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Flashcards in Capital Gains Tax Deck (27)
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6 step process for establishing CGT:

  1. Establish disposal proceeds
  2. Deduct acquisition costs/ selling costs/ costs of enhancements
  3. Deduct current year losses
  4. Deduct previous year losses down to annual exemption amount
  5. Deduct AEA
  6. Add gain to taxable income to determine CGT rate


Opportunities for CGT planning:

  • Making personal pension / gift aid payments extends the basic rate band, meaning more of a capital gain can fall into the basic rate.
  • Expenses of sole traders / partners are deductible, meaning more of a gain could fall into the basic rate. 
  • CGT rates are generally lower than income tax rates, growth funds may be more attractive than income funds for HR/AR taxpayers. 


  • If money is received at a later date from a disposal:
    • Ascertainable
    • Unascertainable
    • Contingent consideration


  • Where there is an ascertainable value, i.e. a fixed amount will be paid at a later time, that amount is charged to CGT when the sale becomes binding. HMRC will refund if the sale does not go ahead or may agree to instalment oayments if the money is not epected within 18 months. 
  • Where there is an unascertainable value, i.e. part of the sale price is not known at the sale date, the market value is used to establish the CGT due with a further calculation made when the final payment takes place. If this leads to a loss, the loss can be treated as having been made at the time of the original sale. 
  • Contingent consideration - payable only if certain conditions are satisfied


Assets exempt from CGT include:

  • Private residence
  • Private motor cars
  • Directly held gilts / qualifying corporate bonds
  • Pension funds
  • ISAs
  • Woodlands
  • National Savings Certificates
  • EIS (if held for 3 years) / VCT
  • Gains on gambling
  • Wasting assets


Transfers between spouses and civil partners:

  • Treated on a no gain no loss basis;
  • Receiving spouse takes on the gifting spouse's original acquisition cost rather than the value at the time of transfer.
  • Inter-spouse transfers are only treated this way if the spouses are living together at somepoint during the tax year. 
  • Disposals between spouses after the tax year of separation but before divorce are taxable - the market value would be used rather than the proceeds as the transaction would be treated as not at arms length.  


How are losses treated for CGT?

  • Losses must be set against gains in the same tax-year even if it means the annual exempt amount is effectively lost. 
  • Losses in excess of gains can be carried forward indefinitely. But in future tax-years, only need to be used to the extent that the AEA is fully utilised. 
  • Losses have to be claimed within four years of the end of the tax year in which they arose. 


Business Asset Disposal Relief (previously Entrepreneur's Relief) - key points:

  • Can be claimed on disposal of all or part of a business after 5 April 2008.
  • Gains made after 6 April 2020 can be relieved up to £1m during a person's lifetime. 
  • Gains that qualify for ER are set against the BRT (10%) first before any non-qualifying gains. 
  • Asset disposed of must have been owed for at least 2 years to apply. 


Who can benefit from Business Asset Disposal Relief (ER)?

  • Assets must have been owned for at least 2 years to qualify
    • Available to sole traders/ partners
    • And on disposals of shares in a trading company if individual is an employee / director of the company and the 5% shareholding test met:
      • hold at least 5% voting rights plus
      • entitled to at least 5% of either
        • companies ditributable profits + assets available for distribution or wind up or
        • disposal proceeds on disposal of company's ordinary share capital


Investor's Relief - key points:

  • Available to external investors who are not employees/ officers of the company whose shares they acquire. 
  • 10% rate applies and the limit is £10m 
    • this is in addition to the £1m business asset disposal relief limit
  • Shares must be newly issued.
  • Issued after 16 March 2016
  • Held for at least 3 years from 6 April 2016 and held continually for 3 years until disposal.


Holdover Relief - key points:

  • Hold over the gain on a disposal by way of a gift
  • Main categories of gits are transfers chargeable to IHT and disposals of trading assets in qualifying business activities.
  • If holdover relief is claimed - no CGT is payable at the time of gift by the donor. 
  • The donee receives the asset at market value and the gain is deferred until disposal.  (The acquisition cost is reduced by the amount of heldover gain). 


