Capital Gains Tax Flashcards
What is the idea of Capital Gains Tax?
To tax the profit that a person might make from disposing of a capital asset which has appreciated (increased) in value during their period of ownership.
When is CGT charged?
Where there is:
1) a chargeable disposal
2) of a chargeable asset
3) by a chargeable person
4) which gives rise to a chargeable gain
(CGT is charged on all gains made in the relevant tax year - 6 April to 5 April)
When is the tax payable?
On or before 31 January following the tax year in which the disposal occurs
(the same dats as for the final payment/refund of income tax for the year).
What are the two main instances of chargeable disposal?
- the sale of an asset
- the gift of an asset during the taxpayer’s lifetime
Is there any chargeable disposal on death?
No.
What is ‘a free uplift on death’?
The personal representatives of the deceased’s estate are deemed to acquire the estate at its then market value.
Chargeable asset definition
All forms of property are included in the definition of asset unless they’re specifically excluded.
What are the main types of asset excluded from CGT?
1) Principal private residence (PPR)
2) Motor cars for private use
3) Certain investments
How can an individual claim the benefit of the exemption of PPR from CGT?
If they have occupied the PPR as their only or main residence during the whole period of ownership.
(though the individual also has a valuable exemption in respect of the last 18 months of ownership - even if they weren’t in actual occupation).
If a person owns more than one home - which residence is the PPR?
This is a question of fact.
How many PPR can a married couple have between them?
A married couple can only have one PPR between them - they cannot each have a different principal place of residence (unless separated).
Are vintage cars included in motor cars for private use?
Yes.
What are examples of certain investments?
- government securities
- National Savings certificates
- shares & securities held in Individual Savings Accounts
- life insurance policies
- UK sterling & any foreign currency held for your own or family’s personal use.
What is the starting point for calculating the chargeable gain?
A gain needs to have been made and in calculating the chargeable gain, the starting point is always the consideration received (or deemed to have been received).
What is applied to the chargeable gain?
The appropriate rate of CGT (either 20% or 10% unless it’s an upper rate gain).
Are gains made by charities exempt?
Yes - providing that the gain is applied for charitable purposes.
How are disposals to charities treated?
Treated as made on a no gain/ no loss basis.
When one spouse disposes if an asset to the other - is it a gain or a loss?
Legislation deems that neither a gain nor a loss has occurred - so no CGT is payable.
Who takes over the base cost (original cost of the asset)?
The spouse receiving the asset takes over the base cost of the spouse who disposed of it.
Example of disposal between spouses.
A husband bought shares in a company for £4000 in May 2018 and three years later gave the shares to his wife.
For CGT purposes, there’s no capital gain/loss on this ‘disposal’ by the husband
The wife in effect acquires the shares at a value of £4000 with an acquisition date of May 2021.
What will the consideration received be where there’s a sale at ‘arms length’?
The consideration received will be the price paid by the buyer when the asset is sold.
Disposals between connected persons - if the parties are connected persons, what will the seller receive?
HMRC will deem the seller to have received market value irrespective of the actual sale proceeds.
Disposal between connected persons - example.
A woman bought some shares in a computer company in 2003 for £5000.
She sells them to her daughter in April 2023 for the same price that she paid for them, £5000.
The market value of the shares at the time she sells them was £40,000.
For CGT purposes, the woman is deemed to have disposed of the shares for £40,000 and will be liable to CGT accordingly.
Her daughter is deemed to have acquired the shares in April 2023 for £40,000.
Who is included in ‘connected persons’?
- the individual’s relatives & spouses of their relatives
relatives are direct ancestors (parents & grandparents), lineal descendants, brothers, sisters
(NOT later relatives - uncles, aunts, nephews, nieces)
- companies, if they’re under common control
- partners in business
(doesn’t include disposal to an individual’s own spouse)
What will happen if the transaction is between unconnected persons & at an undervalue?
For CGT purposes, the sale is deemed to be at the market value at the date of disposal
NOTE: HMRC will not substitute the market value if the seller has simply made a bad bargain.
Where a gift is made, at what value will the donor receive the asset?
The donor will be deemed to have received the market value of the asset from the donee at the date of the gift.
Working out chargeable gain - example
A man purchased a sailing boat to use on his holidays in the Isle of Wight for £100,000 in May 2019.
He found that he didn’t enjoy sailing as much as he expected to and in may 2023 sold the boat for £130,000.
130,000-100,000 = £30,000 gain on the sale.
How many types of expenditure are there which can be deducted from the consideration (or deemed consideration) received?
Three.
What do these deductions enable?
They enable the taxpayer to minimise the gain made & therefore the tax payable.
What are the three categories of expenditure?
1) Initial expenditure
2) Subsequent expenditure
3) Disposal expenditure
What does initial expenditure consist of?
- The cost price of the asset (base cost)
AND
- The incidental costs of acquisition (eg. surveyor’s fees/lawyer fees).
What does subsequent expenditure consist of?
- Subsequent expenditure on the asset which enhances its value
AND
- Expenditure incurred in establishing, preserving or defending title to the asset.
What does disposal expenditure consist of?
Incidental costs of disposal (eg agent’s commission).
Calculation of the gain to include all forms of allowable expenditure
Sale proceeds (market value)
- disposal expenditure
= total
+ net sale proceeds
- initial expenditure
- subsequent expenditure
= chargeable gain
What may result from a disposal, other than capital gain?
A loss.
How are capital losses created?
When the cost of an asset is greater than the consideration received for it on disposal
(although a gift cannot be used to create a capital loss for these purposes).
How are any capital losses made by an individual deducted?
Since CGT is only charged on overall gains made by an individual in a tax year - any capital losses that an individual has made in the same tax year can be carried across & deducted from any gains made in that tax year.
(such losses must be set off against other capital gains made in the same tax year first).
