Capital Gains Tax

Question 1

When is capital gains tax chargeable? What four requirements are needed?

Answer 1

• there is a chargeable disposal
• of a chargeable asset
• by a chargeable person
• which gives rise to a chargeable gain

Question 2

What is a chargeable asset?

Answer 2

Most valuable personal possession and certain non-physical assets such as shares

Not cars.

Land although exemption for main home - Private Residence Relief

Certain invests also excluded - government securities, National savings certificates, shares and securities held in individual savings accounts (ISAs) and life assurance policies

Excluded - UK sterling and any foreign currency held for your own or your family’s personal use

Question 3

Who is a chargeable person?

Answer 3

Individual who is a UK taxpayer for the relevant tax year

Companies do not therefore pay CGT

Question 4

What is a chargeable gain?

Answer 4

Increase in value between purchase price and sale price less any allowable expenditure

Question 5

What disposals are not seen to give rise to a chargeable gain?

Answer 5

• disposals to or from charities
• disposals between spouses
• disposals on death

Question 6

What will be the consideration when a sale is at arm’s length?

Answer 6

Will be the price paid by the buyer

Question 7

What will the consideration be between connected persons?

Answer 7

HMRC will deem the seller to have received the market value irrespective of the actual sale proceeds

Question 8

Who are connected persons for CGT purposes?

Answer 8

• individuals relatives and spouses - parents, grandparents, lineal descendants, siblings but not uncles, aunts, cousins, nephews, nieces
• companies if they are under common control
• partners in business

Question 9

What happens if there is a disposal at an undervalue?

Answer 9

If transaction is between unconnected persons at an undervalue, then CGT will deem sale to be at the market value at date of disposal

Question 10

What happens where an asset has been gifted?

Answer 10

Donor will be deemed to have received the market value of the asset from the donee at date of gift

Question 11

What allowable expenditure can be deducted from any chargeable gain amount?

Answer 11

• cost incurred in acquiring the asset (such as conveyancer’s fees and purchase cost)
• costs incurred that contribute to the value of the asset (the cost of building an extension but not costs of maintenance or repair) or preserve value of asset/title
• costs incurred in disposing of the asset (such as conveyancer’s fees for the sale and estate agents’ commission)

Question 12

What happens if the taxpayer has made losses at the same time they made the gains?

Answer 12

The taxpayer can offset any loses against any gains made

Question 13

Is there a time limit on how far losses can be carried forward?

Answer 13

• but must be applied against first available gains

Question 14

What annual exemption is a taxpayer entitled?

Answer 14

£6,000 currently for individuals

£0 for companies

Question 15

What conditions must be met for Private Residence Relief to apply so no CGT due?

Answer 15

• It has been the person’s main home for all the time that they lived in it
• they have not let it out (other than taking a lodger)
• it has not been used for business purposes
• the grounds including all buildings are less than 5,000 square metres
• it was not bought just to make a gain

Question 16

Do companies pay CGT?

Answer 16

No they pay corporation tax on gains

Question 17

What rates are there for CGT?

Answer 17

10% or 20%

Question 18

When will taxpayers pay lower or upper rates of CGT?

Answer 18

10% - where individual’s taxable income plus total chargeable gains after all allowable deductions is less than the basic threshold

20% - where individual’s income exceeds basic rate tax threshold

10%/20% - where individual’s taxable income is less than basic rate band but above basic rate band once gain added, then gain will be taxed at respective amounts that are above and below basic rate band

Question 19

What is the simplified process for CGT?

Answer 19

1. Sale proceeds/market value
2. Less disposal expenditure
3. Net sale proceeds
4. Less initial expenditure
5. Less subsequent expenditure
6. Total chargeable gain
7. Less carried forward or carried across losses
8. Less annual exemption
9. Taxable chargeable gain at relevant rate

Question 20

What is business asset disposal relief?

Answer 20

Reduces higher rate of CGT from 20% to 10% for all qualifying disposal

Question 21

What is a qualifying disposal for business asset relief?

Answer 21

• all or part of a trading business (business must be owned for at least two years prior to disposal)
• assets in a business that used to trade (owned at least two years prior to disposal, assets must have been used in business when it ceased to trade, assets must be disposed of within three years of the business ceasing to trade)
• shares in a trading company (the company must be and have been for at least two years prior to disposal a trading company, shares must have been held for at least two years, person must have officer or employee of company and hold at least 5% of ordinary voting shares and entitled to at least 5% of distributable profits and 5% of assets on winding up) or
• shares in a company that used to trade (shares must have been owned two years before the company used to trade, person must have officer or employee of company and hold at least 5% of ordinary voting shares and entitled to at least 5% of distributable profits and 5% of assets on winding up, shares must be disposed of within 3 years of the company ceasing to trade)

Question 22

How much business asset relief can an individual benefit from?

Answer 22

A lifetime allowance of £1 million

Question 23

What is investor’s relief?

Answer 23

IR reduces higher rate of CGT from 20% to 10% for gains arising on disposal of qualifying shares

Question 24

How much investor’s relief can an individual benefit from in their lifetime?

Answer 24

£10 million

Question 25

What are qualifying shares for investor’s relief?

Answer 25

Will be qualifying if following conditions are met:

• fully paid ordinary shares and issued for cash consideration on or after 17 March 2016
• company is a trading company or the holding company of a trading company
• at the time of issue of shares, none of the company’s shares were listed on a recognised stock exchange
• shares are held by the individual for at least three years from 6 April 2016 (and continuously since issue)
• individual (or any connected person) is not (nor at any time from issue of shares) an officer or employee of the company (or any connected company)

Question 26

What are the two main business reliefs?

Answer 26

• replacement of business assets relief (rollover relief)
• gift of business assets relief (hold-over relief)

Question 27

What is replacement of business assets relief?

Answer 27

Taxpayer can elect to postpone CGT liability the arises on sale of such asset by rolling over the gain into qualifying replacement asset

Question 28

What is a qualifying replacement asset for replacement business asset relief?

Answer 28

Must be one of the following:

• land and buildings
• fixed plant and machinery
• goodwill

New asset does not need to be same as old. Long as it is on the list

Question 29

Is there a limit on how many times a gain can be rolled over for?

Answer 29

No

Question 30

What is gift of business assets relief?

Answer 30

CGT is postponed where there is a gift of business assets until donee ultimately disposes of asset by sale

Annual exemption not allowed to be used here

Question 31

Can gift of business asset relief only be used on gift?

Answer 31

No can be used where asset sold at undervalue but only on party which if a gift ie difference between price paid and market value

Question 32

What assets will qualify for gift of business assets relief?

Answer 32

• goodwill
• assets used in the business
• shares in a trading company not quoted on the stock market