Capital Gains Tax Flashcards
(95 cards)
1
Q
when is CGT payable?
A
CGT is paid when a chargeable asset is sold for profit
2
Q
who pays CGT?
A
Individuals (inc. sole traders), PRs, trustees partners pay CGT
3
Q
what is the position in relation to partnerships and CGT?
A
Where a partnership sells an asset, each partner will be charged separately
4
Q
who does not pay CGT?
A
Companies and charities do not pay CGT
5
Q
Give an overview of a CGT calculation
A
o Step 1: identify disposal of chargeable asset
o Step 2: calculate gain (or loss)
o Step 3: apply reliefs
o Step 4: aggregate gains & losses; deduct annual exemption
o Step 5: apply the correct rate of tax
6
Q
re: step 1 - identify disposal of chargeable asset
what is meant by disposal?
A
Disposal = sale or gift (unless at death, then IHT applies)
There can be full or part disposal of an asset. Part disposals are apportioned.
7
Q
re: step 1 - identify disposal of chargeable asset
what is a chargeable asset?
A
Chargeable assets = all property inc. land, shares, debts, options and incorporeal property
Incorporeal property = a legal right in property i.e. a patent or lease
8
Q
re: step 1 - identify disposal of chargeable asset
what is not a chargeable asset?
A
sterling
9
Q
re: step 1 - identify disposal of chargeable asset
if the asset was gifted, what value is it given?
A
If a gift is made, HRMC will use the market value of the asset at the time the gift was made
10
Q
re: step 2 - calculate gain (or loss)
how is this calculated?
A
sale price or market value – total expenditure (or apportioned expenditure if part disposal) – indexation allowance = gain (or loss)
10
Q
re: step 2 - calculate gain (or loss)
when is the market value used?
A
o when the asset is gifted;
o not a ‘bargain made at arm’s length’; or
o to a connected person
11
Q
re: step 2 - calculate gain (or loss)
what is a ‘bargain made at arm’s length’?
A
A bargain made at arm’s length is a normal commercial transaction whereby parties are trying to get the best deal for themselves.
12
Q
re: step 2 - calculate gain (or loss)
when will a ‘bargain made at arm’s length’ take and not take place? Give an example.
A
Simply because a bad bargain has taken place, does not mean a bargain at arm’s length has not taken place.
A bargain is not considered to be made at arm’s length where the transferer does not intend to get the best deal for themselves. In this instance, the market value is used.
i.e. Ahmed wants to sell his property quickly in order to move. John offers a low price. No one else makes an offer, so Ahmed accepts this price. This may not be the best possible price, but is the best deal for Ahmed and so would be a bargain at arm’s length
13
Q
re: step 2 - calculate gain (or loss)
who is a connected person?
A
A person will be connected with another if they are:
o A spouse/CPs (and their ‘relatives’)
o A relative (or a spouse/CP of the relative), i.e.:
Parents
Siblings
Children
Grandchildren
o A partner, including:
Any spouses/CP of anyone in the partnership
Any relatives of anyone in the partnership
14
Q
re: step 2 - calculate gain (or loss)
when will a company be connected with another?
A
o The same person has control of both companies
o A person(s) has control of one company, and a connected person (or combination of connected persons) has control of the other company
(control = has greater part of share capital or voting power)
15
Q
re: step 2 - calculate gain (or loss)
what does initial expenditure include?
A
o Initial price/market value of asset (inc. consideration of part disposal apportioned values and spouse disposals)
o Costs of acquisition i.e. conveyancing fees, valuation fees, stamp duty
o Expenditure incurred wholly and exclusively in the course of obtaining the asset, i.e. cost of building the property
16
Q
re: step 2 - calculate gain (or loss)
what does subsequent expenditure include?
A
This includes expenditure incurred wholly and exclusively for the purposes of:
o Establishing, preserving or defending title to an asset i.e. legal fees to resolve a boundary dispute)
o Enhancing the value of an asset, which is reflected at the time of disposal i.e. the cost of an extension
16
Q
re: step 2 - calculate gain (or loss)
what does subsequent expenditure not include?
A
the cost of normal maintenance, repairs and insurance is not deductible
17
Q
re: step 2 - calculate gain (or loss)
when is a part disposal common?
