Advanced Taxation - Capital Gains Tax (CGT)

Flashcards covering core Capital Gains Tax rules, reliefs (Rollover, Holdover, BADR, Investors', Gift, Incorporation, PPR), share matching rules, and worked scenario principles based on Advanced Taxation lectures by Owais Mirchawala.

When is Capital Gains Tax (CGT) assessed, and what events constitute a disposal?

Capital Gains Tax is assessed on the disposal of an asset. A disposal includes the sale of an asset, a gift of an asset, or the destruction of an asset. CGT does not arise if an asset is disposed of as part of a trading or business activity.

What is the standard calculation format for determining taxable gain for Capital Gains Tax?

$\text{Disposal Proceeds} - \text{Cost} = \text{Chargeable Gain}$ \text{Chargeable Gain} - \text{Annual Exemption (£3,000)} = \text{Taxable Gain}

What are the standard CGT tax rates for basic rate and higher/additional rate taxpayers?

• Basic rate taxpayer (up to $£37,700$): $18\%$

• Above basic rate band ($£37,701$ and above): $24\%$

How do income tax bands interact with Capital Gains Tax bands?

CGT uses the same tax bands as income tax. The bands are first used against income tax, and any remaining basic rate band is then used for CGT. Tax bands may also be extended by Qualifying Donations and Personal Pension contributions.

What items are included when calculating disposal proceeds and the cost of an asset for CGT?

• Disposal Proceeds: Proceeds received minus costs to sell (legal fees, agent's commission).

• Cost of Asset: Purchase price plus costs to purchase (legal fees, agent's commission) plus improvement costs.

• NOTE that improvement costs are enhancement costs so never include revenue expeditures such as repairor maintenance.

• enhancement must be part of the asset at the date of sale, meaning if the extension was demolished before disposal the extension cost is not included

What are the rules regarding the CGT Annual Exemption?

An Annual Exemption of $£3,000$ is available per tax year. It can be set off against any gains of the tax year, but it cannot be carried forward or carried back.

What is the formula used to allocate cost on a normal part disposal of an asset?

$$\text{Cost of Disposed Part} = \text{Total Cost} \times \frac{\text{Disposal Proceeds}}{\text{Disposal Proceeds} + \text{Market Value of Remaining Asset}}$$

What are the four conditions required for Small Part Disposal (SPD) treatment of land and buildings?

1. The asset must be land and buildings.

2. Proceeds of the part disposal must be less than $£20,000$.

3. Proceeds of the part disposal must be less than $20\%$ of the total value of the asset.

4. Total proceeds on sales of land and buildings during the tax year must be less than $£20,000$.

How is the base cost calculated under Small Part Disposal (SPD) treatment for part disposal of an asset?

Under SPD treatment, the gain on part disposal is deferred rather than immediately charged. The revised base cost of the remaining asset is calculated as: $\text{Base Cost} = \text{Total Cost} - \text{Proceeds of Disposed Part}$

What planning points should be considered before electing for Small Part Disposal (SPD) treatment?

1. Possible wastage of the Annual Exemption due to deferral.

2. Tax bands available in the current year versus future years.

3. Cash flow availability to pay tax.

4. Availability of brought-forward capital losses.

5. Future expected tax rates.

How is an asset treated for CGT purposes if it is lost or destroyed?

It is treated as a disposal with disposal proceeds equal to the scrap value plus any insurance proceeds received.

What is the CGT treatment when insurance proceeds from a destroyed asset are only partially reinvested in a replacement asset?

The amount chargeable immediately is the lower of:

1. The full gain calculated on the disposal, or

2. The cash not reinvested ($\text{Proceeds} - \text{Reinvestment}$). The remaining gain is deferred by deducting it from the base cost of the replacement asset ($\text{Base Cost} = \text{Purchase Price} - \text{Deferred Gain}$ ).

Under what condition can the gain on a damaged asset be deferred?

The gain on a damaged asset can be deferred if $95\%$ or more of the proceeds (scrap and insurance) are reinvested in repairing the asset. The base cost becomes: $\text{Total Cost} - \text{Proceeds of Damaged Part} + \text{Renovation Outflow}$.

What assets qualify for Rollover Relief, and what is the qualifying reinvestment period?

• Qualifying Assets: Land & buildings, fixed plant & machinery, and goodwill.

• Qualifying Period: Reinvestment must occur within $12\text{ months}$ before or $36\text{ months}$ after the date of disposal.

How does Rollover Relief apply if a business asset has partial private use?

Rollover Relief is only available on the business-use proportion of the asset. The non-business use portion produces a gain that is chargeable immediately.

When does Holdover Relief apply instead of Rollover Relief, and what qualifies as a depreciating asset?

