C3 - CGT Flashcards
(99 cards)
1
Q
What is the first step to working out a capital gain or loss?
A
Disposal proceeds less the acquisition cost.
For example, if you bought a painting for £5,000 and sold it later for £25,000, you’ve made a gain of £20,000 (£25,000 minus £5,000).
2
Q
What are the 4 ways in which you can dispose of an asset?
A
Sell it
Give it away as a gift, or transfer it to someone else
Swap for something else
Receive compensation for it - like an insurance payout if it’s been lost or destroyed
3
Q
How is the date of disposal arrived at?
A
Date the contract of sale became binding, not the date the money was actually exchanged
4
Q
What is the CGT treatment on sales and transfers between spouses?
A
CGT exempt, unless you separated and did not live together at all in that tax year, or if you gave assets away for them to sell for their business.
5
Q
Even though transfers and sales between spouses are CGT exempt, when could a gain still arise?
A
Realising gain in future date
6
Q
How is CGT liability distributed between spouses on the sale of property in these circumstances:
1. Joint tenants
2. Tenants in common
A
1.Equal share
2. Unequal share
7
Q
What is a disposal not at arm’s length?
A
Not a close connection, friends for example.
Arms length might be father and daughter.
8
Q
How is an asset valued when disposing not at arm’s length?
A
Market value
9
Q
Deferred consideration can be ascertainable or un-ascertainable. What does this mean?
A
ascertainable = amount to be receieved is fixed
un-ascertainable = amount is not fixed
10
Q
How do the valuations of assets differ when calculating for CGT and IHT?
A
CGT = asset valued
IHT = loss to the estate valued
11
Q
What is the valuation basis for a gift for CGT purposes?
A
Market value
12
Q
What is the most obvious factor when deciding if an asset is subject to income tax or CGT?
A
Income tax if the sales is a trade
13
Q
The sale of an asset soon after acquisition is an indicator of trade for income tax purposes, or sale for CGT purposes?
A
Trade
14
Q
The sale of repeated transactions is an indicator of trade for income tax purposes, or sale for CGT purposes?
A
Trade
15
Q
What does the case of Rutledge v. The Commissioners of Inland Revenue summarise?
A
That the sale of 1,000,000 toilet rolls was proven to be trade because there was no long term investment opportunity and Rutledge simply had “an adventure in the nature of trade”
16
Q
A forced sale to raise cash for an emergency is an indicator of trade for income tax purposes, or sale for CGT purposes?
A
Sale for CGT
17
Q
If a transaction is undertaken with the motive of realising a profit, this is a strong indication of trading for income tax purposes or sale for CGT purposes?
A
but can be for sale and therefore CGT, as people often buy capital assets with a view to making a profit.
18
Q
If money is borrowed to buy the assets, which have to be
sold to repay the loan, then the transaction is more likely to be trading for income tax purposes of sale for CGT purposes?
A
Trading
19
Q
An asset acquired by inheritance or as a gift is likely to be trading for income tax purposes or sale for CGT purposes?
A
Sale for CGT
20
Q
What is the CGT annual exempt amount?
A
£6,000, reducing to £3,000 in 2024/35 tax year
21
Q
What is the definition of trading?
A
trading is indicated when the asset (the subject matter of the transaction) does not yield an ongoing income or give personal enjoyment to its owner;
22
Q
Can the CGT annual exempt amount be carried forward to other tax years if not used?
A
No
23
Q
What is a chattel?
A
A tangible/movable property
24
Q
What is the CGT treatment surrounding chattels?
A
If the value of disposal does not exceed £6,000, it’s CGT exempt.
25
What is the CGT treatment surrounding chattels that are also a wasting asset, such as a yacht?
They have an expected lifespan of less than 50 years and are completely exempt of CGT
26
If chattel disposal proceeds exceed £6,000, the chargeable gain cannot exceed how much?
Five-thirds of the excess over £6,000.
For example, if a ring costing £1,000 is sold for £7,800, the chargeable gain cannot exceed £3,000 ((£7,800 – £6,000) × 5 ÷ 3). Therefore, the chargeable gain is £3,000, rather than the ‘actual’ gain of £6,800.
27
In which 2 circumstances are some assets completely free of CGT?
They are exempt assets
The gain is relieved wholly from tax
28
Can allowable losses be claimed on CGT exempt assets?
