Reliefs for Taxes Flashcards
(28 cards)
There are various reliefs for trading losses available for unincorporated businesses. Give an overview about the general effect of these.
Where there are trading losses, reliefs allow the taxpayer to deduct a trading loss from other income, resulting in them paying less tax overall
Where they are eligible for more than one relief, they may choose which relief to claim, or they can claim relief under multiple if there are still unabsorbed losses and they are eligible
Partners decide individually which relief they wish to claim in relation to their share of the partnership’s losses
Taxpayer must apply for the relief from HMRC; none apply automatically
Explain start-up loss relief for trading profit losses for unincorporated businesses
Relief is available when the taxpayer suffers a loss in any of the first four tax years of a business
Loss can be carried back and set against their income in the three tax years prior to the year of the loss, so they claim some of the income tax they paid to HMRC back
Loss must be set against earlier years before later years – work towards the present
As it works against total income, it means the taxpayer can lose the benefit of their personal allowance
Explain carry-across/one-year carry-back relief for trading losses generally for unincorporated businesses
Four options here; the losses can be
- Set against total income from the same tax year
- Set against total income from the tax year preceding the tax year of the loss
- Set against total income from the same tax year until that income is reduced to zero, with the balance of the loss being set against total income from the tax year preceding the tax year of the loss; or
- Set against total income from the tax year preceding the tax year of the loss until that income is reduced to zero, with the balance of the loss being set against total income from the tax year of the loss
As it goes against total income, it means the taxpayer loses the benefit of their personal allowance
Explain set off against capital gains, in relation to carry-across relief for trading losses for unincorporated businesses
Allows the taxpayer to set trading losses against chargeable gains in the same tax year and applies when a taxpayer has claimed carry-across relief, but not all of the loss has been absorbed
Explain carry-forward relief for trading losses for unincorporated businesses
Taxpayer can carry forward their trading loss for a tax year and set it against subsequent profits which the trade produces in subsequent years, taking earlier years earlier
Losses can be carried forward indefinitely unless the loss is exhausted
Taxpayer must inform HMRC of its intention to claim the relief no more than four years after the end of the tax year in which the loss was incurred
Explain carry-back of terminal trading loss for unincorporated businesses
Any loss incurred in the final 12 months of trading can be set against trading profits in the final tax year and then carried back and set against trading profits in the three years preceding the loss, starting with the most recent year and working back until year limit is reached, or loss is absorbed
No cap to the amount which can be relieved this way
Explain carry-forward relief on incorporation of business for trading losses
If a taxpayer incorporates their business by transferring it to a company wholly or mainly in return for shares, any trading losses which have not been relieved can be carried forward and set against any income they receive from the company, such as their salary or dividends
To be classed as ‘wholly or mainly in return for shares’, 80% or more of the consideration for the business transferred must be shares in the company
What is the cap on start-up relief and carry-across/back relief for unincorporated businesses?
They are subject to a cap of the greater of £50k or 25% of the taxpayer’s income in the tax year in relation which the relief is claimed; cap only applies to income from sources other than trade which produced the loss
Provide a summary of the types of relief for trading losses for unincorporated businesses, the time of loss, what the loss can be set against and for which time periods
1) Start-up relief by carry-back
- The first four tax years of trading
- Total income
- The three tax years preceding the tax year of the loss
2) Carry-across and/or carry-back one-year relief
- Any accounting year of trading
- Total income and (if this is exhausted) chargeable gains
- The tax year in which the accounting year of the loss ends and/or preceding tax year
3) Carry-forward relief
- Any accounting year of trading
- Subsequent profits of the same trade
- Any subsequent tax year until the loss is absorbed
4) Terminal relief by carry-back
- The final 12 months of trading
- Previous profits of the same trade
- The final tax year and then the three tax years preceding the final tax year
5) Carry-forward relief on incorporation
- Up to incorporation
- Subsequent income received from the company
- Any subsequent tax year until the loss has been absorbed
What is rollover relief on replacement of business assets for CGT?