Holdover Relief applies instead of Rollover Relief when disposal proceeds are reinvested into a depreciating asset (an asset with an expected life of less than $60\text{ years}$, such as fixed plant and machinery or leaseholds of less than $60\text{ years}$).

How is the deferred gain treated under Holdover Relief for depreciating assets, and when does it crystallize?

The deferred gain is frozen rather than deducted from the new asset's base cost. The frozen gain crystallizes and becomes chargeable on the earliest of:

1. When the replacement asset is sold,

2. When business use of the asset ceases, or

3. $10\text{ years}$ from acquisition.

What are HMRC's Matching Order Rules for disposals of shares of the same class in the same company?

Shares sold are matched against acquisitions in the following order:

1. Shares acquired on the same day.

2. Shares acquired within the following $30\text{ days}$.

3. Shares from the Section 104 share pool.

How are bonus issues and exercised rights issues treated within a share pool?

• Bonus issues: Treated as shares acquired at zero cost.

• Exercised rights issues: Treated as shares acquired at their exercise price, increasing both the number of shares and the total pool cost.

When can proceeds from selling unexercised rights (rights issue) be treated as a Small Part Disposal?

Gain on the sale of rights can be deferred as a Small Part Disposal if the proceeds received are less than the higher of:

1. $£3,000$, or

2. $5\%$ of the total value of the shares held - ie: value of remaining shares.
   If deferred, the proceeds are deducted directly from the share pool's base cost.

What is the tax rate and lifetime limit for Business Asset Disposal Relief (BADR)?

BADR restricts the rate of Capital Gains Tax to $14\%$ regardless of tax bands, up to a lifetime limit of $£1\text{ million}$ of qualifying gains.

What are the qualifying conditions for an individual disposing of shares to claim BADR?

1. The company must be a trading company and the individual's personal company.

2. The individual must be an employee or officer of the company.

3. The individual must hold at least $5\%$ of the ordinary share capital and voting rights (waived if acquired via an Enterprise Management Incentive / EMI scheme).

4. Qualifying conditions must be met for a minimum ownership period of at least $2\text{ years}$ up to the date of disposal.

FOR THE TAX WIN (FTTW)

How do gains qualifying for BADR affect the Basic Rate Band for other capital gains?

Gains eligible for BADR are taxed first and consume the basic rate band, which may push non-BADR gains into the higher tax rate of $24\%$. Annual exemptions and capital losses should therefore be set against non-BADR gains first.

What are the main conditions to qualify for Investors' Relief?

1. Disposal must be of shares in an unquoted trading company.

2. Shares must be newly issued and acquired for value.

3. The individual must not be an employee or officer of the company.

4. Shares must be held for at least $3\text{ years}$ after 6 April 2016. Tax rate: $14\%$ (subject to a $£10\text{ million}$ lifetime limit).

What is the tax treatment of shares, cash, and Qualifying Corporate Bonds (QCBs) received in a paper-for-paper company takeover?

• Shares: No immediate gain; old base cost carries over to new shares.

• Cash: Chargeable immediately (unless de minimis: proceeds is less than the higher of: $\pounds3,000$ or $5\%$ of total consideration, allowing deferral against base cost).

• QCBs: Gain on the QCB element is calculated at the takeover date and frozen until the QCB is subsequently disposed of or redeemed.

Why might a taxpayer choose to disapply paper-for-paper takeover relief?

A taxpayer may disapply paper-for-paper relief to crystallize the gain immediately if they qualify for BADR on the old shares (e.g., as an employee with $≥ 5\%$ holding) but would not qualify for BADR on the new shares of the acquiring company.

What are the key conditions and effects of Gift Relief (Gift Holdover Relief)?

• Conditions: Joint election by UK resident donor and donee;

• the donee musk not become a non uk resident within 6 years after the gift otherwise it will become immediately chargeable

• asset must be an unincorporated business, unquoted trading company shares, quoted shares where donor has at least $5\%$ voting power, or APR/IHT immediately chargeable assets.

• Effect: Gain is deferred by reducing the donee's base cost ($\text{Base Cost} = \text{Market Value} - \text{Gift Relief}$ ).

How is Gift Relief restricted if an unquoted trading company holds non-business chargeable assets?

Gift Relief is restricted proportionately using the formula: $\text{Gift Relief} = \text{Chargeable Gain} \times \frac{\text{Market Value of Chargeable Business Assets}}{\text{Market Value of Total Chargeable Assets}}$

What are the conditions required for Incorporation Relief?

1. The transfer of an ongoing unincorporated business (sole trader or partnership) to a company.

2. Transfer of all business assets (except cash) as a going concern.

3. Consideration wholly or partly in the form of shares issued by the company.

How is Incorporation Relief calculated when consideration includes non-share consideration (e.g., cash or loan notes)?