A
where part of a piece of land is sold
17
Q
re: step 2 - calculate gain (or loss)
what does incidental costs of disposal include?
A
o Estate agent’s legal fees for selling property
18
Q
re: step 2 - calculate gain (or loss)
if there has been a part disposal, what must happen?
A
If only part of an asset has been disposed of, the initial expenditure (and subsequent) will need to be apportioned to determine the sale price
19
Q
re: step 2 - calculate gain (or loss)
where there has been a part disposal, what is the calculation to work out the apportioned expenditure?
A
A = consideration for part disposal
B = market value of part disposal
- A / (A+B) = apportioned %
- Apportioned % x initial value of asset = apportioned expenditure
Calculate gain: sale price – apportioned expenditure = £50,000
20
Q
re: step 2 - calculate gain (or loss)
what is the position in relation to partnership disposals?
A
- Each partner will pay a portion of the CGT based on their percentage of the share capital / capital profits (i.e. the partnership assets)
- If the percentage has not been agreed, then it will be split equally
- The sale price and expenditure will need to be apportioned accordingly
- Each partner can then choose which reliefs to apply
21
Q
re: step 2 - calculate gain (or loss)
Explain a partnership disposal calculation and give an example of a partnership disposal
A
- Joan – 25% | Kevin – 50% | Larry – 25%
- In 2008, they purchased premises for £200,000
- In 2010, they sell the premises for £300,000
1) calculate the apportioned sale price for each partner (sale price x P’s % = apportioned sale price)
* Kevin owns 50% of partnership assets, so will be taxed on 50% of the proceeds of sale (£300k x 50% = £150k)
2) calculate the apportioned expenditure (expenditure x P’s % = apportioned expenditure)
* £200k x 50% = £100k
3) work out the gain for that partner
- Apportioned sale price (£150,000) – apportioned expenditure (£100,000) = £50,000 gain
4) repeat for other partners
22
re: step 2 - calculate gain (or loss)
what is the position regarding disposals between spouses? What effect does this have?
When there is a disposal between spouses/CPs that live together, there is deemed to be no gain or loss
The sale/market value will be the price the original purchasing spouse paid i.e. if they brought it for £75k when they transfer it, the market value will be deemed to be £75k (£75k - £75k = £0)
The recipient spouse will need to pay CGT on the original spouses' and their gain when they dispose of the asset
23
re: step 2 - calculate gain (or loss)
when are inter-spouse/CP disposals particularly advantageous? Give an example.
o One spouse/CP has already used up their annual exemption and the other has not
o One spouse/CP pays a lower rate of tax than the other
Example
* 10 years ago, Jamila bought a clock for £74,000.
* This was recently valued at £115,000
* Jamila gifts this to her husband, Simon. She will not pay CGT.
* Usually where a gift is made, the donee is deemed to receive this at market value at the time of the gift. Because this is an inter-spouse disposal, Simon is deemed to acquire it for the amount Jamila paid (i.e. £74,000)
* Simon sells the clock for £130,000.
* Sale price (£130,000) – expenditure (£74,000) = £56,000 gain
24
re: step 2 - calculate gain (or loss)
how is indexation allowance calculated?
Initial expenditure x RPI at the date the expenditure was incurred
Subsequent expenditure x RPI at the date of the disposal of the asset
NB: Costs of disposal are not included
If different items of expenditure were incurred at different times, different indexation factors will need to be used for each item
24
re: step 2 - calculate gain (or loss)
what is important to remember about the indexation allowance?
Indexation allowance can reduce a gain, but it cannot create a loss. If it creates a loss then the indexation allowance is 0.
24
re: step 3 - apply reliefs
in summary, what are the types of relief and their effects? Why might someone choose one type of relief over another
o Business asset disposal relied - flat rate of 10% tax applies
o Other reliefs - CGT is not paid until a later date
Generally, with business asset disposal, the tax payable will be cheaper, but the person disposing of the asset must have the means to pay the tax now.
Business asset disposal cannot be used in conjunction with most other reliefs
24
re: step 2 - calculate gain (or loss)
when is indexation allowance relevant?
