week 10: capital taxes Flashcards
(29 cards)
What is Capital expenditure
What is the key difference between depreciation and capital allowances?
Depreciation follows accounting rules; capital allowances follow tax rules.
What are two types of expenditure eligible for capital allowances?
Plant and machinery, and integral features.
What is capital expenditure?
Capital expenditure is spending on assets that provide benefit beyond the current accounting period, such as equipment, vehicles, or buildings. It’s not treated as a trading expense but may qualify for capital allowances.
How are capital allowances treated in tax calculations?
They’re treated as a trading expense and deducted from trading profits.
For individuals, how are capital allowances calculated?
They’re calculated for the accounting period — unless it exceeds 18 months.
What happens if the accounting period is over 18 months?
It’s split into a 12-month period and a remainder period for capital allowance purposes.
What are the key steps to assess capital allowances for plant, machinery, and integral features?
Is the asset eligible?
Is it part of the main pool or special rate pool?
Does it qualify for Annual Investment Allowance (AIA)?
Does it require special treatment (e.g. short-life asset)?
Has there been a disposal (adjust pool accordingly)?
What makes plant and machinery eligible for capital allowances?
It must be used for carrying on the business
It must form part of the setting in which the business is carried on
What integral features are eligible for capital allowances?
Items attached to buildings, including:
Electrical system
Cold water system
Water heating, ventilation, air cooling or purification systems
Floors or ceilings forming part of such systems
Lifts, escalators, moving walkways
External solar shading
What is the difference between the main pool and special rate pool in capital allowances?
Main pool: For most assets excluding long-life or special rate ones; includes cars, taxis, plant/machinery in standard business buildings.
Special rate pool: For long-life assets (>25 years), integral features, and thermal insulation.
What AIA details are not shown on the tax tables and must be memorised?
Cars are not eligible for AIA
Unused AIA is not transferable
Excess over £1 million goes to WDA (18% or 6%) depending on the pool
What special capital allowance treatments should be memorised (not given on the sheet)?
Cars:
0g/km CO₂ → 100% FYA in year of purchase
<50g/km CO₂ → Main pool
≥50g/km CO₂ → Special rate pool
Enhanced Capital Allowances (ECA):
100% for approved “green” assets (e.g. energy-saving equipment)
Separately pooled assets:
Private use assets → only business portion qualifies
Short-life assets → tracked separately from main/special pools
What additional special treatment rules apply for capital allowances (not on the tax sheet)?
Can’t claim CA for:
Cars
Plant only partly used for trade
Gifts
Assets treated as long-life
Taxpayer can elect within 2 years after end of basis period to treat an asset separately
If not disposed of within 8 years, remaining tax WDV is added back to the main or special pool
Q: What rules apply to additions and disposals in capital allowances?
Additions:
Added to pool at cost (net of AIA or ECA)
Disposals:
Deducted at lower of cost or sale proceeds
WDA can be partially claimed or skipped
WDA is annual — pro-rate if accounting period ≠ 12 months
Balancing adjustments:
Balancing allowance if non-pooled asset sold for less than value
Balancing charge if total allowances > cost − proceeds
What are the rules for writing off small balances in capital allowance pools?
If main or special rate pool balance < £1,000, taxpayer may write off full amount
Not allowed for single asset pools (e.g. cars with private use)
If written off, pool = £0, so future disposal may cause balancing charge
What’s the order of applying capital allowances?
Does it qualify for 100% ECA?
If not → Does it qualify for AIA?
Use AIA on special rate pool items first
If not → Add to main/special rate pool → claim WDA
What 3 areas should you focus on when studying Capital Gains Tax?
Definition of a taxable capital gain and chargeable individual
Deductions allowed when calculating taxable gains
CGT tax rates
What is a capital gain and how does it arise?
A capital gain happens when you sell or dispose of an asset for more than you paid for it.
It arises from:
Increase in market value over time
Retained profits in the asset (e.g. company shares)
Scarcity or rising demand
Successful risky investments
How is a taxable capital gain calculated, and who is chargeable?
Taxable gain = sale value − original cost (or inherited value)
Chargeable persons include:
UK resident individuals
Trustees and personal representatives
Partners: taxed individually based on their share of any partnership gain
Who is exempt from paying Capital Gains Tax (CGT)?
Charities (if gains used for charitable aims)
Local authorities
Registered friendly societies
Approved scientific research associations
Investment trusts
Pension funds
Companies → they pay Corporation Tax on chargeable gains instead
What is a chargeable disposal for Capital Gains Tax, and what are the exceptions?
A:
CGT is charged on the sale, gift, loss, or destruction of a chargeable asset
Gains are taxed when realised (i.e. asset is disposed of)
Not chargeable if:
Gift between spouses or civil partners
Death of the taxpayer
Gift to charities, museums, or art galleries
What assets are exempt from Capital Gains Tax (CGT)?
Principal Private Residence (PPR)
Motorcars
Gambling winnings
ISAs, National Savings Certificates, Premium Bonds, Life assurance policies
Foreign currency (if for private use)
Works of art donated for public/national benefit
How is Capital Gains Tax assessed?
Tax year basis: e.g. 6 April 2023 – 5 April 2024 (due 31 Jan 2025)
Calculate gain/loss for each disposal
Net total gains/losses for the year
Offset current year losses first, then brought-forward losses
Apply annual exemption (can choose which gains to offset)
If losses wipe out gains, annual exemption is lost
