy it just to make a gain
Part of gain taxable for periods of non-residence
Multiple homes - elect to determine which house to be treated as main residence
If part of property is let and the landlord is in shared occupancy, then special exemption (lettings relief). Gain arising from part that is let is reduced by lowest of:
- £40,000
- Amount of gain exempt because house is main residence
- Gain attributable to the let part or period of letting
Intention of purchase - can’t use exemption if gain occurred on property purchased wholly with intent to make a gain
CGT - Pre-1982 Acquisitions
If an asset was acquired before 1st April 1982, use the market value as at 31st March 1982.
Income Tax and CGT
If disposal (sale) leads to income tax charge, then this is deducted from disposal proceeds for calculating CGT
CGT - Losses
Deduct losses of same year in most beneficial way - they can be set against gains
Deduct current year losses first (even if this uses up annual exempt amount) - must be done
If there is more loss than gain in previous tax year, the excess can be carried forward to deduct from this year’s losses - do this next but only down to annual exempt amount
Losses must be claimed within 4 years of the end of the tax year in which they were made
CGT - Annual Exempt Amount
£12,300
This can’t be carried forward
CGT - Tax Due
Net gains within basic rate tax band - taxed at 10% (18% for residential property not exempt under PPR)
net gains in excess of basic rate tax band - taxed at 20% (28% for residential property not exempt PPR)
CGT Reliefs - Holdover Relief
Allows a client to gift assets, postponing any gain so that it is ‘held-over’ until the recipient of the gift disposes of them.
Main categories are transfers chargeable to IHT and disposals of trading assets
If holdover relief claimed - no CGT payable at time of gift (acquisition cost reduced by amount of heldover gain)
Usually claim jointly by donor and donee, but donor only if gift is into trust
Holdover relief not available for transfers of assets into trust where settlor has an interest
CGT Reliefs - Business Asset Disposal Relief
You may be able to pay less Capital Gains Tax when you sell all or part of your business.
Business Asset Disposal Relief means you’ll pay tax at 10% on all gains on qualifying assets.
Relief available for disposals of shares in business (if 5% shareholding and employee or director) or share in partnership
- For employees/directors must have 5% shareholding entitling them to 5% of voting rights plus
– 5% of firm’s distributable profits and assets on wind up or
– 5% of proceeds on disposal of firm’s ordinary shares
First £1m qualifying gains made during lifetime gains taxed at 10%
Need to own asset for at least 2 years
CGT - Investors’ Relief
Extension of business asset disposal relief to include external investors in unlisted trading companies
Same 10% rate - separate limit of £10m
Conditions:
- Shares newly issued
- Issued post 16th March 2016
- Held for 3 years commencing on/after 6th April 2016
Reinvestment into EIS
Relief claimed on disposal of assets if gain is invested in shares that qualify under EIS
Gain on original disposal is deferred until disposal of EIS shares
Reinvestment into SEIS Shares
50% of reinvested capital gains exempt providing they also qualify for income tax relief
Business Rollover Relief
Can claim relief if you sell assets used in the business and buy other assets for the business
Relief defers gain until disposal of new assets
Incorporation Rollover Relief
Relief available where 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 issue price of shares thus lowering base cost)
Paying CGT
Gain reported to HMRC via self-assessment
Tax usually payable by 31st Jan following end of tax year
Residential property sales:
- payment on account due within 60 days of completion for properties not exempt
