👔 Business 6: CGT

Question 1

When is CGT applicable?

Answer 1

Payable on chargeable gains made by a chargeable person on the disposal of chargeable assets in a tax year

Question 2

Who is a ‘chargeable person’?

Answer 2

□ individuals (personal capacity/as sole trader)
□ PRs’ disposing of deceased’s assets
□ Partners (charged separately for their proportion of the gain)
□Trustees, on disposal of a chargeable asset from a trust fund.

Question 3

Who is NOT a chargeable person?

Answer 3

1. Companies: pay corporation tax instead
2. Charities: exempt

Question 4

What is/isnt a chargeable asset

Answer 4

□ All forms of property (inc debts, options and incorporeal (a legal right in property having no physical existence, eg patent/lease))
□ NOT sterling (cash)

Question 5

What is a chargeable disposal

Answer 5

□ Sale
□Gift

Question 6

5 steps for calculting CGT?

Answer 6

Step 1: is there a disposal of a chargeable asset
Step 2: Calculation of the gain
Step 4: Aggregate gains/ losses; deduct annual exemption
Step 5: Apply the correct rate of tax

Question 7

Step 1: When will there be a disposal of a chargeable asset?

Answer 7

Disposal=gift or sale
Gift-market value at time of gift used to calculate
Death of taxpayer-not disposal ( IHT payable instead)

Question 8

Step 1: Is a disposal of part of an asset chargable to CGT?

Answer 8

Yes

Question 9

Step 2: how do you calculate the gain?

Answer 9

Asset sale price
* LESS purchase price
* LESS Initial expenditure (Cost of asset, Incidental costs of acquisition, expenditure wholly and exclusively incurred in providing the asset (eg building costs)
* LESS Subsequent expenditure ( wholly and exclusively incurred in establishing, preserving or defending title to the asset/to enhance the value of the asset)
* LESS Incidental costs of disposal (Legal/conveyancing/estate agents fee)

Question 10

Step 2: What is indexation?

Answer 10

*Relevant for assets owned between 31 March 1982 and 5 April 1998-adjusted as some increase in value due to inflation?
*To calculate: apply to initial and subsequent expenditure the percentage increase in the Retail Prices Index from the date the expenditure was incurred to the date of disposal of the asset

Question 11

Step 3: What 7 reliefs are available?

Answer 11

1. Rollover on replacement of business assets
2. Rollover on incorporation of a business
3. Hold- over relief on gifts
4. Business asset disposal relief (aka entrepreneurs relief)
5. Private residence relief
6. Damages for personal injury
7. Tangible moveable property (wasting assets and assests that increase in value)

Question 12

Step 3: what is rollover relief on replacement of business assets and what is the effect?

Answer 12

When sole traders/partners sell qualifying business assets and use sale proceeds to get other qualifying business assets, CGT postponed until seller disposes of new assets

Qualifying business assets: Land, Buildings, Goodwill, Fixed plant and machinery (but sale results in loss normally) Used in trade of business not as an investment NOT company shares

Question 13

Step 3: Who does rollover relief on replacement of business assets apply to?

Answer 13

1. sole trader, using in their trade
2. partnership, using in its trade
3. individual partner, where partnership using in partnership trade
4. individual SH, where used in the trade of the company in which SH owns shares and Co is their ‘personal company’ (5% voting shares)

Question 14

Step 3: time limtis for rollover relief on replacement of business assets

Answer 14

*acquire replacement asset within 1y before or 3y after disposal of original, (unless HMRC extends)
*must claim relief within 4y end of tax year they get replacement/asset sold

Question 15

Step 3: How is rollover relief on replacement of business assets applied?

Answer 15

gain notionally deducted from acquisition cost of replacement asset, which gives a lower acquisition cost to use in CGT calculations when the asset is disposed of in the future

Question 16

Step 3: can you use the annual exemption with rollover relief on replacement of business assets

Answer 16

no, its lost

Question 17

Step 3: what is Rollover relief on incorporation of a business?