Business Rollover Relief - key points:

  • Available where business assets are sold and the proceeds reinvested in other assets for the business. 
  • Must be a trading business and assets used for trading purposes. 
  • New assets must have been purchased one year before or three years after disposal of old assets in order to qualify. 
  • Relief only defers gain until the sale of new assets. 


Incorporation relief - key points: 

  • Defers gain due when an unincorpoated business is incorporated in exchange for new shares in the company. 
  • Any gain is deducted from the issue price of the shares in the new company. 

Sole trader may wish to transfer the business to a company for various reasons. A company offers the advantage of limited liability and a possible reduction in the tax charge on profits (e.g. sole trader liable at 45% income tax versus 19% corporation tax payable by the company).


EIS reinvestment - key points for CGT:

  • CGT due on a disposal can be deferred if the gain is reinvested into EIS shares. 
  • Reinvestment must be made within 12 months before or up to three years after disposal. 
  • Gain is only deferred until the EIS shares are disposed of (unless the proceeds are reinvested into EIS) or the investor dies. 
  • Investor gets 30% income tax-relief (tax reducer) and CGT relief at 10% or 20% as appropriate + 8% if gain was on residential property not exempt through PPR.


SEIS reinvestment - key point for CGT:

  • 50% of the CGT due on a disposal can be exempted totally if the proceeds are reinvested into SEIS. 
  • This is restricted to a limit of 50% of the reinvested gain up to a maximum of £100,000 in the current tax year. 


CGT Planning - useful strategies to minimise CGT:

  • Use AEA for tax-free profits up to £12,300
  • Realise losses to reduce CGT payable
  • Plan disposal date of assets to ensure CGT AEA is used each year/ when tax will be paid at a lower rate. 
  • Split asset (if possible) to sell before and after the end of the tax-year to benefit from 2 x AEA. 
  • Ensure record is kept of all costs involved in buying and selling an asset so these can be deducted from the gain. 
  • Report and use losses from current and previous tax years. 
  • Use exemptions (ISAs), reliefs (EIS deferral, SEIS 50% exempt). 
  • Invest in income producing assets - where more favourable to tax position. 
  • Transfer assets between spouses - outright and unconditional. 


CGT and Trusts - Bare Trust - key CGT points:

  • Gift into a trust is a disposal - holdover relief if this is a business asset.
  • Beneficiary taxable at their own rates on disposal by trustees. 
  • They can use their AEA and any taxable gains will be taxed at the appropriate rate. 
  • Beneficiary must include gains on their self-assessment. 


CGT and Trusts - Vulnerable Beneficiary - key CGT points:

  • Trustees are charged the amount of CGT that would have been due if gains were assessed on the beneficiary. 


CGT and Trusts - IIP - key CGT points: 

  • Gift into a trust is a disposal - CGT may be payable by the settlor though HR relief is available on all assets unless it is a settlor interested trust. 
  • Settlor pays tax for settlor-interested trust, they can claim this back from the trustee. 
  • Otherwise, Trustees pay tax on disposals. 20% after trust exemption, 1/5 of half the AEA. 28% on property that is not PPR of a beneficiary. 
  • Holdover Relief available on any assets leaving the trust. 
  • Where life tenant of a pre-22 March 2006 trust dies, the assets are revalued at the market vaue at the date of death. No CGT charge on the trustees for any increase in value between asset entering trust and death of life tenant. 
  • Unless Holdover relief claimed by settlor, in which case held over gains are chargeable and tax is payable by the trustees. 
    • Same rules apply to IPDI trusts, trusts for bereaved minors, death before 18 of a beneficiary under 18-25 trust and trusts for vulnerable and disabled. 
    • Generally no uplift on death of life teneant for trusts created post 22 March. 


