Capital Gains Tax

Question 1

What is capital gains tax?

Answer 1

A tax paid by UK resident individuals and UK resident trustees/PRs on gains made of disposals of certain assets.
Companies pay corporation tax rather than CGT

Question 2

What is the change in ruling that has come in on 6th April 2015 regarding UK residential property and a non UK resident?

Answer 2

If they sell any UK residential property after this date and they are non UK resident then CGT is payable

Question 3

What are the 4 definitions of disposal?

Answer 3

• Sale/surrender of an asset
• Gift of an asset ( during a donor’s lifetime)
• Transfer or assets from a trust to a beneficiary
• Destruction of an asset where the money received from an insurance claim or compensation will be the disposal proceeds. [Where no monies are received then this will be classed as a loss for CGT purposes

Question 4

How does HMRC decide whether someone is trading and therefore whether the asset is making a regular profit and should be taxed as income tax or this is a one off transaction which CGT should be paid?

Answer 4

They review 9 badges of trade - not every badge needs to be present as the court looks at the overall position:-

• Is there a profit seeking motive
• The number of transactions
• The nature of the asset
• Evidence of similar transactions
• Changes to the asset - has it been repaired to sell on
• Way the sale was carried out
• Source of the finance
• Interval of time between purchase and sale - trade is usually sold quickly
• Method of acquisition

Question 5

Name some of the assets that are exempt? - (16)

Answer 5

• Bank/building society accounts
• Gilts and qualifying corporate bonds
• Principle private residence
• Decorations for valour
• Private motor vehicles
• Foreign currency for expenditure abroad
• Gaming winnings
• Shares in VCTs
• Shares in EISs and SEISs
• Shares in an approved incentive plan
• Woodlands
• Pension funds
• Life assurance
• Non wasting chattels if deposit value is less than £6000
• Wasting chattels ( with a useful life of less than 50 years eg race horse, fine wine
• ISAs, Junior ISAs and CTFs

Question 6

Name 4 assets that are not exempt?

Answer 6

• Property that is not a main residence
• Non qualifying corporate bonds
• Second hand insurance polices
• Unit trusts/OEICS investing in gilts and qualifying corporate bonds

Question 7

What is the principle private residence relief (PPR)

Answer 7

Where a private residence is exempt from CGT
If a portion of the property has not always been part of the main residence then you apply a formula to see if there is some CGT that would need paying:-

Period of ownership

Question 8

What absences are allowed in respect to private residence?

Answer 8

• One year between taking residence and acquisition
• Last 18 months ownership
• where someone is absent as they have been living in job-related accommodation
• Any 4 year period if caused by employment elsewhere in the UK, provided that the individual resided there before and after the absence and no other residence was exempt
• Any 3 year period provided that the individual resided there before and after the absence and no other residence was exempt
• Any period if caused by overseas employment, provided that the individual resided there before and after the absence and no other residence was exempt

Question 9

What must an individual do if they have two residences?

Answer 9

They must notify HMRC as to which one is the main residence and which one is not. The notice must be given after 2 years after acquisition of the second property

Question 10

What is the rule around non wasting chattels?

Answer 10

Exempt if disposal value is £6000 or less. If a set ie 2 vases then the £6000 is the set.

Question 11

What happens with a chattel where it is worth more than £6000?

Answer 11

Chargeable gain is the lower of:-

• the actual gain
• 5/3 of the excess of the proceeds over £6000

Question 12

What is the ruling around disposals between spouses and civil partners?

Answer 12

No disposal is classed as having taken place so no CGT

On the end disposal the acquisition cost of the first spouse is used

Question 13

What is the rules around CGT transfers to spouses where they have separated?

Answer 13

In the first year the transfer is not subject to CGT.
On the next year there will be CGT payable and this is calculated on market value on the date of transfer as they would be classed as connected people

Question 14

Is a transfer to a HMRC registered charity or national institution exempt?

Answer 14

Yes

Question 15

Can you transfer the annual CGT exemption?

Answer 15

No

Question 16

Is the date of the transfer of the asset or the date or payment or the date of disposal the date of the contract and from when CGT is payable?

Answer 16

Date of disposal

Question 17

What is deferred consideration in respect to CGT?

Answer 17

Where there is a delay in payment and the amount of consideration is ascertainable, this means that CGT becomes payable by the seller before payment has been received

Question 18

What is contingent consideration in respect to CGT?

Answer 18

This is where an additional payment is made if a certain event or circumstance occurs (eg. profits after a sale reaching a certain level) then this s later received will be classed as a separate disposal

Question 19

What happens with CGT when spouses or civil partners dispose of jointly held assets?

Answer 19

The gain is apportioned by:

• Either 50/50
• Or by the pre-agreed percentage if tenants in common

Question 20

What happens with CGT if the disposal is not at arms length?

Answer 20

This is where an asset is sold to a relative or a friend.

The market value is used rather than the sale proceeds.

Question 21

Name 4 examples of incidental acquisition costs that can be deducted in the CGT calculation?

Answer 21

• Stamp duty land tax
• Stamp duty reserve tax
• Valuation costs
• Estate agent fees

Question 22

What is enhancement expenditure in relation to CGT?

Answer 22

It is something that is wholly and exclusively incurred on a asset for the purpose of enhancing the value of the asset and reflects in the state of the asset on the date of the disposal eg building an extension to a property

Question 23

Can maintenance expenses be deducted for CGT purposes?

