Capital Gains Tax Flashcards
(59 cards)
Do companies pay capital gains tax?
No. They pay corporation tax.
What is a chargeable asset (under the TCGA 1992)?
All forms of property (including debts, options and incorporeal property). It does not include sterling so the disposal of cash in sterling is not subject to CGT.
Define incorporeal property.
A legal right in property which has no physical existence, eg patent or a lease.
List the steps to calculate CGT.
1) Is there a disposal of a chargeable asset;
2) Calculate the gain;
3) Consider reliefs;
4) Aggregate gains/ losses and deduct any annual exemptions
5) Apply the correct rate of tax.
Explain step 3 of calculating CGT: consider reliefs.
There are various reliefs which are available which will need to be applied.
Explain step 5: apply the correct rate of tax.
Following rates apply to any gains other than residential property or gains which do not qualify for business asset disposal relief:
1) If taxpayer’s taxable income isless than basic rate threshold (£37,700), rate of tax payable on gains is 10%;
2) if taxpayers taxable income exceeds basic rate threshold, rate of tax payable on gains is 20%.
Explain step 4 of calculating CGT: Aggregate gains/ losses and deduction of annual exemption.
Gains and losses from all sources are added together.
Annual exemption of 6,000 is deducted at this stage.
The annual exemption is the capital gain every CGT payer can make each year without being taxed. Current exemption is £6,000.
Explain gains made on assets which qualify for business asset disposal relief.
Taxed at 10% regardless of the taxpayer’s income.
What is the rate of CGT payable by trustees and PRs?
20% (or 28% for residential property).
How is the basis (ie the amount the asset was bought for) calculated where the asset was received as a gift?
It will be calculated by HMRC based on its market value at the time of the gift.
Say they bought a watch for 100k and then gifted it. the market value at the time of the gift (eg 300k) would mean the 200k is a capital gain and therefore taxable.
Is CGT still applicable where the taxpayer only sells or gives away part of an asset?
Yes.
Explain the situation where someone dies.
There is no disposal, so therefore no CGT is payable.
The PRs however are deemed to acquire the asset at market value at the date of death. This is known as the probate value.
This is not subject to CGT however it will potentially be subject to IHT.
How is the gain of a chargeable asset calculated?
The following things are subtracted from the consideration for the sale:
1) Initial expenditure:
2) Subsequent expenditure:
3) Incidental costs of disposal.
List what counts as initial expenditure.
- Cost price of asset (or market value if gifted or probate value if taxpayer inherited it);
- Incidental costs of acquisition (eg conveyancing fees, legal fees, valuation feed and stamp duty); and
- Expenditure wholly and exnlucsivley incurred in providing the asset (eg cost of building the property).
List what counts as subsequent expenditure.
- Expenditure wholly and exclusively incurred in establishing preserving or defending title to the asset. Eg legal fees to resolve a dispute regarding title to a property.
- Expenditure wholly and exclusively incurred to enhance value of the asset (which is reflected in the value of the asset at time of the disposal. Eg cost of building an extension to the house.
Is the cost of normal maintenance, insurance and repairs deductible as subsequent expenditure?
No.
What constitutes incidental costs of disposal (and I therefore deductible)?
Legal fees for the sale and other profession fees (eg estate agent’s fees).
What is an indexation allowance?
An allowance to account for inflationary gains within the total capital gain amount.
This allowance is only relevant where charge to tax was deferred by using rollover or gold-over reliefs before April 2008
The relief of this allowance is only available where the asset was owned at some point between 31st March 1982 and 5th April 1998.
Explain relief on replacement business assets (rollover relief).
Enables sole traders to and partners to sell certain assets (qualifying business assets.) without paying CGT, provided the proceeds of sale are invested in other qualifying business assets.
Seller will have to pay tax eventually, but CGT charge is postpones until seller dispose of new assets.
What are qualifying business assets for rollover relief?
Main qualifying business assets for purposes of rollover relief are: land buildings and goodwill.
Asset must be used in the trade of the business rather than being held as an investment. Fixed plant and machinery are qualifying business assets.
Are shares qualifying business assets for the purposes of rollover relief?
No.
When does the rollover relief apply?
Applies when qualifying asset is disposed of, and the asset is owned by:
1) a sole trader who uses the asset in their trade;
2) a partnership which uses the asteroid in their trade;
3) an individual partner, where partnership uses the asset in the partnership trade; or
4) an individual shareholder, where asset is used in the trade of the company, in which the shareholder owns shares. for this to apply, company must be the shareholder’s personal company, meaning they must own at least 5% of the voting shares in the company.
Provided both the asset disposed of and asset acquired fall within the definition of qualifying asset, rollover relief will apply. the assets do not have to be the same type of asset (eg goodwill could be sold and a property could be bought).
Is there a tie limit on rollover relief?
Yes.
taxpayer must acquire the replacement asset within one year before, or three years after, disposal of the original asset.
HMRC can extend the time period.
How is rollover relief applied?
Taxpayer must claim relief within 4 years from end of the tax year in which they acquire the replacement asset (or if later, within 4 years from end of tax year in which the original asset is sold).
Gain is deducted from acquisition cost of the replacement asset. This is then the value which will be subject to CGT in the future, as the eventual disposal value of the ‘new’ asset will be less the adjusted CGT amount calculated when the rollover relief applied.