Incorporation Relief is restricted to the proportion of consideration received in shares: $\text{Incorporation Relief} = \text{Total Gain} \times \frac{\text{Value of Shares Consideration}}{\text{Total Consideration}}$ The relief is deducted from the base cost of the shares received.

What are the CGT consequences of asset transfers between spouses and transfers on death?

• Between Spouses / Civil Partners: Disposals take place on a 'no gain / no loss' basis; the recipient inherits the transferor's original cost.

• On Death: Transfers of assets on death are exempt from CGT; assets are revalued to probate market value with no CGT payable.

What are the rules governing CGT on wasting and non-wasting chattels?

• Wasting Chattels (tangible, movable property with a life of $≤ 50\text{ years}$): Generally exempt from CGT unless used in business and capital allowances were claimed.

• Non-Wasting Chattels:

  • Both cost and gross disposal proceeds $≤ £6,000$: Completely exempt.

  • Both cost and proceeds $> £6,000$: Normal CGT applies.

How is the allowable cost calculated on the disposal of a short lease (less than 50 years)?

A short lease is a wasting asset. To avoid double taxation, the allowable cost is depreciated using the lease percentage table: $\text{Adjusted Cost} = \text{Original Cost} \times \frac{\text{Percentage for remaining lease length at disposal}}{\text{Percentage for original lease length at acquisition}}$

What deemed periods of occupation qualify for Principal Private Residence (PPR) relief?

Subject to being preceded and followed by actual occupation (except the final period):

1. Up to $36\text{ months}$ absence for any reason.

2. Any period spent working abroad for employment.

3. Up to $4\text{ years}$ ($48\text{ months}$) absence due to employment or self-employment elsewhere in the UK.

4. The final $9\text{ months}$ of ownership (always deemed occupation if the property was occupied as PPR at any point).

NOTE : the requirement of actual occup after deemed is waived if it was prevented by employment conditions

What is the maximum deduction allowed for Letting Relief in relation to a Principal Private Residence?

Where letting relief applies, the relief is restricted to the lowest of:

1. $£40,000$,

2. The amount of PPR relief awarded, or

3. The chargeable gain attributable to the letting period.

how destruction of an asset is treated if proceeds are not reinvested or partly reinvested?

if not reinvested then the whole gain becomes chargeable immediately
if partly reinvested then the unused amount wil become chargeable while the rest can be deferred and adjusted from the cost of the replacement asset (cost - deferred gain)

when is rollover releif available?

when a business sells a qualifying asset and reinvests the proceeds into another qualifying asset within qualifying period

it is not must the assets to be the same for example you can sell building and reinvest into fixed plant

how is a damaged asset treated?

trated as a part disposal the insurance and scrap proceeds are treated as proceeds and cost is calculated using part disposal formula
cost of the remaining part will be":
TOTAL COST - PART DISPOSAL COST + RESTORATION COST (if any id carried out )

SPD can be elected if at least 95% of proceeds are used for restoration and in that case the gain will be deferred rather the proceeds will be deducted from proceeds.

TOTAL COST - PROCEEDS+ RESTORATION COST

what are he common points in rollover releif, holdover releif gift releif and incorporation releif?

for rollover and holdover releif: 1- only the business portion can be deferred 2- if the full amount is not reinveste the unused amount creates an immeditely chargeable gain

for gift releif: only the CBA portion can claim gift releif 2- if consideration was received then only the gift element qualifies for gift releif
gift element= mv - consideration
CBA: assets that are not exempt under CGT (current assets and liabilities are ignore) - assets that are used in the business - land and building
CA: are CBA and investment properties


for incorporation releif: only the share exchange consideration qualifies for incorporation releif, the cash portion will crete immediately chargeable gain

what assets are exempt under CGT?

a)    Motor vehicles suitable for private use.

b) venture capital trust (VCT)DOOR

b)     National savings and investments certificates and premium bonds.

c)     Gilt- edged securities (treasury stock).

d)     Qualifying corporate bonds (QCBs)

e)     Wasting chattels (tangible, moveable asset e.g. racehorses)

f)      ISAs

g)     Damages for personal or professional injury.

h)     Foreign currency bank accounts held by individuals

i)      Decorations for bravery where awarded, not purchased.

j)      Gambling winnings

k)     Inventory and other current assets.

l)      Gold sovereigns minted after 1837

l) non westing chattels <6000

what is the most beneficial way in which capital losses can be used?

current year losses must be used against current year gains, meaning that the AE cannot be perserved. however losses b/f can be carried forward indefinitelty and can be utulized in a way to preserve the AE

NOTE: if a claim has been made to use trading losses agaisnt capital gains then it is use before the capital loss b/f and AE cannot be preserved.

how are shares valued if gifted for free or at undervalue?

