Topic 4

Question 1

What is Capital Gains Tax (CGT)?

Answer 1

CGT is a tax payable on the gain made when certain assets are disposed of, such as property, shares, and business assets.

Question 2

What are some examples of assets subject to CGT?

Answer 2

Personal property (worth more than a certain amount).
Real estate or land that is not the main home.
A main home if it has been let out or used for business.
Sale of shares (unless held in an ISA).
Business assets like land, buildings, machinery, or trademarks.

Question 3

How is CGT calculated?

Answer 3

CGT is applied to net gains in a tax year, after deducting any allowable losses from the same or previous years.

Question 4

What is the annual exempt amount for CGT?

Answer 4

It is a tax-free allowance for gains in a tax year. If unused, it cannot be carried forward.

Question 5

What types of trusts can claim the full CGT allowance?

Answer 5

Bare trusts (where a beneficiary has absolute entitlement).
Trusts for a vulnerable beneficiary.
Legal personal representatives.

Question 6

What qualifies as a ‘disposal’ for CGT purposes?

Answer 6

Selling, transferring ownership, giving an asset away, or receiving compensation for its loss or destruction.

Question 7

What was ‘bed and breakfasting’ in relation to CGT, and why is it no longer effective?

Answer 7

It was a strategy where investors sold and repurchased shares within a short period to spread gains across multiple years.
Now, any shares sold and repurchased within 30 days are treated as if the transaction never happened for CGT purposes.

Question 8

When is Capital Gains Tax (CGT) not due?

Answer 8

CGT is not payable when assets change hands due to death, though inheritance tax may apply instead.

Question 9

What happens to assets on death for CGT purposes?

Answer 9

There is a deemed disposal at market value at the time of death.
Legal personal representatives acquire assets at this value.
If the inheritor later sells the asset, CGT is based on the gain since inheritance.

Question 10

How does CGT apply to non-UK residents regarding UK property?

Answer 10

Since 6 April 2015, non-UK residents must pay CGT on gains from UK residential property, but only on gains made after that date.
Since 6 April 2019, CGT applies to non-residents on UK non-residential property as well.

Question 11

How can a non-resident individual reduce CGT on a UK property?

Answer 11

They may claim Private Residence Relief if they live in the property for at least 90 days during a tax year.

Question 12

What can an individual do if they make a loss on the disposal of an asset?

Answer 12

The loss can be offset against gains made elsewhere, starting with gains in the same tax year.

Question 13

Can capital losses be carried forward or backward?

Answer 13

Capital losses can be carried forward to offset future gains but cannot be carried back to previous tax years.

Question 14

How are capital losses and the annual exempt amount applied?

Answer 14

Capital losses are used first to reduce gains in the same tax year.
Brought-forward losses are used only to the extent necessary to reduce gains to the annual exempt amount.
Any remaining losses are carried forward to future years.

Question 15

What costs can be deducted from the sale proceeds when calculating a capital gain?

Answer 15

The acquisition base cost (purchase price) and incidental costs of buying and selling the asset.

Question 16

Can enhancement costs be deducted from a capital gain?

Answer 16

Yes, improvements can be treated as part of the purchase price, but maintenance and repair costs cannot.

Question 17

How are capital gains made on or before 31 March 1982 treated?

Answer 17

They are not taxed. For assets acquired before this date, their value as of 31 March 1982 is used instead of the actual purchase price.

Question 18

What is the tax period for CGT?

Answer 18

CGT applies to gains from disposals made between 6 April of the current tax year and 5 April of the following year.

Question 19

How can capital gains be reported?

Answer 19

Through HMRC’s self-assessment tax return or the ‘real-time’ CGT service.

Question 20

When is CGT payment due?

Answer 20

Normally, by 31 January following the end of the tax year in which the gain is realised.
For non-exempt residential property gains, within 60 days of completion via HMRC’s CGT on UK property account.

Question 21

What are the steps for calculating CGT liability?