Answer 17

when individual sells interest in unincorporated business to Co->Gain rolled over to shares which seller gets as consideration so CGT payable when they sell these (Gain deducted from cost of new shares)

Question 18

Step 3: is Rollover relief on incorporation of a business applied automatically?

Answer 18

Yes

Question 19

Step 3: what are the conditions for Rollover relief on incorporation of a business to apply

Answer 19

*Business transferred as going concern (so run same after just with diff owner)
*Consideration is all shares issued by Co (or only % received can be rolled over
*Business transferred with all its assets

Question 20

Step 3: can you use the annual exemption with rollover relief on incorporation of a business?

Answer 20

No, its lost

Question 21

Step 3: what is hold- over relief on gifts?

Answer 21

when making gift/sale of undervalue of certain types of business asset, CGT not payed but donee will be charged CGT if they dispose of asset

Question 22

Step 3: conditions for Hold- over relief on gifts
to apply

Answer 22

1. Must be gift/gift element of sale at undervalue
2. Both parties must agree/elect within 4y end of tax year of disposal
3. Must be chargeable ‘business asset’
   a. used in donor’s trade, or their interest in such assets (if sole trader or partner)
   b. hares in unlisted trading company
   c. shares in a personal (5% voting shares) trading company (even if listed)
   d. assets owned by SH and used by their personal trading company

Question 23

Step 3: when will hold- over relief on gifts of business assets not apply?

Answer 23

If donee Co, relief n/a to gift of shares

Question 24

Step 3: can you use the annual exemption with hold- over relief on gifts?

Answer 24

No

Question 25

Step 3: What is the effect of business asset disposal relief (aka entrepreneurs relief)?

Answer 25

Reduces a 'qualifying business disposal' to a flat rate of 10%, subject to lifetime cap of £1million

Question 26

Step 3: What is a 'qualifying business (business asset disposal relief)

Answer 26

SOLE TRADER/PARTNERSHIP Disposing of whole/part of business as a going concern OR following cessation of the business (provided assets used in business at time of cessation) Interest in business as a whole, ( just not assets) and owned for either: 1. 2y ending with the date of disposal 2. 2y ending with cessation of business IF disposal is within 3y after cessatione COMPANY 1. Co is trading 2. AND is a ‘personal company’ (5% ordinary shares giving them 5% voting rights) AND: a. beneficially entitled to 5% profits available for distribution to equity holders AND 5% assets available on winding up b. OR beneficially entitled to 5% proceeds of sale if the whole of the ordinary share capital of the company were disposed of 3. AND disponer is an employee/officer of Co 4. AND above satisfied for 2y ending with date of disposal feOR date co ceased trading (and the disposal within 3y cessation of trading).

Question 27

Step 3: time limits for Business asset disposal relief (aka entrepreneurs relief)

Answer 27

on or before the first anniversary of the 31 January following the tax year in which the qualifying disposal was made

Question 28

Step 3: what reliefs are avaliable for Tangible moveable property?

Answer 28

□ Wasting assets-assets with a predictable life of less than 50y (inc consumer goods eg kitchen appliances/TVs)=exempt □ Tangible assets that increase in value (eg antiques)=exempt if consideration for disposal £6k or less

Question 29

Step 3: What is private residence relief?

Answer 29

Applies to: dwelling house inc grounds of 1/2 hectare that individual has occupied as main residence through period of ownership (excluding last 9mo) Effect: exempt

Question 30

Step 3: what is relief for damages for PI?

Answer 30

Effect: exempt

Question 31

Step 4: how much is the annual exemption

Answer 31

£3,000

Question 32

Step 4: can the annual exemption be carried forward?

Answer 32

No

Question 33

Step 4: How does the annual exemption interact with Rollover on replacement of business assets or hold over relief?

Answer 33

Cant also use: *Business asset disposal relief *Annual exemption Specifically rollover on replacement cant generally be used with: *hold over *Rollover on incorporation

Question 34

Step 4: how does the annual exemption and other reliefs interact with rollover on incorporation?