1) Enables sole traders and partners to sell certain assets (qualifying business assets (QBAs)) without paying CGT, if the proceeds are invested in other QBAs
- Charge to CGT postponed until seller disposes of new assets
2) Principal QBAs are land, buildings and goodwill; company shares do not qualify
- Asset must be used in trade of the business rather than held as an investment
- Can dispose one type of QBA (goodwill) and rollover into purchase of another type (land)
3) Relief applies when a QBA is disposed of, and it is owned by:
- Sole trader
- Partnership
- Individual partner
- Individual shareholder where they own at least 5% of the voting shares
Must acquire the replacement asset within 1 year before or 3 years after disposal of original asset
Taxpayer must claim relief within 4 years from the end of the tax year in which they get the replacement asset
Annual exemption cannot be used when the taxpayer applies for rollover relief
How does rollover relief on replacement of business assets actually apply? Give an example scenario
Gain is notionally deducted from acquisition cost of replacement asset
Example – A sells a workshop for £77k and makes a gain of £33k. A then buys a larger workshop for £95k and claims rollover relief. Workshop 2 later sold for £140k
- Gain on disposal of workshop 1 is postponed, so no CGT payable in that tax year
- Workshop 2 deemed to have been acquired for £62,000 (£95k-£33k gain)
More CGT to pay in future
What is rollover relief on incorporation of business for CGT?
Applies where conditions met + individual sells their interest in an unincorporated business to a company
- Gain is rolled over into shares that the seller receives as consideration for the sale of assets to the company
- CGT payable only when individual disposes of shares
Conditions
- Business transferred to a different owner, but carried on as same business
- Consideration must all be in shares issued by the company; part share consideration = only that part of gain can be rolled over
- Business must be transferred with all assets, ignoring cash, otherwise relief won’t apply
Gain is rolled over by notionally deducting it from the cost of acquisition of the new shares
HMRC applies relief automatically + annual exemption cannot be used if rollover relief on incorporation applies
What is hold-over relief on gifts for CGT? What are the conditions for it to apply?
Allows an individual to make a gift of certain types of business asset or sell them at an undervalue, without paying CGT
- If donee disposes of the asset, they pay tax on their own gain and donor’s gain
Conditions:
i) Only available on gifts or the gift element of a sale at an undervalue
ii) Only the part of the gain relating to chargeable business assets qualify for the relief. Chargeable business assets includes:
- Assets used in donor’s trade (sole traders or partner using assets in partnership)
- Shares in a trading company which are not listed on a recognised stock exchange
- Shares in a personal trading company, even if listed - Personal = donor owns 5% or more voting shares
- Assets owned by a shareholder and used by their personal trading company
iii) Both donor and donee must elect to apply for the relief within 4 years from the end of the tax year of the disposal
How does hold-over relief on gifts apply for CGT?
Market value is taken as the consideration
Deemed gain is then deducted from market value of the asset to get a notional acquisition cost
When the donee later disposes of the asset, the notional acquisition cost and qualifying expenditure is deducted from the sale or market value to find donee’s gain
- Donee’s gain includes held-over gain plus any gain during ownership
Once the donee’s chargeable gain has been calculated, reliefs should be considered as normal
Annual exemption cannot be applied before the gain is rolled over
In overview, how does business asset disposal relief work for CGT?
If this relief applies, the rate of tax is reduced to a flat rate of 10%, up to a lifetime cap of £1 million; after this, BADR doesn’t apply
Taxpayer must claim BADR on or before first anniversary of 31st January following the tax year in which the qualifying disposal was made
- 2024/25 disposal, claim by 31st Jan 2027
Must be a qualifying business disposal for the relief to apply
How does business asset disposal relief apply to sole traders and partnerships for CGT?
Where a sole trader or individual partner disposes of the whole or part of a business, the relief may apply
- Relevant where business disposes of as a going concern or assets used in business are disposed of following cessation of the business
The interest in the business as a whole must have been owned either:
- Throughout the period of 2 years ending with date of disposal
- Throughout the period of 2 years ending with cessation of business, if disposal is within 3 years after cessation of business
Only assets used for the purposes of the business are eligible for relief
- Not company shares or assets held as investments
How does business asset disposal relief apply to disposal of company shares?