Answer 21

1. Calculate the gain amount.
2. Deduct any allowable losses.
3. Deduct the CGT annual exempt amount.
4. Determine the taxable gain.
5. Add the taxable gain to taxable income to establish
   applicable CGT rates.
6. Apply tax at the appropriate rate(s).

Question 22

What is Private Residence Relief?

Answer 22

Private residence relief is a relief that exempts individuals from paying CGT when they sell a property that has been their main or only residence.

Question 23

Can private residence relief apply to properties other than houses or flats?

Answer 23

Yes, it can also apply to houseboats or fixed caravans if they are used as the main residence.

Question 24

What happens if someone has more than one property?

Answer 24

They may nominate one of the properties to claim private residence relief.

Question 25

What factors affect private residence relief eligibility if the owner spends time away from the property?

Answer 25

Private residence relief may still apply if time away is due to job-related accommodation or other qualifying circumstances.

Question 26

What is Business Asset Disposal Relief?

Answer 26

A relief that allows business owners to pay a lower CGT rate when selling qualifying business assets.

Question 27

What conditions must a limited company owner meet to qualify for business asset disposal relief?

Answer 27

They must hold at least 5% of the ordinary share capital, have at least 5% of voting rights, and be entitled to at least 5% of the company’s distributable profits and net assets.

Question 28

Do property letting businesses qualify for business asset disposal relief?

Answer 28

No, most property letting businesses do not qualify.

Question 29

What is business asset rollover relief?

Answer 29

A relief allowing CGT to be deferred if the proceeds from a sold business asset are reinvested in another business asset within a set timeframe.

Question 30

What is the timeframe for purchasing a replacement asset under business asset rollover relief?

Answer 30

It must be bought within one year before or three years after the sale of the original asset.

Question 31

What is gift hold-over relief?

Answer 31

A relief that allows CGT on the gain from gifted assets to be deferred until the recipient disposes of them.

Question 32

What types of assets qualify for gift hold-over relief?

Answer 32

Assets used in the donor’s trade or their personal company. Shares in an unlisted trading company or personal company. Agricultural property eligible for inheritance tax relief. Assets subject to an immediate inheritance tax charge.

Question 33

What is inheritance tax (IHT)?

Answer 33

A tax levied on the estates of deceased persons, charged on the value of the estate that exceeds the available nil-rate band.

Question 34

What is the nil-rate band for IHT?

Answer 34

The amount on which a nil rate (0%) of IHT applies, meaning no tax is due on that portion of the estate.

Question 35

How can surviving spouses or civil partners increase their nil-rate band?

Answer 35

They can inherit the unused portion of their late spouse’s or civil partner’s nil-rate band, increasing their own exemption.

Question 36

Why does IHT include gifts made before death?

Answer 36

To prevent tax avoidance through 'death-bed' gifts, IHT applies to gifts or transfers made within seven years prior to death.

Question 37

What is the Residence Nil-Rate Band (RNRB)?

Answer 37

An additional nil-rate band applied when a residence is left to direct descendants, reducing the taxable estate for IHT purposes.

Question 38

How does the RNRB affect IHT calculations?

Answer 38

The RNRB is deducted from the estate’s value before calculating IHT, but it cannot exceed the value of the deceased’s residence.

Question 39

Can the RNRB be carried forward if unused?

Answer 39

Yes, any unused percentage of the RNRB can be transferred to a surviving spouse or civil partner for use on their death.

Question 40

What is the maximum IHT-free estate for married couples or civil partners?

Answer 40

£1 million (£175,000 × 2 RNRB + £325,000 × 2 NRB).

Question 41

How does the RNRB taper for estates over £2 million?

Answer 41

The RNRB is reduced by £1 for every £2 that the estate exceeds £2 million.

Question 42

Can unused RNRB be applied to other assets in the estate?

Answer 42

No, it can only be applied to the value of a qualifying residence but can be carried forward if not fully used.

Question 43

What is a potentially exempt transfer (PET)?

Answer 43

A gift made during a person’s lifetime that is not subject to IHT at the time of transfer, becoming fully exempt if the donor survives for seven years.

