Topic 4 Flashcards
What is Capital Gains Tax (CGT)?
CGT is a tax payable on the profit (gain) made from the disposal of certain assets, such as property, shares, or business assets.
What types of assets are subject to CGT?
Assets subject to CGT include personal property (worth over a certain amount), real estate (not the main home), shares (not in an ISA), and business assets.
What is the annual exempt amount in CGT?
The annual exempt amount is the level of gains that can be made in a tax year before CGT becomes payable.
Can unused CGT allowance be carried forward to the next year?
No, the annual exempt amount cannot be carried forward if it is unused.
What deductions can be made from CGT?
Allowable capital losses made in the same year or carried forward from previous years can be deducted from the taxable gains.
Why might a person’s main home be subject to CGT?
If the home has been let out or used for business, it may be subject to CGT upon disposal.
How does the annual exempt amount benefit taxpayers?
The annual exempt amount allows individuals to make gains up to a certain level without paying CGT, similar to a personal allowance for income tax.
Why are certain trusts entitled to the full CGT annual exempt amount?
Bare trusts and trusts for vulnerable beneficiaries are granted the full exempt amount to provide additional financial support for beneficiaries.
How are trustees of most other trusts treated under CGT?
Trustees of most other trusts are entitled to a maximum of half the CGT annual exempt amount.
When is CGT payable?
CGT is payable when a gain is made on the disposal (sale, gift, or transfer) of certain assets.
How are losses handled under CGT?
Capital losses from the same year or carried forward from previous years can be deducted from gains before CGT is calculated.
Are there any exceptions where CGT does not apply?
CGT does not apply to the sale of an individual’s main home (unless it’s been used for business or let out), assets in an ISA, and personal belongings worth less than the exempt amount.
How does CGT apply to business assets?
CGT applies to the disposal of business assets like land, buildings, machinery, and registered trademarks.
Why is the annual exempt amount important for CGT?
The annual exempt amount allows individuals to make gains up to a specific limit each tax year without incurring CGT, reducing their overall tax liability.
Why are business assets subject to CGT?
Business assets are included to ensure that profits from the sale of significant assets, such as land or trademarks, are taxed similarly to personal investments.
How does CGT apply differently to trusts?
Bare trusts and trusts for vulnerable beneficiaries get the full CGT exempt amount, while other trusts get only half of the exempt amount, reflecting the different tax treatment for various types of trusts.
What is the meant by ‘Disposal’?
(CGT context)
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.
What is ‘bed and breakfasting’ in the context of CGT?
‘Bed and breakfasting’ is the practice of selling shares or unit trusts and repurchasing them the next day to realize smaller gains that could be covered by the annual CGT exemption.
Why was ‘bed and breakfasting’ used?
It was used to minimize the CGT liability by realizing smaller gains each year and taking advantage of the annual exempt amount.
How has the tax treatment of ‘bed and breakfasting’ changed?
Shares and unit trusts repurchased within 30 days of sale are now treated as if the transactions had not occurred for CGT purposes, closing the loophole.
Why is CGT due on the entire gain in the year it is realized?
CGT is based on the total profit (gain) from the sale of an asset, and it is payable in the year the asset is sold, regardless of how long the gain was accumulated.
How did the 30-day rule render ‘bed and breakfasting’ ineffective?
The 30-day rule prevents individuals from using the same shares to repeatedly generate small gains by treating repurchases within 30 days as if no sale occurred, thus avoiding the exploitation of the annual CGT exemption.
Why was the ‘bed and breakfasting’ loophole closed?
It was closed to prevent individuals from artificially minimizing their CGT liability by repeatedly selling and repurchasing shares or unit trusts solely to take advantage of the annual exemption.
Is CGT payable when assets change hands due to death?
No
CGT is not payable on assets transferred upon death, though inheritance tax may apply.
What happens to assets upon death for CGT purposes?
Assets are deemed to be disposed of at their market value at the time of death to establish the acquisition cost for future CGT calculations.
When did CGT apply to non-UK residents on residential property?
Since 6 April 2015, CGT applies to non-UK residents on gains from residential property in the UK.
Since when have gains on non-residential property for non-UK residents been taxable?
CGT has applied to non-UK residents on non-residential property since 6 April 2019.
Can non-residents claim private residence relief?
Yes
Non-residents can claim private residence relief if they live in the property for at least 90 days during a tax year.
Why is CGT not payable on assets transferred after death?
