Topic 4: UK Taxation 4 Flashcards
What is 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.
What is 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.
What is (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.
What is 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.
What is 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.
What is 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.
What is 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.
What is 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.
What is Capital Gains Tax (CGT)?
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 and, buildings, machinery or registered trademarks.
What is Disposal for CGT purposes?
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 kind of asset are exempt from CGT? (11 types of asset)
- Main private residence
- Property as the result of a death
- Ordinary private motor vehicles
- Personal belongings, antiques, jewellery and other moveable objects valued at £6000 or less
- Items of national, historic or scientific interest gifted to the nation
- Foreign currency for personal expenditure
- Gilts and qualifying corporate bonds
- National savings and investment (NS&I) products
- Winnings from premium bonds or lottery
- ISAs
- Gains on life assurance policies disposed of by the original owners
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.
Given that capital losses can be carried forward but the annual exempt amount cannot, capital losses brought forward are used only to the extent necessary to reduce gains to the level of the annual exempt amount. Residual losses are then carried forward.
How is CGT calculated?
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 tax able income to establish what rate(s) of CGT should be paid.
6) Apply tax at appropriate rates.There maybe 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 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.
What is the 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.
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.
