Workshop 6

Question 1

why is it important to make the distinction between income and capital?

Answer 1

A receipt = money paid TO the business.
An expense = money the business pays OUT.

It is necessary to distinguish income receipts from capital receipts and income expenditure from capital expenditure becuase expenditure can only be deducted from income receipts and capital expenditure can only be deducted from capital receipts to reduce the overall tax bill.

There is no statutory definition of income or
It is important to be able to distinguish between income and capital to ensure that the correct tax treatment is applied.

Question 2

Income receipts

Answer 2

Money received on a regular basis will be classified as an income receipt. For example:

the trading profits of any business/profession will be income (this is synonymous to the salary received by an individual employee);

interest the bank pays in relation to savings held in an account is an income receipt for the individual/busines, and

rent received by a landlord is an income receipt of the landlord.

Question 3

Capital receipts

Answer 3

If a receipt is from a transaction that is not a part of such regular activity this is likely to be classified as a capital receipt. Think of capital transactions as ‘one-off’ transactions.

Therefore, if a newsagent’s business owned the premises from which the business operates then any gain on the sale of those premises would be a capital receipt.

Question 4

Income expenditure

Answer 4

Money spent as part of day-to-day trading, is ‘income’ expenditure.
Bills for heating and lighting, rent, marketing and stationery expenses, staff wages and other fees in the general running of a business will be income expenses. General repairs will also amount to income expenses. Interest payable on loans is also expenditure of an income nature as it will be paid to the lender on a regular basis (whether that is monthly or quarterly) over a period of time.

Question 5

Capital expenditure

Answer 5

If money is expended to purchase a capital asset as part of the infrastructure of the business or as an enduring benefit for the business, it is ‘capital’ expenditure.
As with capital receipts, capital expenditure can be seen as a ‘one-off’ transaction. Expenditure on large items of equipment and machinery or property will be capital expenditure.
Equally expenditure on enhancing a capital asset (other than routine maintenance) will be capital expenditure. Even though these assets are used by a business to trade, they are one-off purchases.
It is necessary to make the distinction between income and capital expenditure because certain INCOME expenditure can be set off against INCOME receipts in a business context to reduce the overall tax bill.

Question 6

TRADING PROFITS equation

Answer 6

INCOME RECEIPTS – LESS – INCOME EXPENDITURE

Question 7

Capital Allowances

Answer 7

Tax relief for capital expenditure is usually only given when the capital asset is sold/disposed of.

Depreciation is an accounting concept, whereby the cost of an asset is deducted in the accounts over a period of time.

Capital allowances spread the cost of capital expenditure on certain capital items over a period of time. This is achieved by a proportion of the capital expenditure being deducted from income receipts over a period of time.

The relevant allowances are deducted when calculating trading profits (ie income) for tax purposes.

Question 8

Assessment of tax

Answer 8

HMRC collects tax from individuals and businesses via the self-assessment system.

Companies pay corporation tax on all income profits and chargeable gains that arise in each accounting period.

Individuals are assessed to income tax and capital gains tax on the basis of a tax year which runs from 6 April in one calendar year to 5 April in the next.

Companies are assessed to corporation tax on the basis of a financial yearwhich runs from 1 April in one calendar year to 31 March in the next.

Question 9

PAYE System

Answer 9

In some cases income tax is deducted at source. This is the system whereby the payer of a sum that is taxable in the hands of the recipient deducts the tax due in respect of the sum and accounts for it to HMRC on the recipient’s behalf.
The recipient of the taxable sum therefore receives the sum net of tax (ie after tax has been deducted).
One example of a sum where tax is deducted at source by the payer is the Pay As You Earn (PAYE) system. The employer deducts the income tax payable by the employee from the employee’s wage or salary, and accounts for this tax to HMRC. The employee receives the wage or salary net of income tax.
In calculating tax liabilities, it is important to note where tax has been deducted at source because it is the the gross amount of the receipt that must be included in the calculation (rather than the net amount).