CGT and Trusts - Discretionary Trusts - key CGT points:

  • Gift into trust is a disposal - CGT may be payable by the settlor although HR relief is available on all assets unless it is a settlor interested trust. 
  • Settlor pays tax for settlor-interested trust, they can claim this back from the trustees. 
  • Otherwise, trustees pay tax on any disposals during the life of the trust at 20% after the trust exemption (half the AEA, minimum 1/5 of half AEA). Unless gain comes from realisation of residential propert not PPR - in this case CGT is 28%. 
  • Holdover relief is available on any assets leaving the trust, the election should be made jointly between trustees and beneficiaries. 


CGT and Trusts - Offshore Trusts - ket CGT points:

  • A UK domicile who has put assets into an offshore trust is liable to CGT on trust gains if they have an interest in the trust and are a UK resident in the year in which the gain arises. 
  • UK reisdent beneficiaries are liable to CGT on distributions of gains from offshore trusts. 


Disposals subjects to special CGT rules - wasting assets:

  • Wasting assets (tangible movable property with an expected life of less than 50 years) are exempt from CGT unless they are plant and machinery used in a business where capital allowances have been claimed.


Disposals subject to special CGT rules - chattels:

  • Chattel is a piece of movable personal property - this most commonly appears in an exam question as an antique or piece of jewellery.
  • Chattels are free from CGT if the disposal proceeds are less than £6,000. 
  • If disposal proceeds exceed £6,000 (but less than £15,000) then the balance over £6,000 is multiplies by 5/3rds to give the maximum chargeable gain. 


Disposals subject to special CGT rules - Prinipal Private Residence Relief (PPR)

  • PPR is exempt from CGT on sale and there are special rules about periods of absence which can be ignored and periods of absence which can be ignored and periods of absence mean part of sale proceeds are taxable. 
    1. Up to a year between buying the property and actually living in it (may be extended  to 2 years in exceptional circumstances). 
    2. Any period before 1st April 1982
    3. Any period up to 3 years provided it was preceded by and followed by periods of residence AND no other property qualified as PPR.
    4. The last 9 months of ownership provided the property had qualified as PPR at some point.
    5. Periods up to 4 years in total if absence was due to employment elsewhere in the UK - PPR sandwich rules. 
    6. Any period whilst working abroad - PPR sandwish rules
    7. Any period living in job related accommodation with an intention to return to the PPR. 


Disposals subject to subject to special CGT rules - PPRR calculation:

Total Gain x Period of occupation/ total period of ownership


Page 46 - EP Essential Study Notes




Disposals subject to special CGT rules - Share identification rules:

Where a shareholder has acquired a portfolio of shares i the same company over a period of time there is a specific order in which they are deemed to be disposed of when some of them are sold:

  • Acquisition on the same day
  • Acquisitions within the following 30 days
  • Acquisitions in the share pool - this aggregates all acquisitions except those made on the same day or the following 30 days


Disposals subject to special CGT rules - Types of shares:

  • Bonus (scrip) issues 
    • Treated as if acquired on same day as original shareholding with no extra acquisition cost
  • Rights issues
    • existing sharheolders subscribe for more shares. New shares plus any acquisition cost added to share pool. 
  • Scrip (stock) dividends 
    • dividend paid in shres rather than cash. Treated as new acquisitions. 
  • Employee share schemes 
    • Shares acquired through approved share option schemes usually produce larger gains as lower base cost. Election can be made to take gains from unapproved schemes earlier than approved schemes were employee acquires shares under both. 


Disposals subject to special CGT rules - Part disposals:

  • Where an individual only disposes of part of an asset you need to use the apportionment format for part disposals, which is:
    • (A / A + B) x original cost
  • Where A = proceeds of part disposed of and B = market value of part retained. 


Jack bought a field from Emma for £4,000. The remainder being worth £20,000. Emma originally paid £500. 

Deemed cost of part diposed =

(£4,0000 / £4,000 + £20,000) x £500

Gain is therefore £4,000 - £83.33 = £3,916.67. 

Balance of the cost for future disposals = £500 - £83.33 = £416.67.