The assets are considered disposed of at market value to establish the acquisition cost, so CGT is only due if the inheritor sells the asset later and makes a gain.
How does the 90-day rule benefit non-residents?
Non-residents can claim private residence relief, potentially reducing their CGT liability if they live in the property for at least 90 days during a tax year.
Why are gains before 6 April 2015 ignored for non-UK residents on residential property?
The 2015 rule change only applies to gains made after this date, ensuring that previous ownership periods are not subject to CGT for non-residents.
List of assets that are exempt from CGT:
- Main private residence (subject to private residence relief)
- Property as the result of a death
- Ordinary private motor vehicles
- Personal belonging; Antiques, Jewellery and other movable objects below a certain value.
- Items of national, historic or scientific interest gifted to the nation.
- Foreign currency for personal expenditure
- Gilts and qualifying corporate bonds
- NS&I products
- Winnings from Premium Bonds or lottery
- ISAs
- Gains on life assurance policies disposed of by the original owners
What can be done if a loss is made on the disposal of an asset?
The loss can be offset against gains made in the same tax year. Any remaining losses can be carried forward to future years.
Can capital losses be carried back to previous years?
No
Capital losses cannot be carried back to previous tax years.
How are capital losses treated in relation to the annual exempt amount?
Capital losses are used only to reduce gains to the level of the annual exempt amount.
Any remaining losses are carried forward.
Why can’t capital losses be carried back to previous years?
The tax rules only allow losses to be used against current or future gains, not past gains, to maintain a forward-looking tax system.
What happens to unused capital losses after offsetting them against gains?
Unused capital losses are carried forward to be used in future tax years, reducing future taxable gains.
Why are capital losses only used up to the annual exempt amount?
Capital losses are only used to the extent necessary to reduce gains to the annual exempt amount because gains below this threshold are not taxed.
Can capital losses be used to offset all types of gains?
Yes.
Capital losses can generally be offset against all types of gains in the same tax year, including gains from different types of assets.
What happens if the capital losses exceed the gains in the same year?
If capital losses exceed gains in the same tax year, the excess losses are carried forward to offset gains in future years.
Why can’t the annual exempt amount be carried forward like capital losses?
The annual exempt amount is a yearly allowance and must be used within the tax year, unlike capital losses, which can be carried forward to manage future gains.
How do capital losses help manage tax liability in future years?
By carrying forward unused capital losses, individuals can reduce future taxable gains, lowering their CGT liability in subsequent years.
Why is it important to use capital losses strategically?
Strategic use of capital losses helps individuals minimize their CGT liability by ensuring that they only use losses to the extent necessary to reduce taxable gains, preserving the unused portion for future tax years.
What can be deducted from the sale proceeds when calculating CGT?
- The acquisition base cost (purchase price)
- Incidental costs of buying and selling
- Enhancement costs (improvements) can be deducted from the sale proceeds to reduce the gain.
Can maintenance and repair costs be deducted from CGT?
No, only enhancement costs (improvements) are deductible, not maintenance or repair costs.
What is the significance of 31 March 1982 in CGT calculations?
Gains made before 31 March 1982 are not taxed, so assets acquired before that date use their value as of 31 March 1982 for CGT calculations instead of the original purchase price.
When is CGT charged on gains?
CGT is charged on gains made between 6 April of the current tax year and 5 April of the following tax year.
How is CGT on residential property reported and paid?
CGT on non-exempt gains from residential property must be reported via HMRC’s CGT on UK property account and paid within 60 days of completion.
When is CGT payable?
CGT is payable by 31 January following the end of the tax year in which the gain is realized.
Why are enhancement costs deductible but not maintenance costs?
Enhancement costs increase the asset’s value, whereas maintenance and repairs are considered routine expenses that do not add long-term value.
How does the CGT exemption date of 31 March 1982 affect older assets?
For assets acquired before 1982, their value on 31 March 1982 is used to calculate gains, ensuring that only gains made after that date are taxed.
Why must residential property gains be reported within 60 days?
The 60-day rule ensures timely reporting and payment of CGT on residential property, which is treated differently from other assets due to its higher value and potential for significant gains.
How can individuals report their CGT?
CGT can be reported through HMRC’s self-assessment tax return or via HMRC’s real-time CGT service, depending on the type of gain.
What are incidental costs in CGT calculations?
Incidental costs include legal fees, agent fees, and any other costs directly associated with buying or selling the asset
Can capital losses be used to reduce CGT?
Yes
Capital losses from the same or previous years can be used to offset gains, reducing the taxable amount.