share price= (lower quote + (higher quote - lower quote)/2)
DONOT CONFUSE IT WITH IHT valuation. and use QUOTE AND NOT BARGAIN

ehat are QCB (qualifying corporate bonds)?

these exempt under CGT creating no gain no loss

QCBs are:

commecial loans

issue in starling

cannot be converted into shares or other currencies

issued after 13 march 1984

if any of these conditions are not met then they are non qualifying CB and are taxable under normal CGT

wasting chattels? and wasting non chattels?

wasting chattels are usually exempt except if they are P&M that are used for business. in this case the gain is taxable however there will be no loss releif as this was already given under capital allowance.

if they are current assets - exempt

if they are not exempt nor assets used for business (which is rare) then normal CGT applies.

wasting non chattels: these are intangible or immovable assets like rights or patent

the cost is the NBV just like depreciation

GAIN= PROCEEDS - NBV (COST - ACC DEP)

holdover releif?

holdover releif is claimed when the proceeds are reinvested into a dep asset( an asset that has < 60 years life eg: fixed P&M with life of <60 years)

rollover releif is not available for dep assets.

holdover releif is never adjusted againt the base cost of the replacement asset rather the gain is frozen

even when proceeds are reinvested into another dep asset the gain cannot be further deferred

only business portion and the reinvested amount qualifies for holdover releif

when does rollover releif crystalize?

earlier of:

1- when the replacement asset is sold

2- whennthe replacement asset is no longer used for buss

3- 10 years from the purchase date

if before any of these dates an individual buys a non dep asset then a claim can be made to adjust the gain in the base cost of the non dep asset (rollover releif basically)

what are the conditions for BADR?

1. General Conditions:

   • Available only to individuals.

   • the assets must have been used for buss (IP donot qualify)

   • Qualifying conditions must be met for a minimum ownership period of at least 2 years prior to disposal.

2. Qualifying Disposal Categories:

   • Ongoing Unincorporated Business: Disposal of the whole or part of a sole trader business or partnership.

   • Cessation of Business: Disposal of business assets within 3 years of the business ceasing to trade.

   • Shares in a Trading Company:

   • The individual must be an employee or officer of the company.

   • The individual must hold at least 5% of ordinary share capital and voting rights

   • The company must be a trading company and the individual's personal company.

3. Restrictions and Special Rules:

   • Goodwill: Not available on goodwill sold to a close company in which the individual or family holds an interest.

   • Associated Disposals: Personal assets qualify if the individual also disposes of their business interest, the asset was used by the business for at least 2 years, and it was provided rent-free (relief is restricted proportionately if rent was charged).

when SPD can be claimed for rights issue not exercised? and how it is treated?

the disposal qualifies for Small Part Disposal treatment if the gross disposal proceeds received are less than the higher of:

1. £3,000

2. 5% of the total value of the shares held (calculated as: Market Value of Remaining Shares - share price after rights issue * no of shares in issue)

Tax Treatment under SPD

• Gain Deferral: No capital gain is charged immediately in the year of disposal.

• Base Cost Deduction: The gross proceeds received are subtracted directly from the total share pool cost

• Share Count: The total number of shares in the pool remains unchanged.

NOTE that SPD aplis auto soif individual wants to make use of the AE they might elect to disapply

what are the condition for paper to paper takeover releif?

1-the takeover must be genuine and not for tax avoidance

2- takeover should be a public takeover, or at least 25% of the shares must be traded publicly if private takeover

what are paper to paper takeover releif and incorporation releif in common?

for BADR the 2 year ownership is relexed into 2 year ownership combining the old and new shares period

what counts as principal residence in PPR?

no size limit for the house but an empty land of 0.5 acres can be included more than 0.5 requires tax department approval

will PPR be available if part of the house is used exclusively for business?

no, that part is taxable. however, the 9 month rule will still be avilable if that part was residence at some point

in takeover situations, how is QCB consideration dealt with?

the QCB gain is calculated howeever it will be frozen until it is sold. when sold there will be no gain or loss on the disposal however the frozen Gai will become chargeable

How are rights issues treated for CGT when they are not exercised but sold (for shares of the same class in the same company)?

When rights are sold rather than taken up (sold nil-paid), the sale is treated as a part disposal of shares from the share pool. The tax treatment depends on whether Small Part Disposal applies:

1. Normal Part Disposal:

   • The cost allocated to the rights is calculated using the part disposal formula:    $\text{Cost of Rights}=\text{Total Pool Cost}\times\text{ }\frac{\text{Disposal Proceeds}}{\text{Disposal Proceeds} + \text{Market Value of Remaining Shares}}$

   • Chargeable gain is taxed immediately, and the remaining pool cost is reduced by the cost of the rights.

   • The number of shares in the pool remains unchanged.