Workbook3 CGT Flashcards
Disposals also occur when:
Capital sum is received as compensation for damage or injury to assets.
Capital sum received under insurance policy for damage, injury or loss of assets.
Capital sum received for surrender of rights.
Beneficiary under a trust becomes absolutely entitled to settled property against trustees.
Asset is destroyed (physically or legally). The result is usually loss, not gain.
Spouses and civil partners
Disposal between spouses is exempt
First spouse’s gain is passed to other spouse.
Transferring asset from higher-rate taxpayer to lower-rate-paying spouse before sale may save tax.
Same when one spouse has a remaining annual exemption or has losses that can be set against gains.
Inter-spousal transfers only treated like this if spouses live together at some point during tax year.
If disposal after tax year of separation but before divorce, any gain is taxable. Because still married, transfer is non-commercial and the market value used.
Disposals not at arm’s length
Disposal not at arm’s length (using market value) occurs when:
disposal is between individuals with close connection (sales and gifts),
Disposals are between unconnected parties (e.g. sale undervalue or gift).
Profit subject to income tax and CGT
When a disposal leads to income tax, the amount on which it is charged is deducted from disposal proceeds for CGT, preventing double taxation.
CGT and Income Tax
Where it can be seen that someone is ‘trading’, e.g. selling assets a short time after acquisition for a profit, sale will be subject to income tax as opposed to CGT.
Some disposals are CGT exempt, including:
Cars, NS&I, Bonds, Life Policies, Chattels U£6k, Wasting assets, medals, debts, gambling winnings, compo, VCT, EIS, Woods, charity
Private residence is exempt but…
- Part of gain may be taxable if the seller has not occupied the property as their main residence throughout ownership, i.e.
- Period of occupation
- Total period of ownership X total gain = part of property CGT exempt. - The following periods of absence are ignored:
Anyone with more than 1 home can make election to determine which is the ‘main’ residence :
Election is made within 2 years of acquisition of additional property.
Can be changed, but not backdated more than 2 years.
If no election, HMRC can decide based on the facts.
Married couples or civil partners living together can only claim exemption for 1 property at a time.
Owners can only make election if actually residing in both properties.
Disposal proceeds, for commercial basis and disposal not at arm’s length:
Commercial sale proceeds are used.
If given away, market value at the time of the gift is used.
Disposals to a connected person, market value is used.
Market value also used for disposal not at arm’s length (e.g. deliberately undervalued).
Acquisition base cost
Acquisition cost is deducted from proceeds:
If bought on a commercial basis, use purchase price.
If a gift, use the market value unless holdover relief is claimed, in which case donor’s acquisition cost.
If asset is created by the taxpayer, capital expenditure incurred wholly in creation can be deducted.
Losses
Losses on disposals can be set against any gains in same tax year.
If gains dont absorb the loss, excess losses can be carried forward to subsequent years.
One spouse’s loss cannot be set against the other’s gains.
Losses must be claimed within 4 years of the end of the tax year in which they were made.
Losses must be set against gains of same tax year even if this reduces total gains to below the exemption.
When losses are set against gains of later years, it is only necessary to use enough losses to reduce gains to the level of the annual exemption.
A loss need not be reported to HMRC unless disposal proceeds are more than 4 times the annual exemption and/or taxpayer wishes to set loss off against capital gains.
1982 value
If an asset has been held since prior to 1982, its base cost is market value on 31 March 1982.
Holdover relief
Shares are gifted and CGT is deferred.
Transfers that attract immediate charge to IHT, mainly gifts into discretionary and other trusts, qualify for holdover relief – even if no IHT is payable due to the nil-rate band.
Relief given only if donor and donee jointly claim it.
Only available for gifts to persons resident in UK. If donee ceases to be UK resident within 6 years, gain crystallises and tax may be payable. If donee fails to pay, donor may be liable.
Relief is not available for transfers of assets to a trust in which a settlor has an interest.
Business rollover relief
Businesses can claim relief if they sell assets used in the business and then buy more assets.
The company must be trading.
The assets sold must have been used for trading purposes.
Sale price has to be reinvested in new assets for use in the trade.
New assets must be bought in the period starting 1 year before and ending 3 years after disposal of old assets.
Reinvestment into EIS shares
Relief may be claimed, investment must be made in the period 12 months before and ending 3 years after disposal for CGT.
EIS shares may qualify for 30% income tax relief, though conditions are slightly different. Higher-rate taxpayer could get CGT relief as well as 30% income tax relief on reinvestment.
Gain is only deferred and will crystallise on disposal of EIS shares. At that point, original gain will be taxable – subsequent gain on EIS shares is normally exempt.
Original gain is not taxed if held until death.