When does CGT apply to non-exempt assets?
CGT applies to the disposal of non-exempt assets, such as second homes, shares, or business assets, after deducting any applicable exemptions and allowances
Why does CGT on residential property need to be reported separately?
Residential property often incurs significant gains, so HMRC requires reporting within 60 days to ensure timely tax collection and reduce underreporting.
How does the self-assessment tax return integrate CGT reporting?
The self-assessment tax return allows individuals to report capital gains along with their income, providing a complete picture of taxable earnings for the year.
Why does the payment deadline for CGT differ from other taxes?
The 31 January deadline gives individuals time to calculate gains for the previous tax year, align with their overall tax liabilities, and report via self-assessment.
What is the first step in calculating CGT liability?
The first step is calculating the amount of the gain made from the sale of the asset.
What deductions are made before calculating taxable gains?
Any offsettable losses and the CGT annual exempt amount are deducted from the gain.
How is the taxable gain determined?
The taxable gain is what remains after deducting losses and the annual exempt amount from the total gain.
How is the rate of CGT determined?
The rate is determined by adding the taxable gain to the individual’s taxable income to see which income tax band the gain falls into.
Are there different CGT rates for different types of gains?
Yes
Gains that fall within the basic-rate tax band are taxed at a lower rate than those that fall outside of it, and there may be a surcharge for gains from the sale of property not subject to private residence relief.
Why is the CGT annual exempt amount deducted before calculating taxable gains?
The annual exempt amount allows individuals to reduce their taxable gains, similar to a personal allowance for income tax.
How do losses reduce CGT liability?
Losses offset against gains reduce the amount of the taxable gain, lowering the total CGT liability.
Why might different CGT rates apply to property gains?
Gains from the sale of properties not eligible for private residence relief are subject to a surcharge to account for their typically higher value and investment nature.
Why is CGT linked to income tax bands?
Linking CGT to income tax bands ensures that individuals with higher income pay a higher rate of CGT, maintaining progressive taxation principles.
What are the steps in calculating CGT liability?
1) Calculate the amount of the gain.
2) Deduct any losses that can be offset against the gain.
3) Deduct the CGT annual exempt amount (if this has not been used against other gains in the same tax year).
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 surcharge
where the gain results from the sale of
property not subject
to private residence relief.
What is Private Residence Relief?
Private Residence Relief is a CGT exemption available when someone sells their main or only residence, such as a house, flat, houseboat, or fixed caravan.
Can Private Residence Relief be claimed on multiple properties?
No
If someone has more than one property, they must nominate one property as their main residence to claim Private Residence Relief.
Can time spent away from the main residence affect eligibility for relief?
Yes
There are rules about how long someone can be away from their main residence and still qualify for full Private Residence Relief, such as living away due to work.
Does using part of a property for business affect Private Residence Relief?
Yes
If part of the property is used for business purposes, the portion of the property used for business may not qualify for full Private Residence Relief.
Are there limits on the size of the garden eligible for full Private Residence Relief?
Yes
There are rules regarding the size of the garden, and large gardens may not be fully covered by the relief.
Why might someone need to nominate a property for Private Residence Relief?
If a person owns multiple properties and splits their time between them, they must choose one property to benefit from Private Residence Relief to avoid tax on any gain from selling the other property.
How do the rules regarding time away from the main residence protect eligibility for relief?
These rules ensure that individuals who are temporarily away due to work or other circumstances can still claim relief on their main residence without losing the tax exemption.
Why are business use and garden size factors in calculating Private Residence Relief?
Business use and large gardens are considered outside the primary residential purpose of the property, so these factors may reduce the amount of relief available.
What happens if a property was used partly as a residence and partly for business?
The portion of the property used for business may not qualify for Private Residence Relief, and CGT may be payable on that portion when the property is sold.
How long must someone live in a property to qualify for Private Residence Relief?
The property must be the individual’s main or only residence, and certain periods of absence are allowed under specific circumstances, such as work-related absences.
Can relief be claimed if someone rents out their main residence?
Full Private Residence Relief may not apply if the property was rented out, though some relief might still be available for the time the property was used as the main residence.
Why is the size of the garden a factor in claiming Private Residence Relief?
The relief applies to the residential property and its garden, but only to a reasonable size. Excessively large gardens may be treated as separate assets for tax purposes.
How does using a property for business affect eligibility for full relief?
Using part of the property for business alters its primary residential use, which can reduce the relief available, as the business portion may be subject to CGT.
