Learning Material Sample
Personal taxation4. Capital Gains TaxLearning Outcome 1 Understand the UK tax system as relevant to the needs and circumstances of individuals and trusts: Explain the main features of Capital Gains Tax
Capital gains tax (CGT) is a tax charged on the gains or profit made from the disposal of assets. It is le...
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CGT is charged when a gain is made on the disposal of an asset. The term disposal covers more than just sales. It includes situations where assets are gifted, exchanged or where an individual derives a capital sum from an asset. The following circumstances are also considered to be disposals:
The receipt of a capital sum in compensation for damage to an asset The receipt of a capital sum from an insurance company for damage to or loss of an asset The receipt of a capital sum for surrendering rights When the beneficiary of a ... Shortened demo course. See details at foot of page. ...r from the chapter on income tax that assets held jointly are always treated as owned equally unless the ownership is as tenants in common, where each owner has specified their ownership percentage.The disposal of assets on death does not count as a disposal for CGT purposes. The new owners are considered as having acquired the assets at their market value on the date of death.
When would the transfer of assets between spouses be considered as a disposal giving rise to a possible gain? Answer : Purchase course for answer In order to calculate whether a gain has been made on a disposal and therefore a potential liability for CGT has arisen, it is necessary to know the acquisition cost of the asset and the disposal proceeds.
For assets acquired before 1 April 1982, the acquisition cost is taken to be the asset's market value at 31 March 1982. For assets acquired after this date, the acquisition cost is the price paid, minus any allowable costs. For example, an antique painting was purchased at auction in September 1994 for a price of £20,000. The buyer paid the auctioneer £2,000 commission, so the acquisition cost would be taken as £18,000. The disposal price is normally taken to be the proceeds received. However, where the disposal is not on a wholly commercial basis, it is taken to be the market value. A transaction would not be on a wholly commercial basis where the two parties were closely connected, for example between fa... Shortened demo course. See details at foot of page. ...al gain.A person will be considered to be trading when the following conditions exist: The asset(s) being sold do not provide an ongoing income or give personal enjoyment to the owner The sale of the asset(s) is within a short time of the acquisition There are repeated and frequent similar transactions The quantity being sold is large The activities associated with the acquiring and disposing of the assets are extensive and involve for example, the formation of a company, advertising and sales staff, etc The transaction is undertaken with the motive of making a profit Where the transactions are deemed to be trading activities, the gains or profits will be liable for income tax as earned income. Anne sells an antique ring to her sister for £4,000 but its actual market value is £5,500. What figure would be considered as the disposal proceeds of the sale? Answer : Purchase course for answer Some disposals of assets are completely exempt from CGT. This can be either because the asset itself is exempt or the gain is wholly relievable against tax. Importantly, when it comes to calculating any CGT liability, it must be remembered that where an asset is deemed to be exempt, no loss can be claimed against it.
Some of the main exemptions are an individual’s principle private residence, private motor vehicles and gambling winnings. For some of the exemptions there may be conditions that need to be satisfied for the exemption to be applicable. EXEMPT ASSETS The following list shows the main exempt disposals by individuals, including capital sums derived from them. Principal private residence* Private motor vehicles National Savings Certificates and Premium Bonds Government and most corporate bonds and government-guaranteed securities Chattels –i.e. tangible movable property - if the value at disposal does not exceed £6,000** Tangible movable property which is a wasting asset – i.e. has an expected life of less than 50 years*** Decorations for valour Foreign currency for personal use outside the UK Debts repaid to the original creditor Gambling winnings Compensation for damages or injury suffered in a profession or vocation Assets held in ISAs, Junior ISAs and Child Trust Funds Shares in Venture Capital Trusts Shares under Enterprise Investment Schemes (EIS & SEIS) on which income tax relief has been given – losses are allowable Shares with a value up to £50,000 acquired by an empl... Shortened demo course. See details at foot of page. ...p>Chattels** Where the proceeds exceed £6,000, the amount of chargeable gain depends on the amount of the disposal proceeds and the actual gain. The maximum chargeable gain cannot be more than five-thirds of the excess over £6,000. For example, a rare antique book bought for £3,800 is sold for £8,500. The actual gain is £4,700 (£8,500 - £3,800), but under the chattels rules the maximum chargeable gain is calculated using the excess of the proceeds above £6,000 - £2,500. The maximum chargeable gain cannot be more than £2,500 (£8,500 - £6,000) multiplied by 5 and divided by 3 (i.e. £4,166.66). From the two calculations it is the lower figure that is used as the chargeable gain and in this instance, it is £4,166.66 that would be used rather than the actual figure of £4,700. Tangible movable property *** All items of plant and machinery are considered to be wasting assets, whatever their actual life. The item will not be exempt where it has been used in a business and capital allowances have been claimed in each year’s accounts Shares acquired under an employee share ownership agreement **** The exemption applies to agreements made prior to 1 December 2016. Agreements made after 16 March 2016 are subject to a lifetime limit on exempt gains of £100,000 Where an individual has two residences, how long do they have to decide which one will be entitled to the exemption? Answer: Two years from the date when the second property becomes a residence. Each tax year, every individual is entitled to an annual exempt amount which can be deducted from their chargeable gains after all other allowable deductions and any losses ha...
