Capital Gains Tax

Question 1

Give a summary of the 5 main steps to calculate CGT

Answer 1

Step 1: Identify the disposal (sale or gift) of a chargeable asset (part disposals are apportioned)

Step 2: Calculate the gain – deduct costs of disposal, initial and subsequent expenditure and incidental costs of disposal

• Sale price minus purchase price is a starting point

Step 3: Consider reliefs. The main ones are:

• Relief on replacement of business assets (‘rollover’ relief)
• Rollover relief on incorporation of a business
• Hold- over relief on gifts
• Business asset disposal relief

Step 4: Aggregate gains/losses and deduct the annual exemption (deduct the annual exemption from the gains which would be subject to the highest rate of tax)

• Capital losses carried over from the previous year can be deducted here.

Step 5: Apply the correct rate of tax

Question 2

What were the tax rates for CGT between 6th April 2024 and 29th October 2024?

Answer 2

• Standard rate of 10% for basic rate taxpayers (£37,700 and under) and 20% for any gains above the basic rate threshold;
• Residential property rate – apply a surcharge of 8% for basic rate taxpayers and 4% for higher rate taxpayers, meaning that the rates are 18% for basic rate taxpayers and 24% for any gains above the basic rate threshold; or
• Business asset disposal relief rate of 10%, whatever the taxpayer’s income.

Question 3

What are the current CGT rates for disposals from 30th October 2024 onwards?

Answer 3

18% for basic rate taxpayers and 24% for higher rate taxpayers, regardless of whether the disposal is of residential property or not

BADR remains 10% for our purposes

Question 4

In brief, when is CGT chargeable?

Answer 4

CGT is payable on chargeable gains made by a chargeable person on the disposal of chargeable assets in a tax year

Question 5

Who is and is not a chargeable person?

Answer 5

Chargeable persons:

• Individuals (whether in a personal capacity or as a sole trader);
• PRs, when they dispose of the assets of the deceased person;
• Partners, when the partners dispose of a chargeable asset - Each partner is charged separately for their proportion of the gain
• Trustees, on the disposal of a chargeable asset from a trust fund

Not chargeable persons:

• Companies pay corporation tax + charities are exempt from paying CGT

Question 6

What is a chargeable asset?

Answer 6

Includes ‘all forms of property’

• Includes debts and intangible property (patents/leases etc)
• Does not include sterling, so disposal of cash is not chargeable to CGT

Question 7

What is the annual exemption?

Answer 7

The annual exemption is the capital gain every CGT payer can make every year without being taxed on it

• The annual exemption of £3,000 applies to individuals, personal representatives and trustees for disabled people
• The annual exemption for other trustees is lower, at £1,500

Cannot carry forward annual exemption for CGT if unused

Question 8

What is the position when a taxpayer has a mix of gains which do and do not qualify for business asset disposal relief (BADR)?

Answer 8

Gains which qualify for business asset disposal relief (BADR) are taxed at 10%, regardless of income

If a taxpayer has a mix of gains which do and don’t qualify

• BADR gains added to income first
• Other gains treated as top slice of income, so more likely to be taxed at a higher rate

Question 9

What is the tax rate for trustees and PRs?

Answer 9

Gains made by trustees and PRs are taxed at 20%

24% for residential property

Question 10

Give a basic CGT calculation (without any applicable reliefs)

Answer 10

A sells shares for £74,000, which cost them £30k. They have a taxable income of £43,000, so all gains are taxed at 20%

• 1 – Sale of shares
• 2 – Proceeds – cost = £44k
• 3 – no exemptions/reliefs
• 4 – Deduct annual exemption of £3k, so £41k
• 5 - £41k at 20% = £8200

Question 11

Give a basic CGT calculation where the taxpayer has a basic rate income level, with the capital gain taking them into the higher rate

Answer 11

S has taxable income of £32k + sells a factory for £268,000, which had a market value of £205k when they acquired it. S incurred £17,050 in various types of expenditure

• Gain after deductions = £45,950
• No exemptions
• Deduct annual exemption of £3k = £42950
• CGT at 10% on first £5700 (amount of gain below basic rate threshold, £37,700-£32,000) = £570
• CGT at 20% on remaining £37250 (amount of gain above basic rate threshold) = £7450
• Total CGT = £8020

Question 12

Step 1 of the calculation relates to identifying the disposal. Give some more details about this

Answer 12

Disposal includes a sale or gift

With a gift, HMRC will use market value of asset at time of gift to calculate the gain (as there is no sale price)

• Example - X gifts a watch they bought for £300k, with a market value of £500k
• Market value less cost = £200k + follow other steps

Selling or gifting only part of an asset remains chargeable to CGT

No charge to CGT on death, even if market value of an asset higher than when it was acquired – IHT might be payable

• PRs acquire the property at market value on taxpayer’s death

Question 13

What is the starting point for Step 2 (calculate the gain)?