Why is it important to nominate a main residence if someone owns multiple properties?
Nominating a main residence ensures that the individual can claim Private Residence Relief on the property with the most potential for a taxable gain, reducing their overall tax liability.
What is Business Asset Disposal Relief?
Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) allows business owners to pay a lower rate of CGT on qualifying gains from selling trading businesses or assets.
Who is eligible for Business Asset Disposal Relief?
Sole traders and owners of limited companies may qualify, but specific conditions must be met, such as owning at least 5% of the ordinary share capital and voting rights in a company.
What are the shareholding requirements for Business Asset Disposal Relief for limited company owners?
Owners must hold at least 5% of the ordinary share capital, voting rights, and be entitled to at least 5% of the distributable profits and net assets of the company.
Do property letting businesses qualify for Business Asset Disposal Relief?
No
Most property letting businesses do not qualify for this relief.
Can gains from investments in unlisted companies qualify for Business Asset Disposal Relief?
Yes
Gains from investments in unlisted companies can qualify for Business Asset Disposal Relief under certain conditions.
Why was Business Asset Disposal Relief introduced?
It was introduced to encourage entrepreneurship and provide a lower CGT rate for business owners when they sell their businesses or business assets.
How does Business Asset Disposal Relief benefit business owners?
It allows business owners to pay a reduced CGT rate on gains from selling their businesses or assets, lowering their tax liability.
Why do property letting businesses generally not qualify for this relief?
Property letting is considered more of a passive investment activity rather than an active trading business, which is why it does not qualify for the relief.
What conditions must be met for Business Asset Disposal Relief on unlisted companies?
The investor must hold at least 5% of the shares and voting rights in the unlisted company to qualify for Business Asset Disposal Relief.
How long must the business assets or shares be held to qualify for Business Asset Disposal Relief?
The assets or shares must generally be held for at least two years to qualify for Business Asset Disposal Relief.
How does Business Asset Disposal Relief apply to sole traders?
Sole traders can apply for the relief when selling their entire business or assets used in the business, provided they meet the qualifying conditions.
Why must business owners hold at least 5% of the shares to qualify for Business Asset Disposal Relief?
The 5% ownership requirement ensures that only significant shareholders who are actively involved in the business are eligible for the relief, promoting long-term investment in businesses.
What types of disposals qualify for Business Asset Disposal Relief?
Disposals of trading businesses or assets used in trading businesses, and certain disposals of shares in trading companies, qualify for the relief.
What is Business Asset Rollover Relief?
Business Asset Rollover Relief allows business owners to defer CGT when they dispose of business assets and reinvest the proceeds in new business assets.
When must the replacement asset be purchased to qualify for Rollover Relief?
The replacement asset must be bought within one year before or three years after the sale of the original asset.
How long is CGT deferred under Business Asset Rollover Relief?
CGT is deferred until the final disposal of the replacement asset.
How much relief can be claimed under Business Asset Rollover Relief?
Relief can be claimed up to the lower of the gain made on the original disposal or the amount reinvested in the replacement asset.
Why does Rollover Relief defer CGT instead of eliminating it?
Rollover Relief encourages business reinvestment by deferring CGT until a final disposal is made, but it ensures that tax is eventually paid when the assets are no longer used for business purposes.
What happens if the amount reinvested is less than the gain from the original disposal?
If the reinvested amount is less than the gain, only the portion of the gain equal to the amount reinvested is deferred, and the remainder may be subject to CGT.
How does Rollover Relief benefit business owners?
It allows business owners to reinvest in new business assets without facing an immediate CGT liability, improving cash flow for business expansion.
Why is there a specific time frame for purchasing the replacement asset?
The time frame ensures that the reinvestment is directly related to the disposal of the original asset, supporting business continuity and growth.
How does Rollover Relief impact future CGT liability?
By deferring CGT to the disposal of the replacement asset, future CGT liability may be higher when the replacement asset is eventually sold, as the gain is carried over.
What happens if the replacement asset is sold without further reinvestment?
If the replacement asset is sold without reinvestment, the deferred CGT becomes payable at that point.
Why is there a three-year window for reinvestment after selling the original asset?
The three-year window allows flexibility for business owners to find and purchase suitable replacement assets while still benefiting from the relief.
What happens if the replacement asset is sold without further reinvestment?
If the replacement asset is sold and no further reinvestment is made, CGT becomes due on the deferred gain from the original asset plus any gain from the replacement asset.
