9. CGT - charge

Question 1

LIABILITY TO CGT

Answer 1

1. components of charge present
2. computation –> gain or loss?
3. relief? exemption?

s.37(1) - CGT cannot arise if already income tax charge

Question 2

rates

Answer 2

10%/18% (basic rate)

20%/28% (higher rate - based on band of income tax)

18/28 = for residential property and carried interest

Question 3

components of a charge

Answer 3

CHARGEABLE PERSON

DISPOSAL

CHARGEABLE ASSET

CHARGEABLE GAIN

Question 4

CHARGEABLE PERSON S.2(1)

Answer 4

anyone resident or ordinary resident (and if resident only part of the year, still a charge ESCD2)

LIABLE FOR WORLDWIDE CHARGEABLE GAINS

but foreign investors not caught by CGT unless residential property (unfair!)

contrast income tax –> all income tax receipts in the country are taxable

Question 5

DISPOSAL

Answer 5

no definition in legislation

CGT leaflet 8:

• ownership changes
• owner divests himself of his rights or interests over asset

e.g. sale, exchange, gift

Question 6

Examples of disposals

Answer 6

capital sum derived from asset (e.g. insurance paid for damage/destruction to asset)

receipt of compensation/damages

exchange of assets

involuntary disposals

Question 7

disposals that are not disposals

Answer 7

mortgages and bankruptcy (because no underlying disposal)

mortgages: expect property to pass back

for hire purchase: disposal at beginning but if property doesn’t pass, tax is adjusted

Question 8

disposals that do not give rise to CGT (NO CHARGEABLE GAIN)

Answer 8

DEATH s.62

INTERSPOUSAL TRANSFERS s.58

CHARITY GIFTS s.256

SHARE FOR SHARE EXCHANGES

COMPANY RECONSTRUCTION

TRANSFERS BY SPECIAL TRUSTEE

FOREIGN CURRENCY FOR PERSONAL USE

TRANSFER OF SHARES TO EMPLOYEE IN EMPLOYEE SHARE OWNERSHIP TRUST

TRANSFERS WITHIN A GROUP

Question 9

Actual disposals

Answer 9

actual total disposals (e.g. sale/gift of shares)

• CGT Leaflet 8
• straight forward

actual part disposal (e.g. sale/gift of part of a holding of land)

• s.21(2) disposals include part disposals
• s.42: not taxed on whole amount (can reduce DC by some AE of the whole)

CREATION OF OPTION = NOT DISPOSAL (it is itself an asset)

SALE OF 50 OF 100 SHARES = TOTAL DISPOSAL OF EACH 50 SHARE (but if I lose majority, it is a part disposal if shares are worth less)

Question 10

DEEMED DISPOSALS

Answer 10

Deemed part disposals (i.e. receipt of compensation where an asset is damaged)

• s.22
• s.21

deemed total disposal (e.g. destruction of an asset)

• s.22 (capital sum derived from asset)
• s.17 (bargains not at arm’s length - deemed to take place at MV)
• s.18 (transactions with connected person is not at arm’s length)

ASSET DOESN’T SEEM TO MOVE so disposal must be deemed (s.22-24)

Question 11

Turner v Follett

Answer 11

300 shares gifted to T’s children

• disposal deemed at MV
• CGT charge
• not a gift tax because it is the gain that is taxed not the whole gift

Question 12

Davis v Powell

Answer 12

compensation paid for disturbance under AHA s.34 (T gave up lease)

• Revenue argued compensation was derived from the asset (s.22(c)) because lease is the asset
• NO CGT
• cap sum was paid under statute
• NOT sum derived from asset (lease)

Question 13

Davenport v Chilver

Answer 13

two payments:

(1) daughter’s compensation in own right
- CGT
- derived from interest in property (s22)

(2) daughter’s compensation received as beneficiary under mother’s will
- CGT
- derived from rights under statute (s.22 applies)
- order created independent proprietary right, which is an asset, so CGT triggered

CAN DISTINGUISH THIS CASE BY SAYING THE ORDER WAS A FUND held by Gov to pay compensation rather than a normal statute

Question 14

Drummond v Austin Brown

Answer 14

compensation paid for terminating tenancy with notice under s.25 LTA 1954

• CA held asset is statute
• CGT applies (s.22 - sum derived from asset)
• BUT REVENUE didn’t argue this (so not taxed as sum was not derived from lease)

Question 15

Zim Properties v Proctor

Answer 15

S.22 - compensation derived from asset (right to sue - O’Brien)

= CGT

problem: money meant to compensate so if taxed on this is problematic

Question 16

Pennine v Kirklees

Answer 16

compensation under statute

• asset is right under statute (not the right to sue)
• thus, s.22 and CGT applies

Question 17

ESC D33

Answer 17

mitigate problem in Zim where people were taxed on their compensation

IF NO UNDERLYING ASSET = COMPENSATION EXEMPT
(up to £500,000)

IF UNDERLYING ASSET (e.g. shares or a building) = CAP SUM DERIVED FROM RIGHTS OF ACTION (but not statute or contractual rights) ARE TREATED AS DERIVED FROM THE UNDERLYING ASSET

• this means a % of AE can be used to deduct the gain (using part disposal rules)
• e.g. solicitor negligent so sale of building failed, settlement paid has underlying asset of building, so part of AE of building can be deducted in calculating gain on disposal of right of action

Question 18

CHARGEALE ASSETS

Answer 18

not assets:
mere spes (expectation only - e.g. right under will)

right of pre-emption (just right of first refusal, no immediate interest)

sterling

Question 19

no gain on disposal of these assets

Answer 19

debts (other than debts on security)

covenants

certain wasting assets

private residence

government stock

qualifying corporate bonds

EIS and certain BES shares

woodlands

passanger vehicles

certain chattels

Question 20

O’Brien v Benson’s Hosiery

Answer 20

chose in action = asset (because it can be turned into money)

disposing of right to sue = subject to CGT

(if right to sue is for personal injury or UD - not chargeable gain s.51(2))

Question 21

Marren v Ingles

Answer 21

right to receive money on contingency = asset (it is not a debt, so it is not exempt)

right to receive money is too uncertain to be a debt (but it can still be an asset)

debt can be: (1) a contingent debt, or (2) an unascertained sum, but cannot be both

Question 22

Kirby v Thorn EMI

Answer 22

“right” in colloquial a sense is not an asset

• must be legally enforceable and capable of being turned into money
• right to compete/trade in market place is not an asset

A PAYMENT FOR GOODWILL OF A COMPANY IS TAXABLE