Question 44

What happens if the donor dies within seven years of making a PET?

Answer 44

The gift is included in the estate for IHT purposes, and tax may be due if the total value exceeds the nil-rate band.

Question 45

How are gifts offset against the nil-rate band?

Answer 45

Gifts made in the last seven years are deducted from the nil-rate band first, reducing the available nil-rate band for the rest of the estate.

Question 46

What is taper relief in IHT?

Answer 46

A reduction in the IHT due on gifts made more than three years before death, reducing the tax liability over time.

Question 47

How does taper relief reduce IHT on gifts?

Answer 47

0-3 years before death: 100% of IHT due 3-4 years: 80% of IHT due 4-5 years: 60% of IHT due 5-6 years: 40% of IHT due 6-7 years: 20% of IHT due 7+ years: No IHT due

Question 48

If a gift alone exceeds the nil-rate band, how is it taxed?

Answer 48

The excess amount is taxed along with the remainder of the estate, but taper relief may apply to reduce the tax.

Question 49

What is a chargeable lifetime transfer (CLT)?

Answer 49

A gift made during a person's lifetime to companies, organisations, or certain trusts, which is subject to immediate IHT at a reduced rate if the value exceeds the nil-rate band.

Question 50

When is IHT payable on a chargeable lifetime transfer?

Answer 50

IHT is due immediately if the transfer value, combined with previous CLTs in the past seven years, exceeds the nil-rate band.

Question 51

How is the reduced IHT rate applied to a chargeable lifetime transfer?

Answer 51

The reduced rate is applied only to the portion of the transfer value that exceeds the nil-rate band.

Question 52

What happens if the donor dies within seven years of making a chargeable lifetime transfer?

Answer 52

The full amount of IHT becomes due on the transfer, subject to taper relief.

Question 53

What transfers are exempt from inheritance tax (IHT)?

Answer 53

Transfers between spouses and civil partners, both during their lifetime and on death, provided the receiving spouse or civil partner is UK domiciled.

Question 54

What is the exemption limit for small gifts to individuals each tax year?

Answer 54

Small gifts of up to £250 (cash or value) per recipient in each tax year.

Question 55

Which donations are exempt from inheritance tax?

Answer 55

Donations to charity, political parties, and the nation.

Question 56

What is the exemption limit for wedding or civil partnership gifts?

Answer 56

Up to £1,000 per recipient, with an increased limit of £5,000 for gifts from parents, £2,500 from grandparents, or from one spouse/civil partner to the other.

Question 57

What is the exemption for gifts made regularly out of income?

Answer 57

Gifts made regularly out of income that do not affect the donor’s standard of living are exempt from IHT.

Question 58

What is the annual exemption for gifts not covered by other exemptions?

Answer 58

Up to £3,000 per tax year, with any unused portion carried forward for one tax year, but no further.

Question 59

What is value added tax (VAT)?

Answer 59

VAT is an indirect tax levied on the sale of most goods and the supply of most services in the UK.

Question 60

Which financial transactions are exempt from VAT?

Answer 60

Certain financial transactions, such as loans and insurance, are exempt from VAT.

Question 61

Is the supply of financial advice subject to VAT?

Answer 61

Yes, the supply of financial advice is subject to VAT, similar to solicitors or accountants who charge fees.

Question 62

What types of services are exempt from VAT?

Answer 62

Health and education services are exempt from VAT.

Question 63

What does "zero-rated" mean in relation to VAT?

Answer 63

Zero-rated means that goods and services are theoretically subject to VAT, but the rate applied is 0%, which can include food, books, children’s clothes, domestic water supply, and medicines.

Question 64

What is charged at a reduced VAT rate?

Answer 64

Domestic heating is charged at a reduced VAT rate.

Question 65

When is a business required to register for VAT?

Answer 65

A business must register for VAT if its annual turnover exceeds a certain threshold.

Question 66

What are the advantages and disadvantages of VAT registration for businesses?

Answer 66

Advantage: VAT paid on business expenses can be reclaimed. Disadvantages: Goods or services become more expensive to customers due to the VAT charged. Additional administration for collecting, accounting for, and paying VAT.