Question 10

Annual exemption

Answer 10

For CGT: A tax allowance for individuals only.

Question 11

What is annual investment allowance?

Answer 11

A special type of capital allowance.

Question 12

Business Asset Disposal Relief

Answer 12

A tax relief available to individuals in certain circumstances to reduce their chargeable gains. It was formally known as “Entrepreneurs’ Relief” or “ER”.

Question 14

summary of capital allowances

Answer 14

Tax allowances (ie deductions) for capital expenditure available to businesses (whether run by individuals or companies).

Question 15

Capital gains tax (CGT)

Answer 15

A tax paid by individuals on their taxable chargeable gains.

Question 16

Current year basis

Answer 16

Income tax is charged on the current year basis. This means that income earned in this current year (from 6 April 2024 to 5 April 2025) will be taxed in, and according to, the rates applicable to the tax year 2024/25. (See definition of ‘Tax year’ below.)

Question 17

Deduction of tax at source

Answer 17

In some circumstances the payer of certain sums is obliged to deduct tax when making a payment eg deductions of income tax by employers (the PAYE system).

Question 18

Dividend allowance

Answer 18

A band of tax free dividend income available to individuals for income tax purposes.

Question 19

Financial year

Answer 19

Companies are assessed to corporation tax by reference to financial years (rather than calendar years). The financial year begins on 1 April in one calendar year and ends on 31 March in the next calendar year. A company’s accounting period can differ from the financial year.

Question 20

Gross sums and net sums

Answer 20

A gross sum is the total sum before tax is levied. A net sum is the amount left after tax has been paid/deducted.

Question 21

Indexation allowance

Answer 21

A tax allowance (ie deduction) for indexation available to companies in calculating their chargeable (ie capital) gains. This allowance takes into account inflation based on the Retail Price Index (“RPI”), so that a company is not taxed on chargeable gains arising solely because of inflation. Indexation allowance was frozen on 31 December 2017 and cannot be claimed for any period commencing on or after 1 January 2018.

Question 22

Investors’ Relief (IR)

Answer 22

A tax relief available to individuals in certain circumstances to reduce their chargeable gains.

Question 23

Net Income

Answer 23

Total Income less available tax relief.

Question 24

Non-savings income

Answer 24

Income which is not savings or dividend income such as salary (relevant for income tax only).

Question 25

Pay As You Earn (PAYE)

Answer 25

The system under which income tax and employees’ national insurance contributions are deducted at source (ie by the employer) from payments of salary and other employment income to employees.

Question 26

Personal allowance

Answer 26

A band of tax-free income for individuals (relevant for income tax only).

Question 27

Personal savings allowance

Answer 27

A band of savings income available for basic and higher rate taxpayers which is taxed at the savings nil rate (relevant for income tax only).

Question 28

Savings income

Answer 28

Income from savings, such as interest (relevant for income tax only).

Question 29

Taxable income

Answer 29

Net Income less the personal allowance (relevant for income tax only).

Question 30

Tax year

Answer 30

Individuals are assessed to tax by reference to tax years rather than calendar years. The tax year begins on 6 April in one year and ends on 5 April in the next year.

Question 31

Total Income

Answer 31

A taxpayer’s gross income from all sources before any deductions (relevant for income tax only).

Question 32

TTP

Answer 32

Taxable total profits, chargeable to corporation tax. The total of a company’s taxable income profits and chargeable gains.

Question 33

Value Added Tax (VAT)

Answer 33

A tax collected by registered businesses chargeable on supplies of goods and services.

Question 34

Two methods by which HMRC assesses and collects income tax

Answer 34

1. Self-Assessment = This means it is up to the individual to calculate the tax bill and not HMRC. Not all individuals are required to complete a self-assessment tax return. For example, employed individuals with uncomplicated tax affairs are not required to complete a self-assessment tax return because their tax is collected via the PAYE (Pay As You Earn) system. Directors, high and additional rate tax payers and self-employed people are examples of individuals who are always required to complete a self-assessment tax return.
2. Deduction at source = This system is used where the payer of a taxable sum is obliged to deduct tax and account for it to HMRC. The recipient of the taxable sum receives it ‘net of tax’. One example is the PAYE system.