Only relevant where the asset was owned between 31 March 1982 and 5 April 1998 and CGT was deferred using rollover or holdover reliefs before 2008
25
re: step 3 - apply reliefs
what is the criteria for a qualifying business asset?
o Must be a certain type of asset i.e. land, buildings, goodwill, fixed plant and machinery (a ship is a QBA). Shares, goodwill and intellectual property are not QBAs. The QBAs need not be the same type of asset
o Must be owned by a ST, GP or individual SH. The SH must own at least 5% of that company
o Must be used for trade (i.e. not investment) and used in the same trade
26
re: step 3 - apply reliefs
when is rollover relief on replacement of business assets relevant?
Relevant where the taxpayer disposes of a qualifying business asset (QBA) and uses the proceeds to acquire another QBA.
If the taxpayer disposes of the new QBA and buys another QBA, they can continue to roll this gain over.
27
re: step 3 - apply reliefs
if an asset qualifies for rollover relief on replacement of business asset, what happens if the taxpayer does not use all of the proceeds of sale on the a new QBA?
All of the proceeds of disposal must be reinvested, or the relief will be apportioned
28
re: step 3 - apply reliefs
what are the timescales for the new QBA to be acquired?
The taxpayer must acquire the new QBA either:
o 1 year before disposing of the old QBA; or
o 3 years after disposing of the old QBA
o HMRC can permit extensions
29
re: step 3 - apply reliefs (rollover relief on replacement of business asset)
what are the timescales to claim the relief?
The taxpayer must claim the relief within the longer of:
o 4 years from the end of the tax year the old QBA was sold; or
o 4 years from the end of the tax year the new QBA was acquired;
30
re: step 3 - apply reliefs (rollover relief on replacement of business asset)
when will the taxpayer pay CGT?
* The taxpayer will not pay any CGT on the asset until it is sold
31
re: step 3 - apply reliefs (rollover relief on replacement of business asset)
what is the calculation for the adjusted cost of the new QBA?
cost of new QBA – previous gain = adjusted cost of new QBA
32
re: step 3 - apply reliefs (rollover relief on replacement of business asset)
when is the adjusted cost of the new QBA relevant?
This figure is used to calculate gain when CGT is paid in the future
33
re: step 3 - apply reliefs (rollover relief on replacement of business asset)
when calculating the adjusted cost of the new QBA, what is the position in relation to fixed plant and machinery?
Fixed plant and machinery are QBAs, but they are generally considered to be wasted assets. In this situation, the gain is not deducted from the cost of the new asset. Instead, the ‘previous gain’ will be the value at the earlier of:
10 years after the acquisition
Disposal of the asset
The date the asset ceased trade
34
re: step 3 - apply reliefs (rollover relief on replacement of business asset)
what is the drawback of this relief?
* The taxpayer will lose their annual exemption
* This cannot be used in conjunction with:
o Business asset disposal relief
o Hold-over relief on gifts (because there is no gift)
o Rollover relief on incorporation (because the shares are not QBAs)
35
re: step 3 - apply reliefs (rollover relief on replacement of business asset)
what reliefs can this not be used in conjunction with?
* This cannot be used in conjunction with:
o Business asset disposal relief
o Hold-over relief on gifts (because there is no gift)
o Rollover relief on incorporation (because the shares are not QBAs)
36
re: step 3 - apply reliefs (rollover relief on incorporation of a business)
when is this relief relevant?
Relevant where an individual sells their interest in an unincorporated business to a company
37
re: step 3 - apply reliefs (rollover relief on incorporation of a business)
what are the conditions?
o The business must be transferred as a going concern
o The business must be transferred with all of its assets. If the business retains any assets the relief will not apply
o Only consideration by way of shares can be rolled over i.e. if 25% of consideration is shares and 75% is cash, only 25% of CGT could be rolled over. In this instance, rollover relief on incorporation of a business could be used for the shares, and business asset disposal could be used against the cash consideration
38
re: step 3 - apply reliefs (rollover relief on incorporation of a business)
when is CGT payable?
* The CGT will then be postponed until the individual disposes of the shares
39
re: step 3 - apply reliefs (rollover relief on incorporation of a business)
what is the calculation for the adjusted cost for future CGT purposes?
cost of acquisition – gain made = adjusted cost for future CGT
40
re: step 3 - apply reliefs (rollover relief on incorporation of a business)
how is this relief applied?