Answer 13

This step aims to figure out gain between acquisition and disposal

Start with consideration for sale or asset’s market value and deduct the relevant types of expenditure incurred

Question 14

In name only, what are the main types of expenditure that can be deducted?

Answer 14

Initial expenditure

Subsequent expenditure

Incidental costs of disposal

Question 15

What is initial expenditure?

Answer 15

Cost price of asset

Incidental costs of acquisition (eg SDLT and legal fees on acquiring property)

Expenditure wholly and exclusively incurred in providing the asset (cost of constructing a property)

Question 16

What is subsequent expenditure?

Answer 16

Expenditure wholly and exclusively incurred in establishing, preserving or defending title to the asset (eg legal fees incurred re boundary dispute)

Expenditure wholly and exclusively incurred to enhance value of asset, which is reflected in value at time of disposal (eg extension to a house)

• Renovations/maintenance would not count

Question 17

What are incidental costs of disposal?

Answer 17

Legal fees for sale and estate agent’s fees etc

Question 18

What is the indexation allowance for capital gains tax?

Answer 18

Indexation allowance only relevant where a charge to tax was deferred by using rollover or hold-over reliefs before April 2008 and the asset was owned at some point between 31st March 1982 and 5th April 1998

To calculate indexation allowance, 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 19

Step 3 requires applying any applicable reliefs.

What is rollover relief on replacement of business assets?

Answer 19

1) Enables sole traders and partners to sell certain assets (qualifying business assets (QBAs)) without paying CGT, if the proceeds are invested in other QBAs

• Charge to CGT postponed until seller disposes of new assets

2) Principal QBAs are land, buildings and goodwill; company shares do not qualify

• Asset must be used in trade of the business rather than held as an investment
• Can dispose one type of QBA (goodwill) and rollover into purchase of another type (land)

3) Relief applies when a QBA is disposed of, and it is owned by:

• Sole trader
• Partnership
• Individual partner
• Individual shareholder where they own at least 5% of the voting shares

Must acquire the replacement asset within 1 year before or 3 years after disposal of original asset

Taxpayer must claim relief within 4 years from the end of the tax year in which they get the replacement asset

Annual exemption cannot be used when the taxpayer applies for rollover relief

Question 20

How does rollover relief on replacement of business assets actually apply? Give an example scenario

Answer 20

Gain is notionally deducted from acquisition cost of replacement asset

Example – A sells a workshop for £77k and makes a gain of £33k. A then buys a larger workshop for £95k and claims rollover relief. Workshop 2 later sold for £140k

• Gain on disposal of workshop 1 is postponed, so no CGT payable in that tax year
• Workshop 2 deemed to have been acquired for £62,000 (£95k-£33k gain)

More CGT to pay in future

Question 21

What is rollover relief on incorporation of business?

Answer 21

Applies where conditions met + individual sells their interest in an unincorporated business to a company

• Gain is rolled over into shares that the seller receives as consideration for the sale of assets to the company
• CGT payable only when individual disposes of shares

Conditions

• Business transferred to a different owner, but carried on as same business
• Consideration must all be in shares issued by the company; part share consideration = only that part of gain can be rolled over
• Business must be transferred with all assets, ignoring cash, otherwise relief won’t apply

Gain is rolled over by notionally deducting it from the cost of acquisition of the new shares

HMRC applies relief automatically + annual exemption cannot be used if rollover relief on incorporation applies

Question 22

What is hold-over relief on gifts? What are the conditions for it to apply?

Answer 22

Allows an individual to make a gift of certain types of business asset or sell them at an undervalue, without paying CGT

• If donee disposes of the asset, they pay tax on their own gain and donor’s gain

Conditions:

i) Only available on gifts or the gift element of a sale at an undervalue

ii) Only the part of the gain relating to chargeable business assets qualify for the relief. Chargeable business assets includes:

• Assets used in donor’s trade (sole traders or partner using assets in partnership)
• Shares in a trading company which are not listed on a recognised stock exchange
• Shares in a personal trading company, even if listed - Personal = donor owns 5% or more voting shares
• Assets owned by a shareholder and used by their personal trading company

iii) Both donor and donee must elect to apply for the relief within 4 years from the end of the tax year of the disposal

Question 23

How does hold-over relief on gifts apply?