Question 35

Income Tax calculation

Answer 35

Step 1 Calculate Total Income
Step 2 Deduct available tax reliefs (interest on qualifying loans and pension contributions) = Net Income
Step 3 Deduct Personal Allowance (reduced by £1 for every £2 of net income above £100,000) = Taxable Income
Step 4 Split the Taxable Income into Non-Savings, Savings and Dividend Income
NB. Taxable Income less (Savings Income and Dividend Income) = Non-Savings Income
Step 5 Calculate whether the Personal Savings Allowance (PSA) is available (i.e. looking at the Taxable Income figure to see which income tax band it ends in)
Step 6 Apply relevant tax rates
Step 7 Add together the amounts of tax calculated at Step 6 = Total tax liability

Question 36

The personal tax computation

Answer 36

three terms that you will need to become familiar with. These are:
Total Income:
A taxpayer’s gross income from all sources
Net Income:
Total Income less available tax reliefs
Taxable Income: Net Income less the personal allowance It is important when calculating income tax that the steps are undertaken in order so that the correct amount of tax is applied to the correct elements of a person’s income.

Question 37

Calculating Total Income

Answer 37

Add together all the receipts from all the sources of income.

(income received by a taxpayer after deduction of tax at source (ie ‘net of tax’), you will need to include the gross amount in the calculation of Total Income).

Savings income and dividend income are received gross.

There are some special rules and allowances which apply to these particular types of income, as follows.
1. Savings
Some taxpayers will have the benefit of a personal savings allowance. Basic rate taxpayers are entitled to their first £1,000, and higher rate taxpayers are entitled to their first £500 of interest received on savings at the savings nil rate. Additional rate taxpayers do not get the benefit of a personal savings allowance.
2. Dividends
Companies pay dividends to shareholders out of profits that have already been charged to corporation tax. To take account of this a dividend allowance was introduced. The effect of this allowance is that no individual pays any tax on the first £500 of dividend income they receive (prior to 6 April 2024 the allowance was £1,000). The allowance is the same for all taxpayers, no matter how much non-dividend income they receive. As we will see when we apply the rates of tax, the tax rates for dividends are different to those applicable to other forms of income. There is a useful summary table of the tax rates in Step 4 below. Examples of how dividends are taxed are set out below in this topic.
3. Benefits in kind
Many employees receive benefits in kind in addition to the salary they are paid in respect of their employment. Benefits in kind include health insurance, company cars and gym membership.
Cash payments of salary (including bonuses) are subject to deduction of tax under PAYE. Benefits in kind are subject to income tax but are NOT subject to deduction of tax under PAYE. Instead, the employer must report the amount of the benefit to HMRC as well as to the employee. The employee then includes the benefit sums on their tax return if they complete one. Such benefits must be included in the individual’s Total Income.

Question 38

Calculating Net Income

Answer 38

Once Total Income has been calculated the next stage of the income tax computation is to deduct available tax reliefs in order to establish the taxpayer’s Net Income. The only tax reliefs we look at in this topic are interest PAID on qualifying loans and pension scheme contributions.
1. Interest paid on qualifying loans
This type of interest is not to be confused with interest received by the individual from a bank on savings held at the bank (considered previously under total income). This interest is the interest an individual must pay TO the bank as the cost of receiving certain qualifying loans from the bank.
Interest on qualifying loans is a form of tax relief because it can be deducted from Total Income to reduce the amount of income subject to tax thereby reducing the tax bill.
The amount of the interest paid on these loans must be deducted from the taxpayer’s Total Income in order to determine the taxpayer’s Net Income.
Qualifying loans include: - loans to buy an interest in a partnership; - loans to contribute capital or make a loan to a partnership; - loans to buy shares in (or make a loan to) a ‘close’ company (you will learn about these in more detail later); and - loans to buy shares in an employee-controlled company or invest in a co-operative.
2. Pension scheme contributions
Many individuals pay contributions into a pension scheme, either a scheme set up by their employer (an occupational pension scheme) or a personal pension scheme. Such contributions have the benefit of relief from income tax, subject to certain limits.
Relief on pension contributions is given as follows: An amount equivalent to the pension scheme contributions made by a taxpayer during the tax year are deducted from their Total Income for that year (ie at the same time as interest on qualifying loans).
Note: There are limits to the amount an individual can pay into their pension scheme each year but this is beyond the scope of this topic. Most contributions made by an employer to an employee’s pension scheme will be exempt from income tax.
Certain charitable donations are also eligible for tax relief.

