Capital Gains Tax and Inheritance Tax

Question 1

Who pays Capital Gains Tax and what is it charged on?

Answer 1

Payable by individuals, trustees and personal representatives. It is a tax on an increase in an asset’s value during a period of ownership. Charged on sale.

Question 2

The annual exemption can only be used when tax is paid. It cannot be used when a gain is being held-over, rolled-over or deferred. True or false?

Answer 2

True

Question 3

What can be deducted from the disposal value to calculate a basic gain?

Answer 3

Purchase price and allowable expenditure.

Question 4

A higher rate taxpayer will pay Capital Gains Tax at the higher rate on all of their chargeable assets. True or false?

Answer 4

False

Question 5

Shares are not qualifying assets for the purpose of business asset disposal relief and an individual will not usually pay Capital Gains Tax on the gain in value of their main home. True or false?

Answer 5

True

Question 6

Are vehicles or plant/machinery chargeable for the purpose of capital gains tax?

Answer 6

No, as they are wasting assets (they depreciate over time)

Question 7

Can Capital Gains Tax apply to a gift?

Answer 7

Yes

Question 8

What scheme exempts an individual’s main home from paying Capital Gains Tax?

Answer 8

Principal Private Residence Exemption

Question 9

Can an individual deduct the cost of repairs/improvements from the basic gain for Capital Gains Tax purposes?

Answer 9

Yes, it is always deductable.

Question 10

What is the calculation for Capital Gains Tax?

Answer 10

Disposal Value
LESS
Acquisition cost/value and Allowable expenditure
EQUALS
Basic Gain
LESS
Exemptions/reliefs
EQUALS
Chargeable Gains

Question 11

Scott sells a property worth £200k to his friend for £150k. He knows that the true market value is £200k, but sells it for £150k as an
act of generosity. What will the disposal value be for CGT purposes?

Answer 11

The disposal value will be £200k.

Question 12

Graham sells a property worth £200k to his friend for £150k. He is under the impression that the market value is £ 150k and that
£150k is a fair price. He has not had the property valued for several years. What will the disposal value be for CGT purposes?

The disposal value will be £150k.

Answer 12

The disposal value will be £150k.

Question 13

What allowable expenditure may be deducted from a property’s value for CGT purposes?

Answer 13

• Costs of acquisition (e.g. solicitor fees)
• Subsequent expenditure (e.g. cost of improvements)
• Incidental costs of disposal (e.g. solicitor fees)

(Always add these together to original value before deducting from sale price/market value on disposal)

Question 14

What are the Capital Gains Tax charge rates?

Answer 14

• Where business asset disposal relief or investors relief applies - 10%
• Where total taxable income and gains do not exceed the Income Tax basic rate band - 10%
• On the amount over the threshold, where total taxable income and gains exceed the Income Tax basic rate band - 20%
• Where property is residential property, add 8% to amounts above.

Question 15

What is a qualifying business disposal?

Answer 15

• Sale or gift of the whole or part of an unincorporated business, that has been owned for at least 2y prior to disposal
• Sale or gift of shares in a company, provided that it is incorporated, individual is an employee and these conditions have been satisfied for at least 2y
• Sale or gift of assets used by such a trading company or partnership business, but owned individually by the partner or shareholder.

Question 16

What is business asset disposal relief?

Answer 16

Applies where there is a qualifying business disposal.

Question 17

In what order are gains qualified for business asset disposal relief taxed? And at what rate? And what is the lifetime limit?

Answer 17

Taxed first. 10%. £1m

Question 18

How much is the annual exemption for Capital Gains Tax?

Answer 18

£3,000

Question 19

Nikkie is a director of and 25% shareholder in a trading company. She bought the shares (which are ordinary voting shares) in 2017
for £500k. She then sells the shares for £3.5m in August 2021. There is no relevant allowable expenditure and Nikkie is already an
HRT, based on income alone. Nikkie has made a previous BG of £1300 in the relevant tax year and has not made any previous
claim for BADR. What is Nikkie’s CG and how much CGT will be payable?

Answer 19

Nikkie has made a BG of £3m. She is entitled to BADR as this is a QBD of the second type. She is selling at least a 5%
shareholding in a trading company, and she is an officer of the company. She has satisfied these conditions for at least
the two years prior to the sale.

After deduction of the unused part of the AE, the gain (up to £1m) qualifies for BADR and will be taxed at a flat rate of
10%. The remaining amount will be taxed at 20%, as Nikkie is an HRT for CGT purposes.

Basic Gain = £3m
Less Remaining Annual Exemption = £1,700
Chargeable Gain = £2,998,300
£1m x 10% (BADR) = £100,000.00
£1,998,300 x 20% = £399,660
Total Capital Gains Tax = £498,800

Question 20

What is hold-over relief?

Answer 20

Available to an individual who disposes of a business asset by way of gift. Both parties must elect for it to apply.

Question 21

What is Inheritance Tax?

Answer 21

Death will give rise to a charge for Inheritance Tax, not Chargeable Gains Tax. Based on market value.

Question 22

What is business property relief?

Answer 22

On death, no charge to Inheritance Tax on the following business assets:
- An interest in an unincorporated business
- The value of unlisted company shares relevant to trading activities.

Question 23

A client, who is a sole trader, purchased their business (which included a freehold commercial property) ten years ago for £100k. The client has now retired and has sold the business for £200k. They have not made any previous capital disposals.

Which of the following will the client be able to deduct from the sale price in order to calculate their basic gain?

A. The purchase price, estate agents’ fees of £3750 incurred in the sale, £2.5k spent repairing the roof, £3k in legal fees on the sale,
£2k in legal fees on the purchase and £4k in installing a replacement kitchen and windows.

