Description
| BUSINESS TAXATION CGT NOTES
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CAPITAL GAINS TAX SCOPE
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Chargeable disposal |
Of a chargeable asset |
By a chargeable person |
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Sale or gift of asset
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All assets except :
· Motor cars · Gilts and QCBs. · Wasting chattels · Chattels <£6,000 · NSCertificates · Premium Bonds. · Cash · Shares in ISA |
UK Resident |
All individuals qualify for an annual exemption of £12,000 and gains are then taxed at 10% up to the end of the basic rate band (used by taxable income first) and the balance at 20% unless they relate to residential property.
Residential property gains are taxed at 18% up to the end of the basic rate band and the balance at 28%.
Pro forma for fiscal year: Use of losses
| Asset | Chargeable gains | |
| Gain 1 | X | |
| Gain 2 | X | |
| Current year loss | (X) | |
| Net gains | X
|
|
|
Less A/E |
(12,000) |
|
| Loss brought forward losses | (X) | |
| Taxable gain at 10% then 20% if non-residential and 18% and 28% if residential gains | X
_____ |
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CGT is due 31 January following end of tax year.
Capital losses
- Must use against current year gains first
- Then carry forward against future gains (use after the annual exemption)
Calculation of single asset gain/loss for individuals
£ £
Gross sale proceeds (market value if gift) A
Less Incidental costs of sale (X)
Net sale proceeds Net
Less Allowable expenditure
Original base cost (MV when acquired) X
Costs of acquisition X
Enhancement expenditure X
___
(Cost)
_____
Chargeable Gain Gain
_____
Part disposals
If part of an asset is disposed of the sale proceeds are for part of asset \ cost allocated must also represent that part. This is computed as
A = Gross Proceeds (MV of part sold)
B = Market value of remainder
Chattels: Tangible Moveable Property
There are two types of chattels
| Wasting are Exempt | Non Wasting subject to rules below |
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Expected life < 50 years
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Expected life > 50 years |
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racehorse greyhound
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antiques jewellery paintings |
Non Wasting Chattels Rules (antiques)
| Cost
Proceeds |
< £6k
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> £6k |
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< £6k
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Exempt |
Loss restricted Goss proceeds are deemed to be £6,000
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> £6k |
Gain is lower of: – Normal gain – 5/3 [Gross proceeds – £6,000] |
Normal gain
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Connected persons
- Proceeds = market value
- Loss on disposal can only be used against gains made to same connected person
Husband and Wife / Civil Partners
- No gain no loss rule: Used for Tax Planning
- This allows use of both A/E’s as assets can move inside a marriage
CAPITAL GAINS TAX RELIEFS
1a. Principal Private Residence (PPR)
Gains are fully exempt when covered by PPR relief; if occupied by the taxpayer as his main residence for the whole period of ownership. The relief covers the house and garden.
Otherwise
Calculate gain then relief claimed is:
PPR = GAIN X Period of occupation
Period of ownership
Deemed periods of occupation include:
(a) Last 18 months of ownership unconditional
(b) 3 years any reason ü must be preceded/
(c) Working abroad any period ý followed by actual
(d) 4 years working in UK þ occupation*
*If prevented from returning to residence due to work related reasons the requirement is waived.
Note each individual is entitled to one PPR and a married couple can only have one between them.
1b. Letting Relief (only available with PPR)
If the main residence is let during a period of absence a further claim can be made for letting relief to cover the gains on the main residence. Note letting relief can only be used on the gain not covered by the PPR relief.
The Letting exemption is the lower of
- PPR relief claimed
- Maximum (£40,000)
- The chargeable gain, not covered by PPR that relates to the period of letting.
2. Entrepreneur’s Relief
A reduced rate of 10% capital gains tax is available for individuals who have created wealth in a business and then dispose of the business assets. It is available to individuals who sell the whole of their sole traders business or on sale of shares they own in a personal company (if they owned more than 5% of the company & are an employee).
Conditions
- Must have owned business for a minimum 1 year before date of disposal (for shares also need to be employed for a minimum of 1 year)
- Only available on business assets
- There is a £10,000,000 lifetime limit
3. Investor’s Relief
An extension of entrepreneurs’ relief.
A reduced rate of 10% capital gains tax applies to a further £10,000,000 gains as long as they are gains on newly issued unquoted trading shares. There is no minimum requirement on the number of shares and the investor should not be an employee.
Conditions
- Must have owned shares for a minimum 3 years before date of disposal
- Only available on unquoted trading shares
- There is a £10,000,000 lifetime limit
- Gift Relief (holdover relief) on business assets
Available to individuals on the outright gift of qualifying business assets only
Conditions
- Business assets (assets used in donor’s trade or personal company (must hold ³ 5% voting rights))
- Unquoted shares/shares in donor’s personal company (trading company)
- Joint claim required
Procedure
Calculate gain(s): consideration = MV
Gift relief applies to defer gain by deducting from donee’s base cost.
5. Rollover Relief: Replacement of business assets
Available when a trading asset is sold and the proceeds are then reinvested in a replacement business asset. Both assets must be used in the taxpayer’s trade. The gain is deferred until the replacement asset is sold or until the business ceases.
Conditions
- Qualifying assets:
Land and buildings used in trade
Goodwill
Fixed plant and machinery used in trade
- Time limit:
Reinvest within 12 months before ® 3 years after original disposal
Steps:
| 1 | Gain on asset 1
|
X |
| 3 | Rollover relief (Balancing Figure) |
(X) |
| 2 | Proceeds not reinvested are
Chargeable immediately |
X |
Rollover Relief: The allowable cost of the replacement asset is reduced by the amount of the gain rolled over.
Depreciating assets
- When the replacement asset is a depreciating asset (i.e. life of no more than 60 years), the gain is frozen rather than rolled over indefinitely.
- Calculate gain on the original asset.
- This gain crystallizes on the earliest of the following 3 dates:
- Disposal of replacement
- 10th anniversary of acquisition of replacement
- Date replacement ceases to be used in the trade
Tax Rates and Allowances 2019/20
Income Tax
Main Personal Allowances £
| Personal allowance | 12,500 |
| Income limit for personal allowance (Note 1)
Marriage allowance (Note 2) |
100,000
1,250 |
Note 1: When income exceeds the limit a clawback applies reducing the personal
allowance by £1 for every £2 above the limit.
Note 2: Spouses/civil partners are able to transfer £1,250 of their unused personal
allowance to their partner if both are basic rate taxpayers.
Tax Rates and Taxable Bands
| Normal rate | Dividend rate | ||||
| Basic rate | £0 – £37,500 | 20% | 7.5% | ||
| Higher rate | £37,501 – £150,000 | 40% | 32.5% | ||
| Additional rate | Over £150,000 | 45% | 38.1% | ||
Note 3: A personal savings allowance applies at a 0% tax rate to £1,000 for a basic rate tax payer and to £500 for higher rate taxpayers.
Note 4: The first £2,000 of dividend income is taxed at 0% for all taxpayers.
Capital Gains Tax
| Annual exemption | £12,000 | ||
| Standard rate of tax (assets other than residential property) | 10% | ||
| Higher rate of tax (assets other than residential property) | 20% | ||
| Standard rate of tax on residential property | 18% | ||
| Higher rate of tax on residential property | 28% | ||
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Entrepreneurs’ relief: For trading businesses and companies held for at least one year (minimum 5% employee shareholding) Lifetime limit of gains Rate of tax
Lease Premium Formulae Capital proportion is 2% (n-1) P
Chattels Formulae Gains restricted to 5/3(gross proceeds – 6,000)
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£10,000,000 10%
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