Question 39

Calculating Taxable Income

Answer 39

Once Net Income has been calculated, the next stage of the income tax computation is to deduct the taxpayer’s Personal Allowance in order to ascertain the taxpayer’s Taxable Income.
The personal allowance for the tax year 2024/25 is £12,570. The amount of this allowance is reduced by £1 for every £2 of Net Income above £100,000.

This means that individuals with Net Income of £125,140 and above will lose the benefit of the personal allowance completely. To work out the reduced allowance for individuals with Net Income between £100,001 and £125,000, follow this formula:
£12,570 – [(Net Income - £100,000) / 2] = reduced allowance

Question 40

Split the Taxable Income (step 4)

Answer 40

It is CRITICAL that the different types of income (non-savings, savings and dividend) income are separated at this point as they MUST be taxed in the order of non-savings, then savings, and then dividend income as different tax rates apply to each type of income. It may be useful to remember a mnemonic in order to recall which order the incomes are taxed (examples include: “never squash donuts” or “never say die”).
In order to calculate non-savings income, simply deduct the savings and dividend income figures from the Taxable Income.
Taxable Income LESS Savings Income LESS Dividend Income = Non-Savings Income
Worked examples appear under the tax rate summary table.

Question 41

Tax Rate Summary Table 2024/25

Answer 41

Basic > 0 – 37,700 > 20% > 20% > 8.75%
Higher > 37,701- 125,140 > 40% > 40% > 33.75%
Additional > +125.140 > 45% > 45% > 39.35%

Question 42

The Personal Savings Allowance (step 5)

Answer 42

Savings income is taxed at 0% (the savings nil rate) for the first £1,000 (if the taxpayer’s entire Taxable Income is within the basic rate band) or the first £500 (if the taxpayer’s entire Taxable Income exceeds the basic rate band but does not exceed the higher rate band, ie is not over £125,140). There is no savings nil rate for taxpayers whose Taxable Income exceeds the higher rate band (over £125,140).

Question 43

The ‘cake’ method

Answer 43

Another way to look at applying the different tax rates to the different bands of income in calculating income tax is to think about it in terms of baking a cake. You may wish to use this device to remember how to carry out the calculation.
Think of each type of income as being a different layer of the cake - ie:
1) non-savings income is the base layer;
2) savings income is the cream filling; and
2) dividend income is the top layer.
Think of the tax bands as measurements on a ruler sitting vertically next to the cake. The total taxable income will be the height that the overall cake will rise to. Each layer of the cake will rise according to how much tax the taxpayer must pay on each type of income.
Each type of income sits on top of the one before (like the layers in a cake), with the effect that each tax bracket is used up in turn and no bracket is used until the one before it has been exhausted.
If a layer of the cake/type of income rises through a tax band, then the tax rate to be applied will have to be apportioned accordingly (as we saw with the non-savings income in Example 2 above). Example 2 is then illustrated using the cake method but uses the same methodology and figures as set out in the worked example above.

