Topic 4 Flashcards
Private residence relief
Applies when a person or family’s residence is sold. The sale is exempt from capital gains tax as long as the owner(s) lived in it as their main residence.
Business asset disposal relief
Applies to sole traders, partnerships and owners of their own company (not corporate bodies). It allows them to dispose of (sell, transfer, etc) qualifying business assets and pay a lower rate of capital gains tax on any gains made. It applies to the disposal of all or part of a business, including shares, if certain conditions are met. Shareholders must own at least 5% of the company’s ordinary shares to qualify.
(Business asset) Roll-over relief
applies when an individual sells or disposes of some business assets and reinvests some or all of the proceeds to buy other business assets. CGT on the sale is deferred until the new assets are sold, at which point the original gain is brought back into the equation.
Hold-over relief
When qualifying business assets are gifted to someone else, the donor can opt to ‘hold-over’ CGT. This means that they will not pay CGT on any gain they made, but the recipient will be treated as having acquired the assets on the date the donor originally acquired them, and so will pay CGT due on both their ownership and the donor’s ownership of the assets.
Potentially exempt transfer (PET)
Most gifts made during the donor’s lifetime are not subject to IHT at the time. If the donor survives for seven years after making the gift, the gift is outside their estate for IHT purposes – hence when it is made it is ‘potentially exempt’. If the donor dies within seven years of the gift, the gift is brought back into their estate for IHT.
Taper relief
Applies to PETS – if the donor dies within seven years of a PET, the tax due on the part above the nil rate band is reduced by 20% per year from the start of year four.
Chargeable lifetime transfer (CLT)
Gifts made during the donor’s lifetime to a company and most types of trust. IHT at 20% is charged at the time on the gift above the IHT nil rate band. If the donor dies within seven years of the gift, the whole gift is taken back into the estate but the 20% tax already paid is deducted from the final amount due on the gift.
Withholding tax
Tax deducted from investment income at source. Usually used to refer to taxes taken from overseas investments by the country where the tax is due.
capital gains tax
Capital gains tax (CGT) is payable on a gain made on the disposal of certain
assets. Examples include:
personal property (worth more than a certain amount);
real estate or land that is not the individual’s main home;
the individual’s main home if it has been let out or used for business, or if
it is very large;
the sale of shares, if they are not held in an ISA;
business assets, such as land, buildings, machinery or registered trademarks
the annual exempt
amount
Each individual has an annual CGT allowance, referred to as the annual exempt
amount; rather like the personal income tax allowances, this is the level of
gains that can be made in the tax year before CGT starts to be payable. applies
DISPOSAL
For CGT purposes, a disposal can be the sale of an asset, transferring
ownership to another party, giving it away, or receiving compensation
for its loss or destruction
Gains
CGT applies to gains made since 6 April 2015 by individuals or trustees who
are not UK resident on residential property located in the UK. Gains made
during ownership prior to this date are ignored.
Gains that accrue to non‑UK residents on non‑residential property have been
subject to tax since 6 April 2019.
A non‑resident individual might still be able to claim private residence relief
(see section 4.1.4) if they live in the property for at least 90 days during a tax
year
What happens if a loss is made on disposal of an asset?
If an individual makes a loss on disposal of an asset, the loss can generally be
offset against gains made elsewhere. It must be offset first against gains in the
year the loss occurred. Residual losses may then be carried forward to future
years. A capital loss cannot, however, be carried back to a previous year
How is CGT calculated?
The rules relating to calculation of taxable gains include the following:
The costs of purchase can be added to the purchase price and selling costs
can be deducted from the sale price (thus reducing the size of the gain).
The cost of improvements to an asset can be treated as part of its purchase
price (but costs of maintenance and repair cannot).
Capital gains made prior to 31 March 1982 are not taxed so, for an asset
acquired before that date, its value on that date must be substituted for the
actual purchase price.
CGT is charged on gains arising from disposals in the period 6 April in the
current tax year to 5 April in the following year.
It is normally payable on 31 January following the end of the tax year in
which the gain is realised.
Details of chargeable assets disposed of during the tax year must be
included in an individual’s tax return
Calculating CGT liability involves the following
1) Calculate the amount of the gain.
2) Deduct the CGT annual exempt amount (if this has not been
used against other gains in the same tax year).
3) Deduct any losses that can be offset against the gain.
4) What remains is the taxable gain.
5) Add taxable gain to taxable income to establish what rate(s)
of CGT should be paid.
6) Apply tax at appropriate rates. There may be different
rates for taxable gains that fall in the basic‑rate income tax
band and those that fall outside it. There may also be a
supplement where the gain results from the sale of property
not subject to private residence relief.
Check the current tax rates and allowances at: www.gov.uk/
capital‑gains‑tax
Private residence relief
Private residence relief is available when someone sells the property they have
lived in as their main or only residence. The ‘main residence’ does not have
to be a house or flat – it could be a houseboat, or a fixed caravan. If someone
has more than one property and shares their time between each, they may
nominate the property on which they want to claim private residence relief.
There are rules relating to how long an individual may spend away from the
property and still be eligible for the full relief. For example, if someone owns
a house but spends part of the year living away in accommodation provided
with their job, the house is treated as their main residence for private residence
relief purposes
Business asset disposal relief
Business owners are required to pay capital gains tax when they sell (dispose of)
trading businesses and from certain disposals of shares in trading companies.