No
29
Name some disposals that are CGT exempt? (18)
1. Individuals private residence
2. Private motor car
3. NS&I savings certs and premium bonds
4. Bonds (gov and most corporate)
5. Gambling winnings
6. Compensation
7. Army medals (decorations for valour)
8. Foreign currency for personal use outside of UK
9. Debts repaid to creditor
10. ISA, JISA, CTF
11. VCT
12. EIS, SEIS (losses available however)
13. Woodlands
14. Cashback for inducement/enticement
15. Shares up to £50k (pre Dec 2016) and £100k (post Mar 2016) for e’ee shareholder agreements
16. Disposals to charity, museums, housing associations and some national institutions
17. Some assets of national interest (art, histroic houses)
Shares in share incentive plan
30
Whats is the exemption called when an individuals private residence is CGT exempt? And under which conditions does it apply?
Private residence relief
You have one home
You’ve lived in it as your main home for all the time you’ve owned it.
You have not let part of it out - this does not include having a lodger.
31
What is the CGT treatment if an individual has not occupied their main residence for a period of time?
The part of time they didn’t occupy it, may be taxable:
Total gain x (period of occupation / total period of ownership)
32
For identifying periods of occupation in someones main residence, for CGT purposes, which period of time in the past can be completely ignored? (4)
Any period before 1 April 1982
Last 9 months of occupation (36 months disabled persons or if moving into LTC)
Periods totalling up to three years’ absence if a period was both preceded and followed by a period of residence
Any period up to four years in total when employed away from home (within the UK) and any period without limit if working abroad - both must normally be preceded and followed by a period of occupancy.
33
Anyone with more than one home can make an election to determine which home should be treated as the main residence. How soon should this be done?
Within 2 years of the acquisition of the additional property
34
If you elect an additional property to become your main residence, how far can you backdate this?
Cannot be backdated more than 2 years
35
How much do you get for letting relief:
a) Individual
b) Married couple, living in the same house as their tenant?
a) the lesser of, £40,000, or the same amount as the chargeable gain you made whilst letting out that part of your home
b) £80,000 (£40,000 each
36
Who could still be entitled to the letting relief is the homeowner died before the house was sold, and in what 2 circumstances?
Deceased person’s personal representatives.
- Property must have been occupied by the beneficiary before and after the death
- Beneficiary must be entitled to all of the proceeds of the sale
37
What is letting relief?
Lettings Relief is a form of tax relief that can reduce the Capital Gains Tax liability when a homeowner sells a property used both as their main residence and as a rental property.
38
Is letting relief available when parts of the house are used for both full time and part time business purposes?
Not for full time, but it can be used part time for business and part time for personal (i.e a writer who writes in the spare bedroom)
39
Can letting relief be used when a gain arises on a property that was purchased wholly or partly for the purpose of making a gain?
No
40
What is the CGT treatment on a life assurance product such as an investment bond?
Gains on life assurance investments – commonly known as investment bonds – are liable for income tax under the chargeable event rules rather than CGT.
41
What is the CGT rate for non-exempt residential property?
18% for basic rate taxpayers
28% for higher and additional rate taxpayers
42
What are the 6 steps to calculating a capital gain?
SALE - Note down the sale price (disposal proceeds)
ACQUISITION - Minus the acquisition price
EXPENSES - Deduct costs of arranging the sale or purchase
LOSSES - Minus allowable losses, against gains taxable at highest rate first
AEA - Minus annual exempt amount
TAX - Calculate tax at appropriate rate
43
How are the disposal proceeds arrived at on the following (either sale price or market price):
1. Commercial sale
2. Asset given away
3. Disposal to connected person (i.e family)
4. Not at arms length (i.e deliberately set below market value)
Sale price
Market value
Market value
Market value
44
How is the acquisition cost arrived at on the following (either purchase price or market price):
1. Commercial sale
2. Acquired as a gift
Purchase price
Market value (unless holdover relief used, then donor’s acquisition cost)
45
Incidental costs of sale and purchase of assets can be deducted such as what? (6)
L E S S S S
legal costs
estate agents’ fees
stockbrokers’ fees
stamp duty
stamp duty reserve tax
stamp duty land tax
46
Are deductions allowed when calculating a capital gain, for the following expenditure on an asset for:
1. Enhancement (new extension)
2. Repairs (new roof)
Yes to enhancements, no to new roof
47
Who is entitled to deduct indexation allowance?
