Capital Gains tax

Question 1

What is a capital gains tax?

Answer 1

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

Question 2

what does a capital gain arise?

Answer 2

on disposal of the asset

Question 3

what is a chargeable gain?

Answer 3

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.

Question 4

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

Answer 4

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

Question 5

gains on gifts to charities?

how to deal with?

Answer 5

These are exempt.

Question 6

gains on gifts to gallaries?

how to deal with?

Answer 6

These are exempt.

Question 7

gains on gifts to museums?

how to deal with?

Answer 7

These are exempt.

Question 8

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

how to deal with?

Answer 8

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

Question 9

how to deal with Capital gains arisen on cars?

Answer 9

These are exempt.

Question 10

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

Answer 10

These will be chargeable gains.

Question 11

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

Answer 11

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).

Question 12

What is a chattel?

Answer 12

items (assets) of movable property.

Question 13

how to deal with Capital gains arisen on wasting chattels?

Answer 13

These are exempt.

Question 14

what is a wasting chattel?

Answer 14

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

Question 15

how to deal with Capital gains arisen on livestock?

Answer 15

These are exempt.

Question 16

how to deal with Capital gains arisen on gilts?

Answer 16

These are exempt.

Question 17

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

Answer 17

These are exempt.

Question 18

how to deal with Capital gains arisen on national savings certificates

Answer 18

These are exempt.

Question 19

how to deal with Capital gains arisen on premium bonds?

Answer 19

These are exempt.

Question 20

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

Answer 20

These are exempt.

Question 21

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

Answer 21

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

Question 22

when should you calculate the capital gain for an asset?

Answer 22

the date of disposal.

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

Question 23

How do you calculate the gain of an asset individually?

Answer 23

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

Question 24

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

Answer 24

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.

Question 25

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

Answer 25

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.

Question 26

what if, for non-wasting chattels: gross disposal proceeds >£6,000 BUT cost

Answer 26

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.

Question 27

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

Answer 27

1. the loss is calculated in the normal way | 2. the normal exemption for chattels

Question 28

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)?

Answer 28

the whole series of disposals is treated as a single transaction

Question 29

How do you go about applying the annual exemption?

Answer 29

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!

Question 30

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

Answer 30

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

Question 31

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

Answer 31

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

Question 32

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

Answer 32

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

Question 33

How do you apply losses?

Answer 33

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

Question 34

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

Answer 34

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

Question 35

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

Answer 35

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

Question 36

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

Answer 36

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

Question 37

how can "trading lossess" be used?

Answer 37

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.

Question 38

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?

Answer 38

lower of: - the unrelieved trading loss remaining - the ‘maximum amount’ of the chargeable capital gain.

Question 39

when is CGT payable?

Answer 39

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

Question 40

what happens if an individual sells shares?

Answer 40

capital gain arises.

Question 41

how to calculate capital gain for: 1. all of the shares being sold? 2. shares bought over period of time and sold in parts?

Answer 41

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).

Question 42

what is a bonus issue?

Answer 42

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

Question 43

what is a rights issue?

Answer 43

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

Question 44

reliefs available to individuals to reduce their CGT liability?

Answer 44

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

Question 45

Entrepreneurs relief?

Answer 45

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).

Question 46

Principal Private Residence (PPR)?

Answer 46

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

Question 47

limitation to the Principal Private Residence (PPR) relief?

Answer 47

- 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

Question 48

rollover relief?

Answer 48

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)

Question 49

conditions for rollover relief?

Answer 49

* 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.