Tax 2: Capital Gains

Question 1

What is capital gains?

Answer 1

A profit realised when an individual, partnership or company disposes of a capital asset.

Question 2

What is a taxable disposal (disposition)?

Answer 2

May include:
- the sale of gift of an asset,
- trading one asset for another asset
- destruction of an asset if insurance proceeds are received

Question 3

What is capital gains taxed for individuals, partnerships and companies?

Answer 3

Individuals (including partners in partnership)
- pay tax on capital gains at lower rate than tax rate on income

Companies
- do not pay CGT
- capital gains made are taxed at company tax rate of 19%

Question 4

CGT rules for residence vs non residence?

Answer 4

UK Residence
- pay CGT on disposal of any chargeable asset they own regardless of where in world asset is

Non UK Residence
- do not pay CGT even on assets in the UK
EXCEPTION - pay CGT if they dispose of interests in UK land (residential and commercial)

Question 5

When is CGT not charged?

Answer 5

Exempted Assets
- wasting chattels (property of life less than 50 years)
- assets worth less than £6k at time of disposal

Exempt Disposals
- transfers on death (person takes it at probate value)
- Transfer between spouses (recipient deemed to have acquired assets at cost donor acquired it)
- Transfers to charity

Question 6

What is wasting chattels (inc. examples)?

Answer 6

Property of life less than 50 years is exempt from CGT

Includes
- cars
- boats
- watches
- farm animals
- machinery not used in business (is taxable if used in business)

Question 7

When is CGT due?

Answer 7

Generally due and payable in full on 31st Jan FOLLOWING the year in which gain was made.

Land
- disposals of UK residential property CGT must be reported and paid within 30 days of completion

Question 8

How is CGT calculated for assets disposed of by gift and where the transaction is with connected person?

Answer 8

Use market value instead of proceeds of sale.

Connected person is someone close to the person disposing of the asset.

Question 9

How are the proceeds of sale for CGT purposes calculated?

Answer 9

Amount sold for (minus) incidental cost of disposal.

Incidental cost of disposal:
- legal fees
- valuation fees
- advertising cost

Question 10

How is the cost of acquisition calculated for CGT purposes?

Answer 10

cost of acquiring the asset (plus) allowable costs and expenses

Allowable costs and expenses:
- legal fees,
- commissions
- stamp duty land tax
- cost relating to title
- cost of enhancement (inc allowable expenses) (ONLY if enhancement is still part of asset when disposed of)

Question 11

How is private residence relief calculated (general)?

Answer 11

gain x (period of occupation/period of ownership)

• so if lived there during whole course of ownership then no CGT.

Question 12

When will a period of absence not be counted for the purpose of private residence relief?

Answer 12

If deemed occupation (can use multiple):
- if absence was in last 9 months of ownership
- any period of absence up to 3 years (any reason)
- if working abroad (unlimited time)
- if working elsewhere in UK up to 4 years

Question 13

How does Business Asset Disposal Relief work.

Answer 13

Individual only need pay 10% CGT (up to lifetime cap of 1m) on the sale or gift of:

• All or part of a trading business (carried as sole trader or in partnership for at least 2 years pre disposal)
• Shares in a trading company if the individual owns at least 5% of the ordinary voting shares of the company and was an officer or employee of company in 2 years before disposal
• Assets owned and used by the individual’s personal company (owns 5%+ of the ordinary voting shares) or trading partnership in the 2 years before disposal
  (not assets disposed of in isolation, should be selling all assets in 3 year succession)

Question 14

How does Business Asset Disposal Relief work.

Answer 14

If both parties agree for it to apply and it is a qualifying asset.

Donee takes the gift at the same acquisition price the donor originally paid.

So if donee later disposes of asset they are paying for the full capital gain from donors original acquisition (before gift) to their disposal (after gift). So paying for the capital gain incurred by the donor before gift and their own since they were gifted it.

Question 15

What assets qualify for Business Asset Disposal Relief

Answer 15

If gifting to a trust any asset qualifies.

If gifting to an individual only:
- assets used for the purpose of a trade or profession carried on by the transferor or their personal company (owns 5%+ of the ordinary voting shares)

• shares in unsuited trading company
• shares in transferors personal company (owns 5%+ of the ordinary voting shares)
• assets that qualify for agricultural property relief

Question 16

How does replacement of business asset relief (roll over relief) work?

Answer 16

Can be used by sole trader, partners and companies

Used when disposing of qualifying asset and reinvesting in other qualifying asset.
- reinvestment must be in 4 year window staring 1 year before disposing of original asset.

The gain used towards the new asset (reinvested) is subtracted from the purchase price of the new asset for CGT purposes.
- Any gains not used towards new asset is taxable.

Question 17

What assets qualify for Replacement of Business Assets Relief (Roll-Over Relief)?

Answer 17

Qualifying business assets including:
- land
- buildings
- plant and machinery

Question 18

How does Incorporation Relief work?

Answer 18

When individual or partnership transfers interest as going concern to a company (basically incorporate it)

Gain from transfer is deferred by subtracting the gain from the acquisition cost of the company shares they receive.

Gain will be taxed when they dispose of the shares.

Question 19

How does the Enterprise Investment Scheme Reinvestment Relief work?

Answer 19

An individual can defer payment of any CGT by investing the gain in shares in a qualifying unquoted trading company.

Investment must be in 4 year period staring with 1 year before disposal of original asset.

The CGT on the differed gain is chargeable when the EIS shares are sold.

Question 20

Is there an annual exempt amount for capital gains tax?

Answer 20

Yes of individuals
- is currently £12,300

Question 21

Is the annual exempt amount for capital gains tax applied before or after any applicable exemption?

Answer 21

After the exemptions

EXCEPT for Business Asset Disposal Relief which is applied after exemption is subtracted.

Question 22

What is the CGT rate?

Answer 22

Depends on the income tax band and asset.

The exempt amount does not count towards pushing you into next band.

Band
- if income falls in basic band CGT is taxed at 10% so far as taxable capital gains continues to fall fall in basic rate
- CGT that exceeds basic band is taxed at 20%

Land
- residential property CGT is 18% and 28% instead
- applies to residential land in UK and abroad

Steps for working out brackets
- work out taxable Capital Gains
- work out if they have any room in basic income tax bracket remaining
- If yes then tax CG at corresponds to remaining in basic tax bracket at 10% (or 18% if residential land)
- Tax remaining CG (exceeds basic tax bracket) at 20% (or 28% if residential land)

Question 23

How can you use your annual exempt amount to minimise CGT?

Answer 23

Annual Exempt Amount can be allocated in most beneficial way, meaning it can be applied to the asset with the highest CGT.
- basically prioritise residential property

Question 24

How can capital losses be used to reduce tax liability (all rules)?

Answer 24

Capital losses can be used to offset capital gains.

Same year
- If a loss and a gain are made in same year these must be used to offset each other.
- Must be offset before annual exempt amount is applied
- can be used in most efficient way (prio residential property gain)

Carried forward
- if losses exceed gain for a year the remaining can be carried forward
- losses offset AFTER annual exempt amount is applied
- can be used in most efficient way (prio residential property gain)