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Tax > Capital Gains tax > Flashcards

Capital Gains tax Flashcards

1
Q

What is a capital gains tax?

A

is a tax on the increase in value of an asset during the time the individual taxpayer owned it.

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2
Q

what does a capital gain arise?

A

on disposal of the asset

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3
Q

what is a chargeable gain?

A

A chargeable gain is a capital gain that arises and is chargeable (liable to tax).

i.e. it arises when a CHARGEABLE person makes a CHARGEABLE disposal of a CHARGEABLE asset.

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4
Q

how do you tell if there has been a CHARGEABLE gain?

A

arises when a CHARGEABLE person makes a CHARGEABLE disposal of a CHARGEABLE asset.

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5
Q

gains on gifts to charities?

how to deal with?

A

These are exempt.

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6
Q

gains on gifts to gallaries?

how to deal with?

A

These are exempt.

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7
Q

gains on gifts to museums?

how to deal with?

A

These are exempt.

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8
Q

gains on sales of assets which are in the normal course of trade?

how to deal with?

A

not chargeable gain for CGT as its normal course of trade and will be included in trading profits.

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9
Q

how to deal with Capital gains arisen on cars?

A

These are exempt.

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10
Q

how to deal with Capital gains arisen on vans/lorries or vintage/veteran cars?

A

These will be chargeable gains.

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11
Q

how to deal with Capital gains arisen on NON-WASTING chattels?

A

if the gross disposal proceeds (before any incidental disposal expenses are deducted) is less than £6,000 they are exempt (gains are not chargeable to tax).

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12
Q

What is a chattel?

A

items (assets) of movable property.

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13
Q

how to deal with Capital gains arisen on wasting chattels?

A

These are exempt.

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14
Q

what is a wasting chattel?

A

chattels with an expected useful life of 50 years or less.

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15
Q

how to deal with Capital gains arisen on livestock?

A

These are exempt.

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16
Q

how to deal with Capital gains arisen on gilts?

A

These are exempt.

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17
Q

how to deal with Capital gains arisen on qualifying corporate bonds?

A

These are exempt.

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18
Q

how to deal with Capital gains arisen on national savings certificates

A

These are exempt.

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19
Q

how to deal with Capital gains arisen on premium bonds?

A

These are exempt.

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20
Q

how to deal with Capital gains arisen on investments in ISAs and cash?

A

These are exempt.

21
Q

How to calculate CGT for the fiscal year? (Tax year = fiscal year)

A

For each fiscal year;

  1. Calculate gain/loss on each chargeable asset
  2. Consider availability of reliefs
  3. Offset allowable losses
  4. Deduct annual exemption (£11,700 for 2018/19)
  5. Calculate CGT liability using appropriate rate(s)
  6. Pay CGT liability by 31 Jan following end of fiscal year of disposal
22
Q

when should you calculate the capital gain for an asset?

A

the date of disposal.

This is when the contract for sale is made, or all the conditions of the sale contract are satisfied.

23
Q

How do you calculate the gain of an asset individually?

A

deduct the allowable costs. this includes any costs enhancing the value of the asset.

So essentially take the cost of the asset, and add on any other costs enhancing the asset, or incurred with acquisition or disposal. Take this figure from the selling price to get the gain/loss.

e.g. cost of asset, incidental costs of acq and disposal, legal fees, agent fees etc

24
Q

what if PART of an asset is sold (or gifted) ?

A

the disposal is still chargeable, and the allowable cost is limited to:

Y x (A / (A+B))

Y= cost of the entire asset
A = the market value of the part disposed of 
B = The market value of the part of the asset remaining.
25
Q

how do you work out the value of a part disposal that is chargeable

A

allowable cost is limited to:

Y x (A / (A+B))

Y= cost of the entire asset
A = the market value of the part disposed of 
B = The market value of the part of the asset remaining.

also remove any auction fees etc to get the gain.

26
Q

what if, for non-wasting chattels:

gross disposal proceeds >£6,000 BUT cost

A

the gain is the lower of (5/3 x (gross proceeds - £6,000) and the actual gain.

in exam questions work out the gain using both methods as there will be marks available for showing both.

27
Q

what if, for non-wasting chattels:

  1. they are disposed of at a loss, and if the proceeds are >£6,000
  2. they are disposed of at a loss, and the proceeds are
A
  1. the loss is calculated in the normal way

2. the normal exemption for chattels

28
Q

How do you treat a transaction if a series of part disposals of a ‘set’ (e.g. furniture or jewellery) is made to the same individual (or ‘connected person’ of that individual)?

A

the whole series of disposals is treated as a single transaction

29
Q

How do you go about applying the annual exemption?

A

After working out this gain/loss for all disposals made by a taxpayer in the year, add them all together. If there is a net gain, remove the Annual exemption (AE) to get the taxable gains!

30
Q

What if there is an unused part of the annual exemption for CGT?