Answer 23

Market value is taken as the consideration

Deemed gain is then deducted from market value of the asset to get a notional acquisition cost

When the donee later disposes of the asset, the notional acquisition cost and qualifying expenditure is deducted from the sale or market value to find donee’s gain

• Donee’s gain includes held-over gain plus any gain during ownership

Once the donee’s chargeable gain has been calculated, reliefs should be considered as normal

Annual exemption cannot be applied before the gain is rolled over

Question 24

In overview, how does business asset disposal relief work?

Answer 24

If this relief applies, the rate of tax is reduced to a flat rate of 10%, up to a lifetime cap of £1 million; after this, BADR doesn’t apply

Taxpayer must claim BADR on or before first anniversary of 31st January following the tax year in which the qualifying disposal was made

• 2024/25 disposal, claim by 31st Jan 2027

Must be a qualifying business disposal for the relief to apply

Question 25

How does business asset disposal relief apply to sole traders and partnerships?

Answer 25

Where a sole trader or individual partner **disposes of the whole or part of a business**, the relief may apply * Relevant where business disposes of as a going concern or assets used in business are disposed of following cessation of the business The **interest in the business as a whole** must have been owned either: * Throughout the period of 2 years ending with date of disposal * Throughout the period of 2 years ending with cessation of business, if disposal is within 3 years after cessation of business Only assets used for the purposes of the business are eligible for relief * Not company shares or assets held as investments

Question 26

How does business asset disposal relief apply to disposal of company shares?

Answer 26

Disposal of company shares may qualify for relief if: 1) The company is a trading company; and 2) The company is the disposer’s personal company (they hold 5% or more of ordinary share capital and that holding gives them 5% or more of voting rights) and either: * Disposer must be beneficially entitled to at least 5% of profits available for distribution to equity holders and at least 5% of assets available on winding up; or * Disposer would be beneficially entitled to at least 5% of proceeds of sale; and 3) Disposer must be an employee or officer of the trading company 1-3 must be satisfied throughout the 2-year period ending with date of disposal or date the company ceased trading (and disposal occurs within 3 years of cessation of trading)

Question 27

What is tangible movable property?

Answer 27

Wasting assets are generally exempt from CGT – predictable life of less than 50 years Tangible movable property that does not constitute a wasting asset (antiques) are **exempt from CGT if the consideration for disposal is £6000 or less**

Question 28

What is private residence relief?

Answer 28

Disposals of a dwelling house, including grounds up to half a hectare, are exempt from CGT, if the taxpayer occupied the dwelling house as their only or main residence throughout period of ownership

Question 29

How are damages for personal injury treated for CGT purposes?

Answer 29

Exempt from CGT

Question 30

In Step 4, it is necessary to aggregate gains and losses together and deduct the annual exemption. How do the reliefs spoken about in Step 3 and the annual exemption work together?

Answer 30

More than 1 relief may apply to a particular disposal, so taxpayer must choose which to claim 1) Rollover relief on replacement of qualifying assets and hold-over relief on gifts * BADR cannot apply to gains which are to be rolled over on the replacement of qualifying assets or held over on the gift of business assets * AE cannot be first applied to any gains which are to be rolled over or held over under these reliefs * Rollover relief cannot be used in conjunction with hold over or relief on incorporation 2) Rollover relief on incorporation of a business * If this applies, BADR and AE cannot be used * Cannot be used at same time as rollover relief and hold-over relief 3) Business asset disposal relief * AE can be used to reduce gains before applying BADR

Question 31

In Step 5, it is necessary to apply the correct rate of tax. What are the 3 categories of chargeable assets and the rates they are taxed at?

Answer 31

3 categories of chargeable asset: 1) Assets which are not residential property and do not qualify for BADR * Taxed at 10% (up to basic rate threshold of £37,700) and thereafter 20% 2) Assets which qualify for BADR * Taxed at flat rate of 10%, up to £1 million lifetime cap 3) Residential property * 18% for basic rate and 24% for higher rate

Question 32

How is CGT calculated when there is more than one disposal in a tax year?

Answer 32

Chargeable assets in different categories must be **calculated separately**, so that the correct rate of tax can be applied Any losses and AE **can be deducted from gains that are subject to higher tax rates** * Deduct from residential property gains first, then non-BADR assets and finally assets which qualify for BADR * Use losses and AE where they are most favourable to the taxpayer

Question 33

How can capital losses be used to reduce CGT payable?