However, they may be able to pay a lower rate of tax on gains on qualifying
assets if they meet certain conditions. This is commonly known as business asset
disposal relief (previously entrepreneurs’ relief). In order to claim this relief, the
individual must generally own at least 5 per cent of the ordinary share capital
of the business, which enables them to exercise at least 5 per cent of the voting
rights in that company. In addition, they must also be entitled to at least 5 per cent
of the distributable profits and net assets of the company. Most property letting
businesses do not qualify for this relief. Business asset disposal relief also applies
to gains resulting from investment into unlisted companies
Hold‑over relief
Similarly, CGT on any gain arising on the gift of certain assets can normally be
deferred until the recipient disposes of it.Gains may be wholly or partly passed on to the recipient in the case of gifts (or
sale at under value) of the following broad categories of assets:
assets used by the donor in their trade or the trade of their family company
or group;
shares in the transferor’s personal company or in an unlisted trading company;
agricultural property that would attract relief from inheritance tax;
assets on which there is an immediate charge to inheritance tax
What is inheritance tax?
Inheritance tax (IHT), as its name suggests, is levied mainly on the estates of
deceased persons and is charged following an individual’s death. The tax is charged
on the amount by which the value of
the estate exceeds the available
nil‑rate band at the date of death.
Surviving spouses and civil partners
can increase their own nil‑rate band
by the proportion of unused nil‑rate
band from the earlier death of their
spouse/civil partner.
NIL‑RATE BAND
The amount on which a nil rate of
IHT applies; in other words, the
amount is liable to tax but the rate
that applies is 0 per cent
fact
Transfers between spouses and civil partners are exempt from IHT.
Death bed
In order to prevent avoidance of tax by ‘death‑bed’ gifts or transfers, the figure
on which tax is based includes not only the amount of the estate on death but
also the value of any money or assets that have been given away in the seven
years prior to death.
Residence nil‑rate band
If part of the estate includes a residence that is being left to a direct descendant,
then since 2017/18 an additional residence nil‑rate band (RNRB) has been
applied.
The RNRB can be used on death against the value of a property owner’s interest
in property that, at some point, they occupied as a residence and where the
interest in the property is bequeathed to a direct descendant. The property
need not have been the individual’s main residence
NRB nil rate band
175,000
NRB
£325,000
PETs AND TAPER RELIEF
Death within Tax due on gift
1 year of gift 100% of the tax
2 years of gift 100% of the tax
3 years of gift 100% of the tax
3–4 years of gift 80% of the tax
4–5 years of gift 60% of the tax
5–6 years of gift 40% of the tax
6–7 years of gift 20% of the tax
7+ years no tax
In July 2016, Joan made a gift to her daughter of £350,000. She
has made no other gifts in her lifetime. Joan died in October 2020
leaving a total estate worth £420,000. Let’s say the full rate of IHT
is 40 per cent on estates over the nil‑rate band of £325,000. How
much IHT is applied to the value of the gift that is in excess of the
nil‑rate band?
£6,000. In the first instance, the gift uses the available nil‑rate
band of £325,000, there is then an excess of £25,000 above the nil‑rate band. Joan died between four and five years after the gift, so the £25,000 excess is
liable for IHT at 60 per cent of the full rate (ie 40% × 60%)
What is a chargeable lifetime transfer
Some lifetime gifts – notably those to companies, other organisations and
certain trusts – are not PETs but chargeable lifetime transfers, on which tax
at a reduced rate is immediately due. This ‘lifetime’ tax is only payable if value of the chargeable lifetime transfer, when added to the cumulative total
of chargeable lifetime transfers over the previous seven years, exceeds the
nil‑rate band at the time the transfer is made. The reduced rate of tax is only
applied to the excess over the nil‑rate band. As with PETs, the full amount of
tax is due if the donor dies within seven years (subject to the same taper relief).
What gifts and transfers are exempt from inheritance tax?
transfers between spouses and between civil partners both during their
lifetime and on death, provided that the receiving spouse/civil partner is
UK domiciled;
small gifts of up to £250 (cash or value) per recipient in each tax year;
donations to charity, to political parties and to the nation;
wedding gifts of up to £1,000 (increased to £5,000 for gifts from parents or
£2,500 from grandparents);
gifts that are made on a regular basis out of income and which do not affect
the donor’s standard of living;
up to £3,000 per tax year for gifts not covered by other exemptions. Any
part of the £3,000 that is not used in a given tax year can be carried forward
for one tax year, but no further
Value added tax
Value added tax (VAT) is an indirect tax levied on the sale of most goods and
the supply of most services in the UK. Some goods and services are exempt
from VAT, including certain financial transactions such as loans and insurance
VAT rates
The supply of financial advice is not exempt and advisers who charge a fee for
their service are subject to VAT in the same way as solicitors or accountants.
The supply of health and education services is exempt, as are e‑books, and
a number of related goods and services are currently zero‑rated. This is not
technically the same as being exempt: zero‑rated goods and services are
theoretically subject to VAT but the rate of tax applied is currently 0 per cent
(although this could change). Zero‑rated items include food, books, children’s
clothes, domestic water supply and medicines. Domestic heating is charged at
a reduced rate.
Pros and conds registering for VAT
An advantage of registering is that VAT paid out on business expenses can be
reclaimed. Two disadvantages are:
the fact that the firm’s goods or services are more expensive to customers
(by the amount of the VAT that the firm must charge);
the additional administration involved in collecting, accounting for and
paying VAT.
FACTFIND
If you would like to find out more about IHT, go to:
www.gov.uk/browse/tax/inheritance‑tax
FACTFIND
For current VAT rates and thresholds, go to:
www.gov.uk/topic/business‑tax/vat