* This relief is automatically applies, unless the taxpayer de-elects it
41
re: step 3 - apply reliefs (rollover relief on incorporation of a business)
what is the drawback of this relief?
* The taxpayer will lose their annual exemption
* This cannot be used in conjunction with:
o Business asset disposal relief
o Hold-over relief on gifts (because there is no gift)
o Rollover relief on replacement of qualifying assets (because the shares are not QBAs)
42
re: step 3 - apply reliefs (rollover relief on incorporation of a business)
what reliefs can this not be used in conjunction with?
* This cannot be used in conjunction with:
o Business asset disposal relief
o Hold-over relief on gifts (because there is no gift)
o Rollover relief on replacement of qualifying assets (because the shares are not QBAs)
42
re: step 3 - apply reliefs (hold-over relief on gifts)
what does this relief allow? How does this work?
This allows a donor to gift or sell at an undervalue certain business assets without paying CGT.
When the donee disposes of the asset, they will be charged tax on their own and the donor’s gain
43
re: step 3 - apply reliefs (hold-over relief on gifts)
what happens if the donee dies before they transfer the asset?
If the done dies before disposing of the asset, then all of the gains escape capital gains tax
44
re: step 3 - apply reliefs (hold-over relief on gifts)
what assets attract this relief?
Relevant business assets include:
o Assets or an interest in assets used in donor’s trade
o Assets owned by a SH used by their personal trading company
o Shares in an unquoted trading company (AIM not included)
o Shares in a quoted trading company, if it is a personal company (personal company = donor owns at least 5%)
NB: if the donee is a company, the relief does not apply to gift of shares
45
re: step 3 - apply reliefs (hold-over relief on gifts)
how does a taxpayer get this relief?
The donee and donor must apply for relief within 4 years from the end of the tax year from each disposal.
46
re: step 3 - apply reliefs (hold-over relief on gifts)
what is the calculation for the adjusted cost for future CGT purposes?
market value of asset at date of first disposal – gain = adjusted cost for future CGT
47
re: step 3 - apply reliefs (hold-over relief on gifts)
what is the calculation to workout the gain payable by the donee?
When the asset is disposed of by the donee, when calculating the gain the calculation will be:
Price donee disposes assets for – qualifying expenditure – adjusted cost for future CGT = gain
This is so as to capture both the donor and donee’s gain
48
re: step 3 - apply reliefs (hold-over relief on gifts)
what is the drawback of this relief?
* The donor will also lose their annual exemption
* The donor cannot use this relief in conjunction with business asset disposal relief
49
re: step 3 - apply reliefs (hold-over relief on gifts)
what reliefs cannot be used in conjunction with this relief?
* The donor cannot use this relief in conjunction with business asset disposal relief
50
re: step 3 - apply reliefs (business asset disposal)
when is this relief available? what is its effect?
If there has been gain on a qualifying business disposal, the rate of tax payable will be reduced to 10%
This relief is subject to a lifetime cap of £1m on qualifying gains
In other words, qualifying gains up to £1m can be taxed at 10%, anything after this will be taxed at usual 20%
51
re: step 3 - apply reliefs (business asset disposal)
what is the cap?
This relief is subject to a lifetime cap of £1m on qualifying gains
In other words, qualifying gains up to £1m can be taxed at 10%, anything after this will be taxed at usual 20%
52
re: step 3 - apply reliefs (business asset disposal)
when must this relief be claimed by?
The relief must be claimed by 31 Jan in the second tax year after the disposal was made (i.e. disposal made in 23/24, relief must be claimed by 31 Jan 26)
53
re: step 3 - apply reliefs (business asset disposal)
explain the time frames
the relevant conditions must have been satisfied for either:
o Two years preceding the date of the disposal; or
o Two years preceding cessation of the company (so long as trading ceased within 3 years before the date of disposal)
54
re: step 3 - apply reliefs (business asset disposal)
what reliefs can this not be used in conjunction with?
1. hold-over relief on gifts
2. rollover relief on incorporation of a business
3. rollover relief on replacement of business asset
54
re: step 3 - apply reliefs (business asset disposal)
what is a qualifying business disposal?
A disposal of either:
o a qualifying company shares and securities; or
o a qualifying whole or part of a business
55
re: step 3 - apply reliefs (business asset disposal)
what is a qualifying disposal of company shares or securities?