A

It cannot be carried forward if unused. If it is unused it is unused!

31
Q

What if the question does not state what asset was sold to create the gain?

A

assume it is non-residential and non-qualifying for entrepreneur’s relief and so apply 10% and 20% as appropriate

32
Q

what happens if the net gain is less than the annual exemption amount and you have losses brought forward?

A

Use the AE first as this cannot be carried forward and will be lost if not used.

33
Q

How do you apply losses?

A

most beneficial way possible. so residential property first (as higher rate), then normal gains, then gains qualifying for entrepreneur’s relief

34
Q

what if the lossess for the year are greater than the gains and therefore creating a net loss?

A

These losses can be forward for years to offset against the net gain that arises in the future. By reducing the gain figure, you reduce the amount of tax as you apply the CGT relevant % to a lower figure

35
Q

for how many years can you carry forward negative capital gains arising from disposing assets?

A

There is no time limit for this relief, and losses will continue to be carried forward year on year.

36
Q

what is the order of relief to use if there is a postive gain that is chargeable (liable to tax)?

A
  1. Less unused trading losses
  2. Less Annual Exemption (AE)
  3. Less capital gain losses b/f
37
Q

how can “trading lossess” be used?

A

unrelieved trading losses can be offset against total income for a tax year and any remaining loss could be relieved against capital gains for that year.

so if there is trading lossess use these first to relieve the capital gain, if any left then use the AE, and if any left use the capital gain lossess b/f.

38
Q

If you use the trading losses in excess of total income for a tax year to relieve against capital gains, how much can you use?

A

lower of:

  • the unrelieved trading loss remaining
  • the ‘maximum amount’ of the chargeable capital gain.
39
Q

when is CGT payable?

A

single instalment on or before 31 January after the end of the tax year (31 January 2020 for 2018-19).

40
Q

what happens if an individual sells shares?

A

capital gain arises.

41
Q

how to calculate capital gain for:

  1. all of the shares being sold?
  2. shares bought over period of time and sold in parts?
A
  1. sale proceeds - cost
  2. Disposal of shares are matched against acquisitions of the same class of share in the same company in the following order:

First – against any acquisitions on the same day

Second – against shares bought in the next 30 days (to overcome bed and breakfasting of shares where investors sell shares then buy them back the next day. This is done to create gains just under the individual’s annual exemption so that the annual exemption is used and the base cost of the shares is increased to reduce the gain when actually sold)

Finally - against shares in the s104 holding (basically all other shares apart from the above).

42
Q

what is a bonus issue?

A

A bonus issue is basically a free issue of shares to existing shareholders

43
Q

what is a rights issue?

A

A rights issue is where a company again issues shares to its existing shareholders shareholders (again usually in proportion to the existing shareholding) but this time there is a price attached

44
Q

reliefs available to individuals to reduce their CGT liability?

A

a. Entrepreneurs relief
b. Principal private residence relief
c. Replacement of business asset relief

45
Q

Entrepreneurs relief?

A

This relief is available to individuals on the material disposal of certain business assets that have been held for at least a year. The relief is to tax qualifying gains at 10% (rather than 18% or 28%).

certain business assets:
This relief is available on the disposal of all or part of a trading business; assets of trading business on cessation; shares in personal trading company (must own at least 5% of the ordinary shares and be an officer or employee); assets owned by individual and used by their personal trading company (associated disposal).

46
Q

Principal Private Residence (PPR)?

A

This gives 100% relief against any gain arising on the sale of a residential property.

47
Q

limitation to the Principal Private Residence (PPR) relief?

A
  • husband and wife only entitled to ONE PPR unless legally separated
  • Persons owning more than one property and living in both of them must elect which is their PPR (and inform HMRC within two years of moving into the second property). Sale of the non-PPR property is subject to CGT.
  • Properties where the owner has not lived in them throughout the period of ownership are subject to CGT for the proportion of time where the owner has not lived in them. The following are “deemed” periods of occupation:
    *the last 18 months of ownership, provided property was main residence at some point (was 36 months for disposals before 6 April 2014)
    *the following provided actual occupation before and after (unless absence is work related and employment terms prevent returning to property)
    ♣ up to four years where the individual had to live elsewhere in the UK because of employment
    ♣ any periods where the individual had to work abroad
    ♣ three years for any reason
48
Q

rollover relief?

A

Provided a business reinvests all the sale proceeds then the capital gain on the sale of a qualifying business asset can be deferred (ie not taxed if reinvested)

49
Q

conditions for rollover relief?

A
  • The old and new assets must be qualifying assets (land and buildings, fixed plant and machinery, goodwill are the main examples) used in the trade
  • The new asset must be bought within a four year window, starting 12 months before the sale to three years after the sale
  • To get full relief all the sale proceeds must be reinvested. Any proceeds not reinvested become chargeable immediately.

Tax (7 decks)

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