Shortened demo course. See details at foot of page. ...ates to.You can see the current amount in the tax tables. When is the annual exempt amount deducted from a chargeable gain? Answer : Purchase course for answer The calculation of the gain from the disposal of an asset, involves a number of steps.
These are: Establish the disposal proceeds Subtract any allowable disposal costs Subtract the acquisition cost Subtract any costs involved in the acquisition or enhancement - this figure is the actual gain Subtract any allowable losses Subtract the annual exempt amount The resulting figure will be the chargeable gain on which CGT will be calculated and paid at the appropriate rate. We will now consider each of these stages in turn. Disposal proceeds It is important to remember that the disposal proceeds may not be the actual amount received as in certain situations it will be taken as the market value. Can you remember what these situations were? The market value will be used if an asset is given away, if the sale is to a connected person or if the sale is at a value deliberately less than the actual market value. Having established the disposal proceeds, any allowable costs involved in the disposal (such as legal fees or commissions) can be subtracted from the fi... Shortened demo course. See details at foot of page. ... to HMRC unless the disposal proceeds of the asset are more than four times the annual exempt amount or the individual incurring the loss wishes to offset it against other gains or both.Remember that if an asset is exempt, a loss made on it cannot be used against other gains. If there are any losses from the disposal of other assets, these can now also be deducted from the previous figure. You can see an example of the deduction of losses in the workbook. Annual exempt amount The annual exempt amount is the final amount that can be deducted, with the subsequent figure being the chargeable gain. If this figure is in excess of the annual exempt amount, then a liability to pay CGT has arisen. Tax liability will be calculated on this amount and the tax then paid. You can see an example of the deduction of the annual exempt amount in the workbook. We shall now move on to examine the calculation of the tax to be paid. For how long can losses on disposals, once claimed, be carried forward to be used against future gains? Answer : Purchase course for answer If the chargeable gains in a tax year exceed the annual exempt amount, then the excess is liable for CGT.
You can see the current rates in the tax tables. Remember that each individual is ta... Shortened demo course. See details at foot of page. ...e years.You can see an example of the tax calculation in the workbook. How long can any unused annual exempt amount can be rolled forward for? Answer : Purchase course for answer Having established that there is a CGT liability, it may be possible to reduce the amount through the use of one of the available reliefs.
These reliefs are: Business asset disposal relief Investor’s relief Holdover relief Business rollover relief Rollover relief on incorporation EIS reinvestment relief SEIS reinvestment relief We shall now examine each of these in turn. Business asset disposal relief (formerly known as Entrepreneurs’ relief) This relief can be claimed when a business or part of a business is disposed of by a sole trader. Refer to the tax tables for details of the current figures. To qualify for the relief, the assets must have been owned for two years before the date of disposal. The relief can also be claimed on the disposal of shares from a trading company where the individual making the disposal has a 5% shareholding and is also an employee or director. The shareholding test means having at least 5% voting rights and being entitled to at least 5% of either both distributable profits and the assets available for distribution in a wind up OR the disposal proceeds on the disposal of the ordinary share capital of the company, Provided the company is a trading company there is no limit to the relief if the company holds non-trading assets such as investments. A company with more than 20% non-trading activities will not qualify for the relief on the disposal of assets. The ‘no limit’ aspect relates to the fact that for a trading company, there is no restrictio... Shortened demo course. See details at foot of page. ...usiness is transferred partly for cash and partly for shares, partial relief will be given.Where the conditions are satisfied the relief is given automatically, although it is possible to opt out of it. Reinvestment into Enterprise Investment Scheme (EIS) shares Where the gain on the disposal of assets is reinvested into shares qualifying under the Enterprise Investment Scheme, this relief can be claimed. To qualify, the investment into the EIS shares must take place within the period starting 12 months before and ending 3 years after the disposal that was subject to CGT. The gain on the original disposal is deferred until the disposal of the EIS shares. At this point the original gain will become liable for CGT, although any subsequent gain on the EIS shares is normally exempt. If the EIS shares are held until death, the original gain will never be taxed. EIS shares allow an investor to benefit not only from income tax relief but also from the CGT relief. Reinvestment into Seed Enterprise Investment Scheme (SEIS) shares Where the gain on the disposal of assets is reinvested into shares qualifying under the Seed Enterprise Investment Scheme, this relief can be claimed. The reinvested gains are not deferred like the EIS scheme, instead in the 2023/24 tax year 50% of the reinvested gains are exempt from CGT and 50% are taxable. The amount of relief available is up to the stated annual maximum and the investment will also qualify for income tax relief. How is holdover relief given? Answer : Purchase course for answer There are special rules for calculating the chargeable gains on shares of the same type and class which are acquired at different times. The rules are necessary to match acquisitions with disposals.