Indefinitely, as long as the loss if registered within 4 years
48
How soon do capital losses need to be claimed, even if you don’t want to use them yet?
Within 4 years of the end of the tax year in which they were made
49
What is a clogged loss?
An allowable loss that can only be used against the gain involving the same connected party
50
Which gains is it best to deduct allowable losses on, before calculating CGT?
The larger gains, as it’s more tax efficient.
51
How are asset costs arrived at for pre-1982 acquisitions?
Market value as at 31 March 1982
52
Which deductions are not allowed for pre-1982 acquisitions?
Acquisition costs (such as legal fees)
Enhancement expenditure
53
Part disposal calculator
A/A+B x Original cost
54
What is meant by a net gain?
Gains after allowable expenses, losses and annual exempt amount
55
What are the CGT rates for individuals?
If gain falls within basic rate tax band, 10%
If gain falls within higher rate tax band, 20%
56
What is the annual exempt amount for a trust?
£3,000 most of the time
57
What is the reduced tax rate for business asset disposal relief and what is the lifetime limit?
What is charged on gains in excess of the lifetime limit?
10%
Up to a lifetime limit of £1,000,000
20%
58
How long must an asset have been owned for to qualify for business asset disposal relief?
2 years
59
What level of shareholding does an employee or director need to have held, before business asset disposal relief becomes available?
5%
60
If not an employee or director with a 5% shareholding in the business, who else is eligible to claim business asset disposal relief?
Sole trader, but only in respect of chargeable gains arising from the disposal of assets in use for the purpose of the business, not gains from investments.
61
You may be able to pay less Capital Gains Tax when you sell (or ‘dispose of’) all or part of your business. What is the relief known as?
Business asset disposal relief
62
What is an associated disposal for business relief allowance?
Associated disposals are disposals of assets owned by an individual but used by their personal trading company or a partnership in which they are a partner and which take place at the same time as the sale of the partnership or company.
63
You may be able to claim Gift Hold-Over Relief if you give away business assets (including certain shares) or sell them for less than they’re worth to help the buyer.
Who pays the CGT?
You do not pay Capital Gains Tax when you give away the assets
The person you give them to pays Capital Gains tax (if any is due) when they sell (or ‘dispose of’) them
64
Can CGT holdover relief be claimed for transfers to a trust where the settlor has an interest?
No
65
Define a ‘trading asset’ for the purpose of CGT holdover relief.
An asset used in the trade of the donor or by the donor’s personal company
Shares and securities of trading companies, provided that:
… the shares or securities are not quoted on a recognised stock exchange; or
… the donor holds at least 5% of the voting rights in the company.
66
CGT holdover relief that has been given on a transfer to a trust (where the settlor had no interest at the time of the transfer) may be clawed back if, in the clawback period, the settlor obtains an interest, or arrangements are put in place under which the settlor will later obtain an interest.
When does the clawback period start?
Immediately after the transfer and;
Ends six years after the end of the year of assessment in which the transfer takes place.
67
What is holdover relief?
Individuals can hold over the gain on disposals of certain assets by way of a gift. The main categories that qualify are transfers chargeable to IHT and disposals of trading assets including certain private company shares.
68
What is investor relief
| Criteria
Investors’ relief extends business asset disposal relief to long-term external investors in unlisted trading companies. Although offering the same 10% tax rate as business asset disposal relief, investors’ relief has its own separate £10m lifetime limit (compared to the business asset disposal relief lifetime limit of £1m).
The relief is aimed at attracting new capital into companies so shares must be newly issued, being acquired on subscription for new consideration.
The shares must be issued by the company after 16 March 2016.
Shares must be held for a continuous period of three years, starting on or after 6 April 2016, before relief will be available.
With certain exceptions (such as being an unremunerated director), the investor must not be an employee or a director of the company whilst owning the shares.
69
Why would a donor claim CGT holdover relief?
So they can avoid paying tax on the capital gain when they gift them or sell them at a reduced rate to another party.
70
Why is CGT holdover relief not available to claim when gifting to a spouse or charitable organisation?
Because they are already exempt from CGT
71
When can business rollover relief be claimed?
When businesses (companies and unincorporated), sell assets used in the business, to buy other new assets to use in the business
72
When does a capital gain become realised after claiming business rollover relief?