Answer 33

Losses can be set against gains to wipe them out, resulting in no CGT to pay * If this happens, remember an **unused AE cannot be carried forward** to other years * **Unabsorbed losses can be carried forward indefinitely** Approach: (a) work out the gain or loss on each disposal made during the 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 If in Y1, the person has a loss of £200,000, which when set against gains of £10k, leaves £190,000, in Y2, the £190k loss is set against current years' gains until they are down to the amount of the annual exemption of £3k * Year in which loss created – used to fully wipe out gains * Next year after loss – used to wipe out almost all gains, except for final £3k where AE used instead

Question 34

How are part disposals dealt with for CGT purposes?

Answer 34

Where only part of an asset is disposed of, any **initial and subsequent expenditure are apportioned when calculating the gain** Example - X bought a plot of commercial land for £200k and they sold a part of the plot for £100k. The remaining land is worth £300k * The sold land is worth a quarter of the whole (£100k out of £400k total) * The acquisition cost is therefore a quarter of the initial cost of the whole (£50k out of £200k total) * 100k disposal - £50k apportioned cost – AE = £47k chargeable gain at 20% because they are a higher rate taxpayer

Question 35

How are disposals between spouses treated?

Answer 35

Spouses and civil partners who live together can dispose of property to each other **without paying CGT** But, if the recipient spouse later disposes of it, they will pay CGT on any gain they have made and on any gain their spouse made during their period of ownership Might be beneficial if one spouse has used AE that year already or one pays tax at a higher rate than the other When determining the ‘cost’ value on the gift from one spouse to another, it is **the amount that the purchasing spouse paid for it**

Question 36

Give an example of CGT for inter-spouse disposals

Answer 36

Example – J bought an antique for £74k and had it valued at £115k. J gives it to S, who later sells it for £130,000 1) If S is a spouse * No CGT payable when J transfers it * £130k - £74k (actual cost when J bought it) = £56,000 gain * Liable for more CGT when disposing of an asset after an inter-spouse transfer 2) If S was not a spouse * £130k - £115k (current actual value) = £15k gain

Question 37

When a partnership of individuals disposes of an asset, how is this dealt with for CGT purposes?

Answer 37

1) Each partner is treated as making a separate disposal of part of the asset, so they pay a proportion of CGT, based on their percentage ownership of the partnership’s assets * Disposal proceeds and allowable expenditure are apportioned between partners, according to their share in the asset * Each partner decides which relief, if any, they apply for 2) Example – A + B own a quarter each of the partnership’s capital assets and C owns half * They buy an office for £200k and sell it for £300k (£100k gain before deductions) * C will be taxed on half the proceeds, less half the acquisition cost and half the allowable expenditure (owns half the partnership assets) * A + B taxed on a quarter of the proceeds, less quarter the cost and a quarter of allowable expenditure

Question 38

How are LLPs treated for CGT purposes?

Answer 38

LLPs usually treated in the same way as an ordinary partnership for CGT When an LLP ceases trading though, it may be treated as a body corporate for purposes of capital gains

Question 39

How does CGT become relevant when a company buys back shares?

Answer 39

When a shareholder sells their shares back to a company, there is usually an income tax charge Sometimes CGT is relevant if: * Buyer is a trading company + shares aren’t listed on recognised stock exchange (AIM is not a recognised stock exchange for this) * Purpose of buyback must be either to raise cash to pay IHT or for the benefit of the company’s trade * Seller must have owned shares for at least 5 years * Seller must be selling all their shares or reducing their shareholding by at least 25% Might be more favourable to pay CGT rates over income tax, dependent on income level

Question 40

When does CGT need to be paid to HMRC?

Answer 40

Paid on all gains in the tax year and usually payable **on or before 31st January following the end of the tax year** Must pay CGT due from **sales of residential property within 60 days of completion**

Question 41

When does 100% business property relief apply for IHT?

Answer 41

No charge to CGT on death Reduction of 100% of value transferred for ‘relevant business property’ * Business or interest in a business (including partnership share) * Shares not listed on recognised stock exchange (unquoted shares) Asset must have been owned **by transferor** for **at least 2 years at time of transfer**

Question 42

When does 50% business property relief apply for IHT?

Answer 42

Shares that are listed if transferor had voting control of the company immediately before transfer * Voting control is ability to exercise over 50% of votes on all resolutions Land, buildings, machinery or plant owned by transferor personally, but used for business purposes by partnership or a company over which they have voting control

Question 43

What is a key difference between the way **trading losses** can be dealt with by sole traders and by companies for the purposes of paying less CGT/CT on chargeable gains?

Answer 43

Sole traders can **offset trading losses against chargeable gains in the same year** and **offset unabsorbed trading losses against profits of the same trade** made in subsequent years Sole traders cannot offset **an unabsorbed trading loss against a chargeable gain made in a future tax year** for CGT purposes. Companies can **carry forward trading losses and set them against total profits, not just trading profits**