Conditions for qualifying disposal of company shares and securities:
o The company is a traded company
o It is a personal company, and either:
They are entitled to 5% of the profits and 5% of the assets on winding up; or
They are entitled to 5% of the sale proceeds if the company was sold
o The individual is an employee of the company
55
re: step 3 - apply reliefs (business asset disposal)
what is the advantage of this relief over others?
The taxpayer is entitled to their annual exemption
56
re: step 3 - apply reliefs (business asset disposal)
what is a qualifying disposal of whole or part of a business?
Conditions for qualifying disposal of whole or part of a business:
o The business has been disposed as a going concern; or
o The assets have been disposed of following cessation of the business
Only assets used for the purposes of carrying on the business are eligible (i.e. not investments like shares)
o The business / assets were owned by an individual (i.e. a ST or GP)
57
re: step 3 - apply reliefs (chattels)
What is a chattel and what are the types of chattel
A chattel is an item of tangible movable asset, other than freehold land (this means a leasehold interest would be included)
There are:
o Wasting chattels; and
o Non-wasting chattels
58
re: step 3 - apply reliefs (chattels)
what are wasting chattels? Give an example.
Wasting chattel = a chattel with a predictable life of less than 50 years
Plant and machinery are always a wasting chattel (i.e. watches, trains, boats, TVs, kitchen appliances)
59
re: step 3 - apply reliefs (chattels)
what is the position in relation to wasting chattels and CGT? Give an example.
CGT is not payable on wasting chattels (even if the make a profit) unless the chattel is used for trade.
Example - a taxpayer buys a racehorse, even if they later sell this at a profit, this would be exempt from CGT because it is a gain on the sale of a wasting chattel
However, if the taxpayer disposes of a wasting asset which is used for trade (i.e. a van), this would be included for CGT purposes.
In other words, this exemption only really applies to personal property / consumer goods.
60
re: step 3 - apply reliefs (chattels)
what are non-wasting chattels? Give an example.
a chattel with an expected life of more than 50 years (i.e. fine art, antiques, jewellery)
61
re: step 3 - apply reliefs (chattels)
what is the position in relation to non-wasting chattels? Give an example.
If there has been a gain on the disposal of a non-wasting chattel, then this will be exempt from CGT if consideration for the disposal is £6,000 or less
Example - Kate buys a painting for £1,000. Kate sells this for £5,900. The gain of £4,900 is exempt because the proceeds do not exceed £6,000.
62
re: step 3 - apply reliefs (private residence relief)
explain this relief and when it is relevant
Gains arising on disposal of a dwelling house (inc. grounds of up to ½ a hectare) are exempt if it is the taxpayer’s only or main dwelling house through their period of ownership
63
re: step 3 - apply reliefs (private residence relief)
explain the position in relation to the period of ownership
The last 9 months of ownership are ignored for the purposes of this relief
In other words, even if the person hasn’t lived in the property for the last 9 months, they will still be eligible for this relief.
64
what is fully exempt from CGT?
Damages for personal injury are exempt from CGT
65
re: step 4 - aggregate gains & losses – annual exemption
what are the categories of chargeable asset? Why is this important?
There are three categories of chargeable asset (these have different tax rates):
o Residential property
o Assets which do not qualify for business asset relief
o Assets which do qualify for business asset relief
Gains and losses from the same category can be aggregated. If the chargeable assets are in different categories, each category must be aggregated separately to ensure the correct tax band is applied
66
re: step 4 - aggregate gains & losses – annual exemption
if the chargeable assets are in the same category, what is the approach?
1. Gains and losses from the same category are aggregated.
2. The losses from the current year, previous year deducted.
3. The annual exemption can then be applied
67
re: step 4 - aggregate gains & losses – annual exemption
where there have been multiple disposals in a year and one has made a loss, what can the taxpayer do?
Where there have been multiple disposals, if one category has made a loss, this can be offset against a gain of any other category(s)
67
re: step 4 - aggregate gains & losses – annual exemption
if the chargeable assets are in different categories, what is the approach?
1. Gains and losses from each category are aggregated separately.
2. The losses from the current year, previous year and the annual exemption (in that order) are the deducted from the categories which give the tax payer the greatest advantage
68
re: step 4 - aggregate gains & losses – annual exemption
what happens if total losses exceed total gains?