Disposals of shares or units in a Unit Trust are identified with acquisitions in the following order: Acquisitions 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 For example, Pauline has acquired shares in ABC Ltd as: 2,000 shares in October 1998 4,800 shares in March... Shortened demo course. See details at foot of page. ...not pooled with the other shares of the same class that the employee holds in the company. This election enables larger gains to be taxed later than the smaller gains on unapproved scheme shares.Shares acquired from exercising an option on an enterprise management incentive share option or an option under an approved company share option plan or save as you earn scheme usually have a lower base cost for CGT purposes and their sale therefore gives rise to a larger gain. Which type of share transaction will be treated as having no additional acquisition cost for the shareholder? Answer : Purchase course for answer Each individual is responsible for reporting all capital gains on their annual tax return form to HMRC, as part of self-assessment. Where someone does not receive a tax return form but has gains in excess of the annual exempt amount, they must report them within 6 months of the end of the tax year in which the gains occurred. ...
Shortened demo course. See details at foot of page. ... on the disposal until the start of the new tax year would delay the due date for the tax payment by almost two years. You can see an example of this in the workbook.When is the payment date for any capital gains tax due to be paid on an asset that is not a residential property? Answer : Purchase course for answer If the disposal of an asset leads to an income tax charge, the amount that is liable for income tax is deducted from the disposal proceeds before any CGT liability is calculated.
There are a considerable number of links between CGT and IHT. The full overview of IHT is covered in chapter 5, but some main points are given below. A ... Shortened demo course. See details at foot of page. ...s claimed or it does not cover the entire gain, the IHT liability can be deducted from the gain if it is paid by the donor.Where a disposal does not attract an immediate liability to IHT, CGT is payable in the normal way. Explain the difference between a valuation for CGT and IHT purposes. Answer : Purchase course for answer Where at least one trustee of a UK trust is resident in the UK, there is a potential liability for CGT.
The creation of a trust is treated as the disposal of assets at market value by the settlor, even when the settlor is a trustee or retains an interest as a beneficiary. This may give the settlor a personal CGT liability. Other than bare trusts, in most instances if the trust was set up on or after 22 March 2006 gains can be held over, provided the beneficiaries do not include a minor unmarried child of the settlor. Trusts have their capital gains calculated in the same way as that of an individual Trusts also have an annual exempt amount and you can see the current rates of tax and the annual exempt amount for trusts in the tax tables. Where more than one UK trust is created by the same settlor, the annual exempt amount is shared between them, down to a minimum of one-fifth. You can see an example of the calculation of a gain and the tax charge in the workbook . On the transfer of assets into a trust on or after 22 March 2006, it may be possible for the settlor to elect for the gain to be held over. The trustees woul... Shortened demo course. See details at foot of page. ...m any CGT liability on any future sale. HMRC allow this when the beneficiary has an interest in possession and this mirrors the exemption available to individuals. However, the exemption will not be allowed if holdover relief was claimed when the property was transferred into the trust.Offshore trusts A UK-domiciled individual who has placed assets into an offshore trust is liable for CGT on gains made by the trustees of the trust if they have an interest in the trust and are a UK resident in the year that the gains arise. An individual will be deemed to have an interest if they their spouse or civil partner, children and their spouses and/or civil partners or companies connected with them and the settlor’s grandchildren or their spouses/civil partners can benefit. Where the gains are not taxable on the settlor, UK-resident beneficiaries will be liable for CGT on gains from distributions from offshore trusts. Peter has recently transferred assets into a discretionary trust and has claimed holdover relief. Explain which other tax he may be liable for and in what circumstances. Answer : Purchase course for answer Chapter revision test. Your results and 2.5 hours of estimated study time will be added to your CPD certificate on completion. If you retake the test then additional CPD time for the test will be added. Drag and drop question - drag the correct term onto the correct description |
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