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