Question 67

Can a business be deregistered for VAT?

Answer 67

Yes, if a registered business's turnover falls below the threshold, it can apply to HMRC for deregistration.

Question 68

What is stamp duty?

Answer 68

Stamp duty is a tax imposed on documents that give effect to certain transactions, such as conveyances of property or stock transfer forms.

Question 69

What types of transactions are liable to stamp duty?

Answer 69

Transactions involving the purchase of securities and land are liable to stamp duty.

Question 70

When is stamp duty payable?

Answer 70

Stamp duty is payable on paper documents that transfer the ownership of financial assets, such as shares and bearer instruments, over a certain amount.

Question 71

What is Stamp Duty Reserve Tax (SDRT)?

Answer 71

SDRT is charged on transfers completed electronically, particularly through the CREST system, where it is deducted automatically and passed to HMRC. For other transactions, the buyer must notify HMRC and make the payment.

Question 72

Are there any exemptions from stamp duty or SDRT?

Answer 72

Yes, there are exemptions, including transactions in eligible securities on the London Stock Exchange’s AIM and High Growth Segment, transfers of shares in property authorised investment funds (PAIF), and no SDRT on the surrender of units. However, Real Estate Investment Trusts (REITs) pay stamp duty or SDRT at the usual rates.

Question 73

Who pays Stamp Duty Land Tax (SDLT)?

Answer 73

SDLT is paid by the purchaser of property.

Question 74

How is SDLT calculated?

Answer 74

SDLT is charged on different portions of the purchase price, with no SDLT below a certain threshold. Any portion above the threshold is subject to SDLT, with rates increasing as the purchase price rises.

Question 75

Do corporate bodies face different SDLT rates?

Answer 75

Yes, corporate bodies may have different purchase price thresholds and SDLT rates.

Question 76

Does SDLT apply in Scotland or Wales?

Answer 76

No, SDLT does not apply in Scotland or Wales. Instead, these areas are subject to Land and Buildings Transaction Tax (LBTT) in Scotland and Land Transaction Tax (LTT) in Wales.

Question 77

What is SDLT relief for first-time buyers?

Answer 77

First-time buyers, including those purchasing shared ownership properties, can claim a discount on SDLT, which is tapered depending on the property price. For properties below a certain amount, no SDLT is due. The relief is not applicable for properties above a certain price.

Question 78

Who is required to pay corporation tax?

Answer 78

Limited companies, clubs, societies, trade associations, housing associations, and co-operatives pay corporation tax. However, conventional business partnerships, limited liability partnerships, and sole traders are subject to income tax.

Question 79

What profits are subject to corporation tax?

Answer 79

Corporation tax is paid on a company’s profits, including trading profits (after expenses), capital gains, income from letting, and interest on deposits.

Question 80

How is corporation tax calculated for UK companies?

Answer 80

UK companies pay corporation tax on their worldwide profits.

Question 81

How is corporation tax paid by companies with different profit levels?

Answer 81

For companies with profits up to a set threshold, corporation tax is due nine months after the end of the accounting period. For companies with profits above the threshold, corporation tax is paid in quarterly instalments starting halfway through the accounting period.

Question 82

What is the definition of withholding tax?

Answer 82

Withholding tax is a tax on income levied at source before the income is received.

Question 83

How is withholding tax applied to UK employees?

Answer 83

The income tax paid by UK employees is considered a form of withholding tax, as it is deducted at source before the employee receives their income.

Question 84

When does withholding tax apply to non-residents?

Answer 84

Withholding tax is typically levied on income received in a country by non-residents, such as non-resident entertainers or professional sportspeople, either from earned income or investment income.

Question 85

What is the purpose of withholding tax?

Answer 85

The aim of withholding tax is to ensure that income does not leave the country without being taxed.

Question 86

How do tax treaties affect withholding tax?

Answer 86

The UK has reciprocal tax treaties (double taxation agreements) with over 100 countries to prevent the same income from being taxed twice.