Disposal of company shares may qualify for relief if:
1) The company is a trading company; and
2) The company is the disposer’s personal company (they hold 5% or more of ordinary share capital and that holding gives them 5% or more of voting rights) and either:
- Disposer must be beneficially entitled to at least 5% of profits available for distribution to equity holders and at least 5% of assets available on winding up; or
- Disposer would be beneficially entitled to at least 5% of proceeds of sale; and
3) Disposer must be an employee or officer of the trading company
1-3 must be satisfied throughout the 2-year period ending with date of disposal or date the company ceased trading (and disposal occurs within 3 years of cessation of trading)
What is tangible movable property for purposes of CGT?
Wasting assets are generally exempt from CGT – predictable life of less than 50 years
Tangible movable property that does not constitute a wasting asset (antiques) are exempt from CGT if the consideration for disposal is £6000 or less
What is private residence relief for CGT?
Disposals of a dwelling house, including grounds up to half a hectare, are exempt from CGT, if the taxpayer occupied the dwelling house as their only or main residence throughout period of ownership
How are damages for personal injury treated for CGT purposes?
Exempt from CGT
How do the CGT reliefs work with one another?
More than 1 relief may apply to a particular disposal, so taxpayer must choose which to claim
1) Rollover relief on replacement of qualifying assets and hold-over relief on gifts
- BADR cannot apply to gains which are to be rolled over on the replacement of qualifying assets or held over on the gift of business assets
- AE cannot be first applied to any gains which are to be rolled over or held over under these reliefs
- Rollover relief cannot be used in conjunction with hold over or relief on incorporation
2) Rollover relief on incorporation of a business
- If this applies, BADR and AE cannot be used
- Cannot be used at same time as rollover relief and hold-over relief
3) Business asset disposal relief
- AE can be used to reduce gains before applying BADR
How can capital losses be used to reduce CGT payable?
Losses can be set against gains to wipe them out, resulting in no CGT to pay
- If this happens, remember an unused AE cannot be carried forward to other years
- Unabsorbed losses can be carried forward indefinitely
Approach:
(a) work out the gain or loss on each disposal made during the tax year;
(b) deduct any losses of the current year from gains;
(c) deduct any losses brought forward from previous years to reduce any remaining gains to the limit of the annual exemption;
(d) deduct the annual exemption from any remaining gains
If in Y1, the person has a loss of £200,000, which when set against gains of £10k, leaves £190,000, in Y2, the £190k loss is set against current years’ gains until they are down to the amount of the annual exemption of £3k
- Year in which loss created – used to fully wipe out gains
- Next year after loss – used to wipe out almost all gains, except for final £3k where AE used instead
What is a key difference between the way trading losses can be dealt with by sole traders and by companies for the purposes of paying less CGT/CT on chargeable gains?
Sole traders can offset trading losses against chargeable gains in the same year and offset unabsorbed trading losses against profits of the same trade made in subsequent years
Sole traders cannot offset an unabsorbed trading loss against a chargeable gain made in a future tax year for CGT purposes.
Companies can carry forward trading losses and set them against total profits, not just trading profits
How does rollover relief on replacement of business assets work for corporation tax?
Stage 3: Apply reliefs
Main relief is rollover relief on the replacement of qualifying business assets
Allows companies to postpone paying CT, by using consideration received for qualifying asset to buy another qualifying asset
Main qualifying assets are land and buildings – company must use the asset in its trade, so it cannot be held as an investment
- Company shares aren’t qualifying assets
- Can sell one type of qualifying asset and buy another; relief will still apply
Company must acquire the replacement asset within 1 year before or within 3 years after it disposes of the original asset
Gain is notionally deducted from the acquisition cost of the replacement asset
- If a replacement factory is treated as being acquired for £160k (£200k cost - £40000 rolled over gain), when it is sold for £235,000
- £235k - £160k (adjusted acquisition cost) = £75k gain before indexation