Question 44

Income tax due for the year

Answer 44

At the end of the personal tax computation, we establish the total amount of tax that the individual taxpayer should pay for the year. If the taxpayer is in employment with little other income during the relevant tax year, then much of this tax will have been paid already through the PAYE system.
The income tax that remains to be paid must be settled in each year by a final payment to HMRC. Alternatively, if the amount still outstanding and due to HMRC is fairly small, it may be recovered by HMRC through an adjustment to the individual’s PAYE tax code for the following tax year. If it transpires that the taxpayer has overpaid tax during the year the taxpayer will receive a tax refund from HMRC.
Individuals also pay National Insurance Contributions (‘NICs’) out of employment income via the PAYE system. NICs do not affect the individual’s personal income tax computation in any way and will not be considered any further.

Question 45

Summary of Income Tax Calculation

Answer 45

Step 1 Calculate Total Income
Step 2 Deduct available tax reliefs (interest on qualifying loans and pension contributions) = Net Income
Step 3 Deduct Personal Allowance (reduced by £1 for every £2 of net income above £100,000) = Taxable Income
Step 4 Split the Taxable Income into non-savings, savings and dividend income
NB. Taxable Income less (savings income and dividend income) = non-savings income
Step 5 Calculate any personal savings allowance that is available (ie looking at the Taxable Income figure to see which income tax band it ends in)
Step 6 Apply relevant tax rates
Step 7 Add together the amounts of tax calculated at Step 6 = Total tax liability

Question 46

Anti-avoidance legislation

Answer 46

A certain amount of tax legislation has been developed by successive governments in order to put a stop to loopholes which have been exploited by taxpayers seeking to reduce or eliminate their tax liabilities. HMRC and the courts are increasingly hostile towards tax avoidance schemes.
In relation to income tax, you should be aware that a taxpayer cannot reduce their income tax liability by making gifts of certain income-producing items eg shares (which give rise to dividends) or a lump sum (which gives rise to interest) to their children. Instead, under special legislation often referred to as the ‘settlements’ legislation the income is treated as remaining with the taxpayer who made the gift.

Question 47

When is CGT charged?

Answer 47

CGT is charged where there is:
* a Chargeable Disposal
* of a Chargeable Asset
* by a Chargeable Person
* whichgives rise to aChargeable Gain.
CGT is charged on all gains made in therelevant tax year (i.e. 6 April to 5 April).
The tax is payable on or before 31 January following the tax year in which the disposal occurs. This is the same date as for the final payment (or refund) of income tax for the year.

Question 48

Chargeable Disposal

Answer 48

The two main instances of disposal are as follows:
1. the sale of an asset; and
2. the gift of an asset during the tax payer’s lifetime.
There is no chargeable disposal on death. The personal representatives of the deceased’s estate are deemed to acquire the estate at its then market value. This is commonly known as ‘a free uplift on death’.

Question 49

Chargeable Asset

Answer 49

All forms of property are included in the definition of asset unless they are specifically excluded. The main types of asset excluded from CGT are:
1. Principal private residence (‘PPR’):an individual can claim the benefit of this exemption from CGT if they have occupied the PPR as their only or main residence during the whole period of ownership, though the individual also has a valuable exemption in respect of the last 9 months of ownership even if they were not in actual occupation. In cases where an individual owns more than one home it is a question of fact as to which of the residences is the PPR. A married couple can only have one PPR between them: they cannot each have a different principal place of residence (unless separated);
2. Motor cars for private use, including vintage cars;
3. Certain investments, such as government securities, National Savings certificates, shares and securities held in Individual Savings Accounts (ISAs) and life assurance policies; and
4. UK sterling and any foreign currency held for your own or your family’s personal use.

Question 50

Chargeable Gain

Answer 50

A gain needs to have been made when disposing of the asset and in calculating the chargeable gain, the starting point is always the consideration received (or deemed to have been received). The appropriate rate of CGT (either 20% or 10% unless it is an upper rate gain - see further below) is then applied to the chargeable gain.
Disposals to charities are treated as made on a no gain/no loss basis. Gains made by charities are exempt provided that the gain is applied for charitable purposes.

