Capital Gains Tax Summary Notes PDF

Preview

Summary

Summary Notes for Capital Gains Tax Business Law and Practice...

Description

Capital Gains Tax Calculating CGT Step 1: Identify the Chargeable Disposal Step 2: Calculate the Gain or Loss Step 3: Consider Reliefs Step 4: Aggregate Gains and Deduct Annual Exemption Step 5: Apply Correct Rate of Tax

Step 1: Identify the Chargeable Disposal What is it that happened that may give rise to a tax charge e.g. someone sells something A chargeable person – -

almost all individuals including: o trustees - who are charged on the gains made by the trusts they administer o PRs – who are charged on the gains realised when they deal with a deceased’s persons estate o Individual partners in a business – charged on their own share of the gains made on a disposal of an asset by the partnership

makes a chargeable disposal – -

-

Normally involves making a sale of something Sometimes wont be a sale because a chargeable disposal can be a gif If a chargeable person gives away an asset then they are deemed to have made a gain and that gain is calculated in the same way as if they had sold an asset at market value Death of an owner of a disposal asset = not CG

of a chargeable asset – -

Generally, all types of property are chargeable assets Could be tangible, physical property like land Could be intangible like shares An asset can still be chargeable even though the taxpayer has created it rather than buying it or receiving it as a gif Assets that are excluded are private motor vehicles, national savings certificates, and recognised currency (Sterling, Euros, Dollar)

Step 2: Calculate the Gain or Loss

▪ Proceeds of sale – how much you have sold something for e.g. decided to sell buy-to-let property for £250k – this is the gross proceeds for disposal ▪ Deduct from that any incidental costs of disposal e.g. costs for advertising property or conveyancing costs ▪ Once you have done that, you deduct from it the price you paid for it in the first place including any incidental costs when you bought it e.g. bought a house for £200k and had also paid conveyancing costs = both of these can be deducted ▪ Can also deduct any subsequent expenditure e.g. any expenditure you have done to improve the property. Not basic maintenance like painting, but things like adding another room or extensions. The expenditure has affected the capital value of the property.

Need to do this for each asset that has been disposed of separately

If you don’t have initial expenditure because you didn’t buy the asset, it was gifed to you for example. Then the initial expenditure would be the market value of the date you received it.

Step 3: Consider Reliefs

Non-Business Assets •

Main dwelling house – 100%

Business Assets •

Business asset disposal relief

•

Hold over relief

•

•

•

Available for people who are given business assets rather than buying them

•

Those who are gifed a qualifying business asset

•

This ofen happens when a business owner wants to retire and would want to give business to next generation of their family

•

Hold over relief allows the parent to pass on the property in a way that allows the recipient to defer the taxation until the recipient themselves comes to dispose of the business – this means that if a business is kept within a family and is transferred from one generation to the next, CGT will never be paid and continue to be deferred until family sells it to a third party

Roll over relief on incorporation •

Relief you can claim if you have a business which is incorporated (e.g., partnership or sole proprietorship) and you decide to turn it into a limited company by selling business to company in exchange for assets in the company

•

Not really a disposal because the person who owned the business before ends up owning it through the medium of limited company

•

So therefore, not appropriate to tax them at that point

•

So therefore, the gain is rolled over until they sell the shares in the business

Roll over relief on replacement of a qualifying business asset •

To allow a company to sell an asset like factory or office building and use the money to buy a new one

•

If they are taxed on the gain of selling the old one, might not have enough money to buy the new one – may hinder the expansion of the business which Government does not want

•

Allowed to avoid tax when you sell the qualifying business asset on the basis that you actually re-invest the proceeds in a business replacement asset

More than one can apply to a scenario, but taxpayer can only choose one they want to use Cannot use more than one

Worked Example

During the tax year David: ● Sells his main residence for £400,000. He bought the property three years previously for £200,000 (assume this includes acquisition costs like solicitors’ fees). Last year he spent £50,000 building an extension to the property. ● Gives an antique vase to his nephew. The vase is worth £23,000. He bought the vase two years ago for £10,000. ● Sells some shares for £100,000. He bought the shares five years ago for £80,000.

100,000 for shares – assume it includes stamp duty for shares

Step 4: Aggregate Gains and Deduct Annual Exemption

Annual exemption = £12,300

Step 5: Apply Correct Rate of Tax

•

Basic - 10%

•

Higher - 20%

Plus 8% surcharge on residential property – if the chargeable asset is residential property other than the main dwelling house add 8% to either 10% or 20%

•

Business Asset Disposal Relief Flat rate - 10%

Apply the Rate of Tax

Special Rule Disposals between spouses/civil partners •

No Gain/No Loss

•

Gain deferred...