Answer 23

No but they can for income tax purposes
Eg repairs and re- decorating could be deducted as an income tax expenses but if an extension to a property is built then this would be treated as enhancement expenditure

Question 24

What are the rules on when losses can be offset when calculating CGT? (7)

Answer 24

The loss must be :-

• A loss that is not exempt from CGT
• A loss from an EIS or SEIS

The loss must be registered with HMRC
This has to be within 4 years from the end of the tax year
If not registered then it cannot be used
The loss must be offset against losses in that same tax year
Losses cannot be carried back
Losses can be carried forward indefinitely

Question 25

What is the advantage of a brought forward loss with CGT?

Answer 25

It can be used more flexible than the same tax year loss as you can use just the amount up to the level of the annual exemption. Any left over can then be carried forward again to use on a another year

Question 26

What is the rule with CGT if an asset was bought before 1st April 1982?

Answer 26

The gain is calculated using the market value of 31st March 1982

Question 27

Why are CGT reliefs given?

Answer 27

To ensure that businesses are not disadvantaged and to encourage entrepreneurship and venture capital

Question 28

What are the rules in using EIS and SEIS to offset any capital gains tax? (4)

Answer 28

If the gain is made from the disposal of another investment, then the CGT may be deferred if the gain is invested either into an EIS or SEIS There is no upper limit on this Investment must be made either one year before or 3 years after the disposal This deferred gain may be taxable at a later date on disposal of the EIS ( at the rate of CGT at this point)

Question 29

When can someone claim entrepreneurs' relief?

Answer 29

When an individual disposes after holding for at least a year:- * all or an independent separate part of a trading business on as a sole trader or partner *assets of a trading (individual/partner) business following its cessation *Shares/securities in a personal trading company where the individual is a director or employee of the company and holds a minimum of 5% of the ordinary share capital and 5% of voting rights for at least 1 year Can still apply for relief if the shares are sold within 3 years of the cessation of trade

Question 30

What must you firstly do with entrepreneurs relief before an non qualifying gains?

Answer 30

ER must be applied first and set against the basic rate band then any other gains are applied after that. The individual can still offset their highest gain to the personal allowance

Question 31

What is the new investors relief?

Answer 31

This is an extension of CGT and has ben extended to external investors in unlisted trading companies. So individuals can claim 10% on any disposal of ordinary shares in an unlisted trading company provided that they:- * were newly issued to the individual and acquired for new consideration on or after 17 March 2016 * have been held for a period of at least 3 years from 6 April 2016 * it is also subject to the lifetime cap of £10m

Question 32

What is CGT holdover relief? (3)

Answer 32

It means that the individual making the gift of personal assets is not chargeable too CGT on disposal, instead the recipient will be liable on CGT on any gain at a later disposal. Both the recipient and the transferor must be UK resident Application must be made jointly by both recipient and transferor

Question 33

What can CGT holdover relief be claimed on?

Answer 33

* Business assets used for the trade, profession and vocation of the transferor and of their personal company * Shares not listed on a major stock exchange nor AIM ( and the donor holds a minimum of 5% share capital) * Qualifying agricultural property

Question 34

What is business rollover relief?

Answer 34

This allows a UK resident to rollover a gain or part of a gain on disposal of a qualifying business asset (used for trading purposes) if the gain is re-invested into a new qualifying asset Also available where assets of an unincorporated business are transferred to a limited business

Question 35

What are the rules regarding business rollover relief? (2)

Answer 35

It must be acquired within 12 months before the disposal of the asset of 3 years after Do not have to use it can use it as a disposable for CGT and claim ER

Question 36

What is the share matching rule that the HMRC has put in place to determine when shares are sold, which ones that they are?

Answer 36

* Any shares acquired on the same day as the disposal * Any shares acquired in the following 30 days * From a weighted average pool of shares held

Question 37

Why did the "any shares acquired in the following 30 days rule" come into force from the HMRC?

Answer 37

This was to stop any bed and breakfasting where shares were sold in the evening and then bought in the morning at a similar price to crystalise any gains

Question 38

What is a rights issue?

Answer 38

If a company wishes to raise further share capital then it must offer shares to existing shareholders. Usually the number offer is in proportion to what the holder has and at a discount to the current share price Any shares bought is considered as a purchase and will be added to the average pool

Question 39

What is a bonus issue? ( or scrip or capitalisation)

Answer 39

Shares are issued fully paid to existing shareholders without any further capital being raised. No acquisition for CGT purposes and the new shares are deemed to have been acquired on the same day as the holding.

Question 40

Is share buy back considered a CGT disposal?

Answer 40

Yes

Question 41

What are scrip dividends?

Answer 41

Where a company issues dividends in the form of shares rather than cash and these are treated as new acquisitions for CGT. Acquisition cost is the cash equivalent of the dividend

Question 42

What is the unit trust equalisation payment?

Answer 42

This is where an investor buys a unit trust and within the purchase price is the accrued income. When the investor receives their first income payment then the accrued interest has already been paid for and therefore classed as a return of capital. This must be deducted from the acquisition cost when calculating the gain

Question 43

When does CGT get paid and how?

Answer 43

Lump sum payment and deadine date is the same as a tax return ie 31st January the following tax year