Question 51

Disposals between spouses

Answer 51

When one spouse disposes of an asset to the other, legislation deems that neither a gain nor a loss has occurred, so no CGT is payable. In effect, the spouse receiving the asset takes over the base cost (ie the original cost of the asset to the transferring spouse) of the spouse who disposed of it.
This is the case for spouses or civil partners notwithstanding disposals between connected persons (see later).

Question 52

Allowable expenditure

Answer 52

There are three types of expenditure which can be deducted from the consideration (or deemed consideration) received. These deductions enable the taxpayer to minimise the gain made and therefore the tax payable. The categories of expenditure are as follows:
Disposal expenditure
Incidental costs of disposal (eg agents’ commission).
Initial Expenditure
1. The cost price of the asset (the ‘base cost’); and
2. The incidental costs of acquisition (eg surveyors’ fees/lawyers’ fees).
Subsequent expenditure
1. Subsequent expenditure on the asset which enhances its value; and
2. Expenditure incurred in establishing, preserving or defending title to the asset.

Question 53

Calculation of the gain to include all forms of allowable expenditure

Answer 53

In order to calculate the chargeable gain made by the seller all of the allowable expenditure needs to be included in the calculation as follows:
Sale proceeds (or market value)
Less disposal expenditure
= Net sale proceeds
Less initial expenditure
Less subsequent expenditure
= Chargeable gain

Question 54

Using capital losses

Answer 54

Instead of a capital gain, a loss may result from a disposal. Capital losses are created when the cost of an asset is greater than the consideration received for it on disposal (although a gift cannot be used to create a capital loss for these purposes).
Since CGT is only charged on overall gains made by an individual in a tax year, any capital losses that an individual has made in the same tax year can be carried across and deducted from any gains made in that tax year. Such losses must be set off against other capital gains made in the same tax year first.
If there are insufficient gains against which to offset the losses in the same tax year that they are incurred, any unrelieved losses are set against gains in future tax years I.e. carried forward (in so far as the gains in those years are not covered by the annual exemption; see below) until used up. There is no time limit on taking a loss forward but it must be used against the first available gains.
Note that there are limits as to how much an individual may claim in loss relief in certain circumstances (we will not explore this further).

Question 55

Annual Exemption (‘AE’)

Answer 55

Every individual is entitled to an annual exemption.
The annual exemption for the current tax year is £3,000, it was £6,000 in the previous tax year.
This means that all individuals are entitled to make up to £3,000 of gains tax free in this tax year.
Companies do not have the benefit of any AE.

Question 56

Tax payable on the gain

Answer 56

When the Total Chargeable Gain (i.e. after deductions and the annual exemption) has been calculated, losses can then be taken into account and all gains are added together to find the Total Taxable Chargeable Gains.
It is then necessary to calculate the tax payable on the total taxable chargeable gains.
In order to calculate the tax payable, the following rules apply:
1. Companies
All gains realised by companies will be calculated according to similar principles as those applying to CGT (with certain exceptions eg companies qualify for indexation allowance for inflationary gains up to December 2017 but do not have an annual exemption). Such gains will then be taxed at corporation tax rates (see later).
Companies do not pay CGT; they pay corporation tax. Therefore, in relation to gains made by companies, reference should be made to ‘corporation tax on chargeable gains’ rather than CGT.
Note: charities are generally exempt from paying CGT.
2. Individuals
There are two rates of CGT: 10% and 20% (unless the gains are upper rate gains (see below)).
Broadly, basic rate taxpayers pay 10% CGT and higher and additional rate taxpayers pay 20% CGT. It is important to have calculated a person’s income tax prior to their capital gains tax in order to establish this.
The details of the calculation are as follows:
* Where an individual’s Taxable Income plus total taxable chargeable gains after all allowable deductions (including losses and the AE) is less than the basic rate tax threshold of £37,700, the rate of CGT will be 10%.
* Where an individual’s Taxable Income exceeds the basic rate tax threshold of £37,700, the CGT rate will be 20%.
* Where an individual’s Taxable Income is less than the basic rate tax band threshold of £37,700 but after the gains are added, the combined total exceeds the threshold that part of the gains within the unused part of the basic rate tax band will be charged to CGT at 10% and any part that exceeds the threshold will be charged at 20%. Apportioning tax in this way when bands are straddled was also seen in Example 2 of the income tax element.
Note: Certain gains known as ‘upper rate gains’ are charged at 18% or 24%, for example disposal of a property that is not a PPR. We will not consider the details of upper rate gains.