B. Estate agents’ fees of £3750 incurred in the sale, £3k in legal fees on the sale and £2k in legal fees on the purchase.

C. The purchase price, estate agents’ fees of £3750 incurred in the sale, £3k in legal fees on the sale and £2k in legal fees on the
purchase.

D. The purchase price, estate agents’ fees of £3750 incurred in the sale, £3k in legal fees on the sale, £2k in legal fees on the
purchase and £4k in installing a replacement kitchen and windows.

E. Estate agents’ fees of £3750 incurred in the sale, £3k in legal fees on the sale, £2k in legal fees on the purchase and £4k in
installing a replacement kitchen and windows.

Answer 23

C. The purchase price, estate agents’ fees of £3750 incurred in the sale, £3k in legal fees on the sale and £2k in legal fees on the
purchase.

Question 24

A client is selling their 25% ordinary shareholding in a trading company for £2m. They bought the shares 20 years ago for £500k and they carry 25% of the voting rights in the company. You can assume that there is no allowable expenditure. The client was a director of
the company, until they retired five years ago. The client is a higher rate taxpayer (HRT) and has only made one other capital disposal,
three years ago, where they claimed business asset disposal relief (BADR) on a chargeable gain of £200k.

Which of the following best describes the client’s liability for capital gains tax (CGT)?

A. The client will be entitled to the full annual exemption (AE) and to BADR on the chargeable gain. CGT will be charged at 20%, as
the client is an HRT.

B. The client will be entitled to the full AE and to BADR on the chargeable gain, up to £1m. CGT will be charged at 20% on the
balance, as the client is an HRT.

C. The client will be entitled to the full AE and to BADR on the chargeable gain up to £800k. CGT will be charged at 20% on the
balance, as the client is an HRT.

D. The client will be entitled to the full AE and to BADR on the chargeable gain. CGT will be payable at a rate of 10%.

E. The client will be entitled to the full AE, but not to BADR. CGT will be payable at a rate of 20%, as the client is an HRT.

Answer 24

E. The client will be entitled to the full AE, but not to BADR. CGT will be payable at a rate of 20%, as the client is an HRT.

(retired 5 years ago, not employed for the last 2 years by the business)

Question 25

A trading partnership has three partners (a man, a woman and a client) who have been in partnership for five years. They share income profits equally and capital profits in accordance with their capital contributions, which are as follows: Man: 50% Woman: 30% Client: 20% Four years ago, the firm purchased office premises for £100k, and they have just been sold for £200k. None of the partners have made any previous capital disposals and they are all higher rate taxpayers. Which of the following best describes the partners' liability to capital gains tax (CGT) on the sale? A. Each partner will pay CGT on the percentage of the basic gain that corresponds with the proportion in which they share capital profits. They will be entitled to deduct any allowable expenditure and the annual exemption first and it is likely they will qualify for BADR, paying tax at 10%. B. Each partner will pay CGT on the percentage of the basic gain that corresponds with the proportion in which they share capital profits. They will be entitled to deduct the annual exemption first, but it is unlikely that they will qualify for BADR. C. Each partner will be liable to pay CGT on one-third of the basic gain. They will be entitled to deduct any allowable expenditure and the annual exemption first and it is likely they will qualify for BADR, paying tax at 10%. D. Each partner will be liable to pay CGT on one-third of the basic gain. They will be entitled to deduct any allowable expenditure and the annual exemption first, but it is unlikely they will qualify for BADR, so they will pay tax at 20%. E. Each partner will pay CGT on the percentage of the basic gain that corresponds with the proportion in which they share in capital profits. They will be entitled to deduct any allowable expenditure and the annual exemption first and it is likely they will qualify for BADR, paying tax at 20%, as higher rate taxpayers.

Answer 25

A. Each partner will pay CGT on the percentage of the basic gain that corresponds with the proportion in which they share capital profits. They will be entitled to deduct any allowable expenditure and the annual exemption first and it is likely they will qualify for BADR, paying tax at 10%.

Question 26

A client sold their holiday home in England two weeks ago. The client is a higher rate taxpayer and the property has never been let commercially. The property was bought for £400k five years ago and is now being sold for £700k. Legal fees of £1.5k were paid on the acquisition, and solicitors' and estate agents' fees together totalling £3.5k have been incurred on the sale. Three years ago, the client built a substantial extension costing £100k. The current annual exemption is £12,300 and the client has made no previous capital disposals. Which of the following best identifies the client's capital gains tax liability? A. £56,540 B. £36,540 C. £18,270 D. £79,156 E. £51,156

Answer 26

E. £51,156

Question 27

A client who was a 50% partner in an accountancy business dies. He purchased his share in the business ten years ago for £200k and it is now worth £350k. He also owned, for eight years, business premises that were occupied by the business. There is no binding contract for sale of these assets in the partnership agreement. Which of the following best describes the tax position in respect of the business interest and the premises? A. The personal representatives will pay capital gains tax (CGT) on the market value of the business interest and the chargeable gain on the premises. B. The personal representatives will pay CGT on the chargeable gain of the business interest and the premises. C. No CGT will be payable, but the personal representatives will acquire the business interest and the premises at their market value as at the date of the client's death. Inheritance tax will be payable. D. No CGT will be payable, but the personal representatives will acquire the business interest and the premises at their market value as at the date of the client's death. It is likely that business property relief (BPR) of 100% will apply to the business interest and BPR of 50% will apply to the premises. E. No CGT will be payable, but the personal representatives will acquire the business interest and the premises at their market value as at the date of the client's death. It is likely that BPR of 100% will apply to the business interest and the premises.

Answer 27

D. No CGT will be payable, but the personal representatives will acquire the business interest and the premises at their market value as at the date of the client's death. It is likely that business property relief (BPR) of 100% will apply to the business interest and BPR of 50% will apply to the premises.