At disposal of the new assets (although this can be deferred again if acquiring another new asset to replace this one)
73
What 4 conditions must be met for a business to be able to claim business rollover relief?
Must be trading
Assets sold must have been used for trading purposes
Sales price must be used to acquire new assets, also for use in the trade
New asset must be bought within a period of 1 year before sale of first asset, and three years after
74
How does rollover relief work on incorporation of a business?
When an unincorporated business (sole trader or partnership) is transferred to a limited company in exchange for new shares in that company.
When you incorporate a business, you generally transfer the assets of the trade to the business, which would be charged to CGT as if it were a market value disposal, under the connected party rules.
75
To qualify for CGT relief when investing in EIS shares, in which period of time should the investment into the EIS be made?
In the period starting 12 months before and ending 3 years after the disposal subject to CGT.
76
For how long is the gain on the original disposal deferred when claiming CGT relief upon investment into an EIS?
The gain on the original disposal is deferred (never exempt) until the disposal of the EIS shares. The original gain then becomes taxable but the new gains from the EIS investment do not.
77
What CGT relief is available, in addition to income tax relief at 30%, for investment into EIS shares?
10, 18, 20 or 28% (depends on the type of asset disposed of)
78
If the EIS shares are held until death having used the EIS relief, the original gain will always be taxed. True or false?
False, it will never be taxed
79
What is the main way in that reinvestment into SEIS shares, differs to reinvestment into EIS shares, when it comes to CGT relief?
SEIS - 50% of original gain deferred, 50% chargeable to CGT
EIS - 100% of original gain deferred
80
What is the maximum amount in gains available from a reinvestment into SEIS, for relief to be available each tax year?
£200,000
81
Why might an individuals son refuse to agree on a CGT holdover relief claim, where he’s been given shares in his dad’s company for a lot less than they are worth?
Son will be liable to pay the CGT on both the original deferred (heldover) amount, and any new gains since then.
82
For calculating the chargeable gains on shares for CGT purposes, disposals of such shares, or units in unit trusts, are identified with acquisitions in which order?
1. Same day
2. Following 30 days
3. Aquisitions in share pool
83
Why do disposals need to be identified with acquisitions “withing the following 30 days”?
To prevent ‘bed and breakfasting’
84
Which share acquisitions are included in the share pool when calculating chargeable gains for CGT purposes?
All acquisitions except those made on the same day or the following 30 days.
85
Why is there no extra acquisition cost when it comes to bonus (scrip) shares?
Because they are issued for free
86
What is a bonus or scrip issue of shares?
An offer of free additional shares to existing shareholders, from accumulated profits
87
When an individual is already a shareholder and subscribes for more shares under a rights issue, there is usually an additional acquisition cost. Where are the shares and costs placed for acquisition identification purposes?
Share pool
88
A scrip dividend is also known as what?
Stock dividend
89
What is a scrip dividend?
Dividends offered as additional shares, not cash
90
In which two ways can chargeable gains be declared?
Self-assessment (most popular)
HMRC’s real time CGT service (though self-assessment will still be required)
91
If individuals who have made gains that exceed the annual exempt amount do not receive a tax return to complete, how soon should they tell HMRC about the gains?
Within six months of the end of the tax year of disposal
92
Capital losses do not need to be reported to HMRC. True or false?
False - both gains and losses should be reported
93
When is CGT due to be paid?
31 January following the end of the tax year when the
gain was made.
94
If a disposal is being made towards the end of the tax year, it may be worth delaying it until after 5 April, WHY?
Because this will defer the due date for payment by a full year.
95
How soon should a payment on account of CGT be paid, after completion of a UK residential property (where not exempt as a private residence)? And how is payment made?
Within 60 days.
This is done by making an online property report.
96
The payment on account provisions also apply to trusts. True or false?
True
97
Nicole makes a gain (not in respect of residential property) on 1 July 2023 on which CGT is payable. The gain has to be included in her tax return for 2023/24. When is the CGT due to be paid?
31 January 2025
98
Graham completed the disposal of a residential property on 10 April 2023, realising a chargeable gain of £100,000. The property had always been let out.
When was the payment on account due plus any additional tax?
Payment on account by 9 June 2023 (within 60 days of completion)
Any additional tax due on 31 January 2025 (the 31 January following the end of the tax year).
99