Question 57

Summary of Capital Gains Tax calculation

Answer 57

In order to calculate an individual’s capital gains tax liability correctly the following formula should be used:
Sale proceeds/market value: A
Less disposal expenditure: (B)
= Net Sale Proceeds: C
Less initial expenditure: (D)
Less subsequent expenditure: (E)
= Total Chargeable Gain: F
Less carried forward or carried-across losses: (G)
Less annual exemption: (3,000)
= Taxable Chargeable Gain: H
Apply CGT to the Taxable Chargeable Gain (H) at the appropriate rate (10% or 20%)

Question 58

Business Asset Disposal Relief (formerly known as Entrepreneur’s Relief or ER)

Answer 58

Business Asset Disposal Relief reduces the higher rate of CGT from 20% to 10% for gains arising on qualifying disposals.
The reduced 10% rate of CGT is applied to the Taxable Chargeable Gain (ie the gain after all allowable deductions, losses and the annual exemption).
A qualifying disposal is a disposal of:
1. all or part of a trading business;
2. assets in a business that used to trade;
3. shares in a trading company; or
4. shares in a company that used to trade;
where, in each case, certain conditions are satisfied. The conditions are as follows:
1. Where someone disposes of all or part of a business:
* the business must be a trading business; and
* the business must have been owned for at least two years prior to the date of disposal.
2. Where someone disposes of assets used in a business that used to trade:
* the business must have been owned for at least two years before it ceased to trade;
* the assets must have been used in the business when it ceased to trade; and
* the assets must have been disposed of within three years of the business ceasing to trade.
3. Where someone disposes of shares in a company:
* the company must be and have been for at least two years before to the date of disposal, a trading company;
* the shares must have been held for at least two years before the date of disposal;
* the person disposing of the shares must have been an officer or employee of the company who holds at least 5% of the ordinary voting shares and is entitled to at least 5% of the profits available for distribution and 5% of the net assets on a winding up, for at least two years before the date of disposal.
4. Where someone disposes of shares in a company that used to trade:
* the shares must (generally) have been owned for at least two years before the company ceased to trade;
* the person disposing of the shares must have been an officer or employee of the company who held at least 5% of the ordinary voting shares, and was entitled to at least 5% of the profits available for distribution and 5% of the net assets on a winding up, for at least two years before it ceased to trade; and
* the shares must be disposed of within three years of the company ceasing to trade.
Note that Business Asset Disposal Relief is not automatic: in order for it to apply, the taxpayer must make a claim on or before the first anniversary of 31 January following the tax year in which the relevant disposal is made.

Question 59

Business Asset Disposal Relief – Lifetime Allowance

Answer 59

Business Asset Disposal Relief gives each individual a lifetime allowance, which is now set at £1 million.
This means that the first £1 million of qualifying gains that an individual makes in his lifetime can be charged to CGT at a reduced rate of 10%.
An individual can make as many qualifying claims as they like during their lifetime until their cumulative gains reach the £1 million lifetime limit. Any gains beyond the £1 million lifetime allowance will be charged to CGT at either 10% or 20% (depending on the rate at which the individual pays CGT; see below).

Question 60

Investors’ Relief (‘IR’)

Answer 60

IR was introduced to give a benefit to investors in unlisted trading companies who hold their shares for at least three years.
IR reduces the higher rate of CGT from 20% to 10% for gains arising on disposals of qualifying shares, subject to a lifetime limit of £10 million.
Shares will be qualifying shares if the following conditions are met:
* The shares are fully paid ordinary shares and were issued to the individual for cash consideration on or after 17 March 2016;
* The company is (and has been since the shares were issued) a trading company or the holding company of a trading group;
* At the time of issue of the shares, none of the company’s shares were listed on a recognised stock exchange;
* The shares are held by the individual for at least three years from 6 April 2016 (and continuously since issue); and
* The individual (or any connected person) is not (nor at any time has been from the date of issue of the shares) an officer or employee of the company (or any connected company).

