Capital Gains Tax

Question 1

what is the charge of capital gains tax?

Answer 1

cgt applies to the chargeable gain that an individual makes from making a chargeable disposal of a chargeable asset which increased in value during their period of ownership

Question 2

when is CGT payable?

Answer 2

• charged on gains made in the relevant tax year = 6 April to 5 April
• payable on or before 31 Jan following the tax year in which the disposal occurs

Question 3

what are the steps to calculate CGT? (7)

Answer 3

1. there must be a chargeable disposal
2. the disposal must be of a chargeable asset
3. calculate the total chargeable gain = consideration minus allowable expenditure
4. deduct any losses which were carried forward or carried across
5. deduct the annual exemption
6. apply the CGT rate on the resulting total taxable chargeable gain figure
7. consider any reliefs

Question 4

what is a chargeable disposal?

Answer 4

sale or gift of an asset (death is not a chargeable disposal - value of asset is uplifted to date of death value)

Question 5

what assets does CGT not apply to? (4)

Answer 5

1. principal private residence
2. motor cars for private use
3. certain investments = ISA shares and securities, life assurance policies, government securities, national savings certificates
4. currency

Question 6

what is the principal private residence exemption for CGT?

Answer 6

• gains made on disposing a principal private residence are exempt from CGT
• PPR = individual must have occupied the home as their main residence during the whole period of ownership
• PRR is not lost if they did not occupy in the last 18 months of ownership
• a married couple can only have 1 PPR between them unless separated

Question 7

what is the CGT liability when a disposal is made to or from a charity?

Answer 7

no gain is deemed to be made - no CGT

Question 8

what is the CGT liability when a disposal is made to a spouse / CP?

Answer 8

• no gain is made
• the spouse receiving the asset takes over the base cost of the spouse who disposed of it

Question 9

how is chargeable gain ascertained?

Answer 9

consideration received for the asset minus allowable expenditure

Question 10

how is consideration determined if the disposal was between connected persons?

Answer 10

the seller is deemed to have received market value irrespective of the actual sale proceeds

connected persons =
- lineal descendants, parents, grandparents, siblings relatives, spouses of relatives
- not: spouses, uncles, aunts, nephews, nieces
- companies under common control
- partners in a business

Question 11

how is consideration determined if the disposal was made at an undervalue between unconnected persons?

Answer 11

sale is deemed to be at market value at date of disposal (but HMRC will not substitute market value if seller made a bad bargain)

Question 12

how is consideration determined if the disposal was a gift?

Answer 12

market value of the asset at the date of the gift

Question 13

what is the allowable expenditure and what are the different types? (5)

Answer 13

allowable expenditure is deducted from the consideration deemed received to calculate the chargeable gain

types:
- cost of asset
- incidental costs of acquisition (surveyor/lawyer fees)
- subsequent expenditure to enhance value of asset (not to repair asset)
- expenditure to preserve title tot the asset
- costs of disposal (agent commission, lawyer fees)

Question 14

how can capital losses be used to reduce CGT liability?

Answer 14

• capital losses = cost of asset is greater than consideration received after selling it
• gifting cannot be used to offset capital gains
• can be deducted from the total chargeable gain by:
  (1) carrying losses across = losses made in a tax year can be deducted from gains made in the same tax year
  (2) carrying losses forward = unrelieved losses from previous tax years can be carried forward to set off gains made in later years until used up (but losses from the same year must be used first)

Question 15

what is the annual exemption?

Answer 15

6000 taxed at 0% (only for individuals not companies)

Question 16

what is the tax rate for CGT?

Answer 16

• 10% = taxable income (net income minus personal allowance) plus total taxable chargeable gain (after deducting losses and annual exemption) is less than the basic rate threshold for income tax of 37,000
• 20% = taxable income is over basic rate threshold for income tax of 37,000
• if taxable income is less than 37,700 but after the total taxable chargeable gain is added it exceeds the threshold = gains under 37,700 taxed for CGT at 10% and gains above 37,700 taxed at 20%

Question 17

what are the 3 available reliefs for individual CGT liability?

Answer 17

1. Business Asset Disposal Relied (BADR)
2. Investor’s Relief
3. Rollover or Holdover Relief

(NOT substantial shareholding exemption - this is only for companies)

Question 18

what is business asset disposal relief?

Answer 18

BADR reduces the higher CGT rate from 20% to 10% on gains arising from qualifying disposals

Question 19

what are qualifying disposals for BADR to apply and what are the requirements for each? (4)

Answer 19

1. disposing of all or part of a trading business owned for at least 2 years before disposal
2. disposing of assets used in a business which used to trade = asset was owned for 2 years before business stopped trading and asset was disposed of within 3 years of business stopping to trade
3. disposing of shares in a trading company = for at least 2 years before disposal:
   - company was a trading company
   - shares held by individual
   - individual was officer or employee
   - individual held at least 5 % of ordinary voting shares, entitled to 5% of dividends, and 5% of assets on winding up
4. disposing of shares in a company that used to trade =
   - shares owned for 2 years before ceasing trading
   - individual was officer or employee
   - individual held at least 5 % of ordinary voting shares, entitled to 5% of dividends, and 5% of assets on winding up for 2 years before ceasing trading
   - shares disposed of within 3 years of ceasing trading

Question 20

is there a maximum amount of business asset disposal relief an individual can claim?

Answer 20

yes - lifetime allowance of £1 million charged to 10%

Question 21

what is investor’s relief?

Answer 21

individual disposing of qualifying shares in an unlisted trading company = reduces CGT rate from 20% to 10% up to a lifetime limit of £10 million

Question 22

what shares qualify for investor’s relief? (5 conditions)

Answer 22

1. shares are fully paid up ordinary shares issued to the individual for cash consideration
2. company is trading company and was since shares were issued (or holding company of trading group)
3. none of the company’s shares were listed at time of issue
4. individual held shares for 3 years since 2016
5. individual or connected person is not an officer or employee of the company, and has not been so since shares were issued

Question 23

what is rollover relief for an individual’s CGT liability? (4 points)

Answer 23

• CGT liability of a sale of a BUSINESS asset can be deferred by rolling over the gain made on the sale by reducing the base cost of a qualifying replacement asset
• qualifying assets = land, buildings, P&M, goodwill
• annual exemption CANNOT be used to reduce the gain rolled over
• time limits = qualifying replacement asset must be bought in the 12 months before or 3 years after sale of old asset

Question 24

what is holdover relief for an individual’s CGT liability?

Answer 24

• if individual disposes of a qualifying business asset via gift, the donor will have no CGT liability but the donee’s acquisition cost is reduced by the amount of the deemed gain
• the donee can claim holdover relief if it also disposes of the asset via gift
• annual exemption cannot be used to reduce the gain rolled over
• can also be claimed where an asset is sold at an undervalue = but holdover relief will only reduce the CGT paid on the difference between the price and the market value
• qualifying assets = assets used in the business, goodwill, unlisted trading company shares