They will not have to pay CGT
They will lose their annual allowance for that year and it cannot be carried forward
Any unused loss is carried forward into the next tax year
69
re: step 4 - aggregate gains & losses – annual exemption
if the tax payer has used all of the current years' losses and there is still a gain, what can they do?
Once all of the current year losses have been offset against the gains, they can use previous years' losses.
If there are still losses after that, the annual exemption can be applied
70
re: step 4 - aggregate gains & losses – annual exemption
what is the annual exemption?
for 2024/2025 is £3,000
for trustees (not inc. trustees for disabled people), this is £1,500
70
re: step 4 - aggregate gains & losses – annual exemption
if there has been no gain, what is the effect?
they cannot use their annual exemption
71
re: step 4 - aggregate gains & losses – annual exemption
can the annual exemption be carried over?
Unused AE cannot be carried over into the following tax year
72
re: step 4 - aggregate gains & losses – annual exemption
what is particularly important to consider at this stage in relation to the annual exemption?
Consider whether any reliefs have been used that mean the taxpayer is not entitled to AE, i.e.:
o Relief on replacement of business assets
o Holdover relief on gifts
o Rollover relief on incorporation
73
re: step 5 - apply the correct rate of tax
what is the rate of tax for business asset disposal relief?
flat rate of 10% is applied (regardless of taxpayer’s income)
74
re: step 4 - aggregate gains & losses – annual exemption
if the previous years' losses are greater than the current years' gains, what happens?
The taxpayer only needs to use enough losses up to the point of the annual exemption (£3,000).
The taxpayer would then not pay any CGT
Any unabsorbed losses can be rolled over again. These losses can be carried forward indefinitely.
1. aggregate gains and losses
2. deduct this years' losses
3. apply the annual exemption
4. deduct the previous years' losses. If there is still a loss, this can be rolled over into the next tax year.
75
re: step 5 - apply the correct rate of tax
what rate of tax do PRs and trustees pay?
o Flat rate of 24% on residential property
o Flat rate of 20% on all other chargeable assets
76
re: step 5 - apply the correct rate of tax
what is the rate of tax on residential property?
Residential property (where relief isn’t applicable):
o Basic rate taxpayer - 18%
o Higher rate taxpayer - 24%
77
re: step 5 - apply the correct rate of tax
what is the rate of tax for other assets (i.e. not inc. res property)?
* Other tax rates (not inc. residential property):
o Basic rate taxpayer 10%
o Higher rate taxpayer 20%
78
re: step 5 - apply the correct rate of tax
what happens if a gain pushes the taxpayer into a different tax band?
If the taxpayer is usually a basic rate taxpayer, but their taxable income plus the gain pushes them into the higher tax band, then they will pay tax at both rates. The amounts payable will depend on how much of their taxable income takes up the basic rate band
79
re: step 5 - apply the correct rate of tax
where a gain pushes the taxpayer into a different tax band, how is this calculated?
upper limit of basic rate tax band - taxable income = amount of basic rate tax band available for CGT purposes
the taxpayer uses this amount to apply the lower rate of tax. Once this is exceeded, they must pay the higher rate of tax
80
when is CGT arising from sale of a residential property payable?
the taxpayer must submit a provisional calculation to HMRC and pay this within 6- days of completion
81
when is CGT liability arising from all other assets (i.e. not residential property) payable?
the taxpayer must report their CGT liability to HMRC by 31 December in the tax year after the gain was made, and pay by 31 January i.e. gain is made in 2024/2025, it must be reported by 31 Dec 2025 and paid by 31 Jan 2026
This timescale also applies for the first payment of the instalment option
82
How can CGT be paid?
o HMRC’s real-time CGT service
o HMRC’s property service
o Self-assessment tax return
83
When will HMRC allow the instalment option and what is the number of payments?
HMRC will (in limited circumstances) allow payment in 10 annual instalments:
o The disposal must be a gift
o The chargeable asset is either:
Land;
A controlling shareholding in a company; or
Any shareholding in an unquoted company
o The conditions for hold-over relief are not met
84
who is entitled to the annual exemption?
The £3000 annual exemption applies to individuals, personal representatives and trustees for disabled people.
The annual exemption for other trustees is lower, at £1,500.