Answer 34

Cant also use: *Business asset disposal *Annual exemption *Rollover on replacement of assets *Hold over BUT if consideration is part cash part shares, can sometimes use rollover on inc for part relating to shares and business asset disposal and annual exemption for part relating to cash

Question 35

Step 4: how does the annual exemption and other reliefs interact with business asset disposal relief?

Answer 35

Cant be claimed with hold over/rollover CAN use annual exemption before

Question 36

Step 5: rates of tax for assets qualifying for business asset disposal relief?

Answer 36

*10% regardless of income *Where have some gains that qualify and some don’t 10% rate will be added to their income first, meaning that their other gains will be treated as the top slice of their income and therefore be more likely to be taxed at 20%, or at 28% on residential property

Question 37

Step 5: rates of tax for residential property

Answer 37

8% surcharge

Question 38

Step 5: rates of tax for assets qualifying for assets other than residential property/qualidting forbusiness asset disposal relief

Answer 38

*10%-if capital gains + taxable income don’t exceed threshold for basic income tax (£37,700) *20%-capital gains + taxable income over the basic rate threshold

Question 39

Step 5: rates of tax for trustees and PRs

Answer 39

20% 28% for residential property

Question 40

Step 5: how is CGT calculated when theres more than 1 disposal?

Answer 40

□ Chargeable assets in different categories must be calculated separately so that the correct rate of tax can be applied. □ Losses and annual exemption can be deduced from gains subject to higher tax first 1. Deduct from residential prop first 2. Then assets which don’t qualify for business asset disposal relief 3. Then assets which do qualify for business asset disposal relief

Question 41

What can be done if a gain is transferred at a loss?

Answer 41

*If CGT losses exceed gains, setting losses against gains will wipe out gains and so no CGT to pay (loose annual examption) *If still unabsorbed losses, may be caried forward indefinatley and used to the reduce gains to limit of the annual exemption

Question 42

How do tou calculate setting a loss against a gain?

Answer 42

(a) work out the gain or loss each tax year; (b) deduct any losses of the current year from gains; (c) deduct any losses brought forward from previous years to reduce any remaining gains to the limit of the annual exemption; (d) deduct the annual exemption from any remaining gains

Question 43

What happens when theres is a part disposal?

Answer 43

any initial and subsequent expenditure are apportioned when calculating the gain

Question 44

What happens with disposals between spouses?

Answer 44

If living together, no deemed gain or loss for disposals BUT when recipient disposes, they pay CGT on gain made by them AND spouse

Question 45

How is CGT paid in partnerships?

Answer 45

*Treated as if each partner making separate disposal in proportion of % ownership of partnership assets *can choose own relieds if any

Question 46

How is GCT relevent when a new partner joins a partnership?

Answer 46

will involve the other partners disposing of part of their existing share of the asset because the assets are shared amongst more partners

Question 47

Are LLPs treated the same as partnerships for CGT purposes?

Answer 47

Yes mostly BUT may be treated as body corporate when ceases to trade,

Question 48

Is CGT relevent to share buyback?

Answer 48

Normally charge to income tax BUT CGT relevant if: i. buyer a trading co and shares not listed on recognised stock exchange ii. purpose of buyback is to raise cash for IHT or for the benefit of the company’s trade iii. Seller owned shares for at least 5y iv. seller is selling all of their shares or substantially reducing by at least 25% to a maximum of 30% of the issued share capital

Question 49

When must GCT be paid?

Answer 49

*before 13 Jan following end of tax year OR 30d from making assessment if later *BUT for residential prop: must submit provisional calculation of gains made form sale and pay dx due within 30d completion

Question 50

How is CGT paid?

Answer 50

HMRC’s real- time CGT service HMRC property service self- assessment tax return

Question 51

Can CGT be paid in installments?

Answer 51

In 10 annual instalments if (rare): * disposal= gift * qualifying asset is land, a controlling shareholding in co or any shareholding in a company whose shares are unquoted; * conditions for hold- over relief to apply NOT met If yes, first payment will be due by 31 January following the end of the tax year in which the disposal was made.

Question 52

When did indexation end?

Answer 52

End of 2017