Question 61

Other Business Reliefs

Answer 61

Alongside BADR and IR, there are two main business reliefs, which defer liability to CGT. These are:
· Replacement of business assets relief (‘Rollover Relief’)
· Gift of business assets relief (‘Hold-over relief’)
1. Replacement of business assets relief (‘Rollover Relief’)
To avoid having to pay CGT each time certain business assets are sold and replaced, a taxpayer can elect to postpone the CGT liability it realises on the sale of such an asset by ‘rolling over’ the gain into the replacement asset.
This applies to land and buildings, fixed plant and machinery and goodwill. The new asset need not necessarily be of the same type as the old one. It merely needs to be within the list of qualifying assets.
The effect of the relief is that any gain arising from a disposal of a qualifying asset is carried forward and ‘rolled’ into the cost of a qualifying replacement asset. The acquisition cost of the replacement asset is reduced by the amount of the gain being rolled over.
Therefore, any tax relief is postponed until the replacement asset is sold and no new qualifying replacement asset is purchased in its place.
It is possible to roll over gains indefinitely provided sufficient qualifying assets are bought within the time limits.
The annual exemption cannot be used to reduce the gain rolled over.
2. Gift of business assets relief (‘Hold-over relief’)
Where an individual gives away a business asset, the donor (the person making the gift) and donee (the person receiving the gift) can claim hold-over relief. As a transfer at an undervalue or gift, the market value rule will apply. The donor will have no liability to CGT but the donee’s acquisition cost for CGT purposes is reduced by the amount of the donor’s deemed gain.
In effect the CGT liability is postponed until the donee ultimately disposes of the asset (although further hold-over relief can be claimed if the donee then gives away the asset).
As in the case of roll-over relief, the whole chargeable gain must be held over if a claim for hold-over relief is made. The donor cannot use his annual exemption to reduce the gain held over.
Hold-over relief may also be claimed where an asset is sold at undervalue but the hold-over relief will only be available on the gift element, ie the difference between the price paid and the market value.
Business assets on which hold-over relief may be claimed include goodwill, assets used in the business and shares in a trading company not quoted on a stock market.

Question 62

IHT trigger events

Answer 62

Potentially exempt transfers (‘PET’) – Lifetime transfers of value which could become chargeable to IHT depending on whether the transferor survives for seven years after the transfer. Only failed PETs (i.e. those where the transferor does not survive for seven years) are chargeable.
Lifetime Chargeable Transfers (‘LCT’) – Lifetime transfers of valuewhich are immediately chargeable to IHT at the lifetime rate.These are also reassessed if the transferor dies within seven years.
Death – When a person dies there is a deemed transfer of all the assets that they own (s 4 IHTA). IHT is chargeable on this transfer of value.

Question 63

Transfers of value

Answer 63

IHT is payable on the value transferred by a ‘chargeable transfer’ (s 1 IHTA).
* A chargeable transfer is a ‘transfer of value’ made by an individual which is not an “exempt transfer” (s 2(1) IHTA).
* A “transfer of value” is a ‘disposition’ which results in an immediate decrease in the value of the individual’s estate (s 3(1) IHTA).
Broadly, this means gifts but it can also include transactions at an undervalue (e.g. selling your house to a family member for less than it is worth – The difference in value counts as a gift). It applies to gifts of all forms of property (i.e. anything with a monetary value).
The ‘value’ of a transfer of value depends on the trigger event.
* For lifetime transfers, it is assessed by reference to the loss in value to the donor.
* For the death estate, the value is calculated by reference to the market value of items in the estate on the date of death (s 160 IHTA).