Oxbridge Notes | Capital Gains Tax

CAPITAL GAINS TAX

CGT is levied on the profit made (or deemed to be made) on the disposal of an asset. The profit is the ‘gain’ and special rules apply to calculate the ‘chargeable gain’.
Chargeable Persons			Individuals Business partners			Personal representatives Trustees
Chargeable Assets			Chargeable Assets: Every asset is a chargeable asset unless it is an ‘exempt asset’.
			Exempt Assets: This includes:
			Private motor vehicles Cash	Wasting assets – assets with a predictable life < 50 years Chattels disposed of for less than 6,000
Disposals			Sale Gift: gain based on market value Loss: compensation/insurance indemnity forms basis of calculation of gain			Death: deemed disposal on death but no CGT payable Between spouses living together: no gain/no loss
CGT Rates
10% Standard Rate					20% Rate for gains which, added to income, exceed 34,500
OR
18%					28%
IF gain is realised on disposal of residential property to which principal private exemption does not apply.
Basic Equation Disposal Price/Market Value (on date of gift) less (initial expenditure + subsequent expenditure* + incidental cost of disposal*) = GAIN/LOSS any subsequent expenditure must improve the property BUT excludes maintenance, repairs, or insurance ** incidental costs of disposal include legal fees, agent fees, etc.
Exemptions Exemptions operate to reduce the amount of the gain to be charged to CGT. The two main exemptions to consider are the annual exemption and the spouse exemption. Other exemptions include gains made on the disposal of one’s principal private dwelling house (s.222-226 Taxation of Chargeable Gains Act 1992.
Annual Exemption		All individuals receive an annual exemption of 11,700 for the current tax year.
Spouse Exemption		Any disposal of a chargeable asset by a person to their spouse is deemed to be a disposal on a no gain/no loss basis. When the spouse subsequently sells the asset, CGT is charged on the basis of the difference in value calculated by reference to the original acquisition cost.
On Death Automatic revaluation of assets at probate value with no charge to CGT Assets vest in PRs at the probate value but with no charge to CGT Probate value then becomes the acquisition cost for any disposals by PRs, beneficiaries, or trustees
Unabsorbed Losses You can offset current CGT with previous CGT losses in order to reduce CGT payable in that tax year.
Calculating Capital Gains Tax
1	Calculate gain/loss using the basic equation.
2	Deduct any losses brought forward from previous years to reduce any remaining gains.
3	Deduct exemptions to reduce/eliminate the gain.
4	Claim reliefs to reduce/defer the taxation.
5	Apply the appropriate rates of CGT.

Business Reliefs from CGT
Relief	What it does	Conditions	Application	Other	Relation
Roll-over relief on the replacement of qualifying business assets TCGA 1992 ss. 152-159	CGT is postponed when the consideration obtained for the disposal is applied in acquiring another qualifying asset by way of replacement	1. Must be a qualifying business asset (s.155; land, buildings and good will) used in the trade of the business. Exc. Company shares 2. Replacement asset must be acquired within one year before or three years after the disposal of the original asset	The gain is notionally deducted from the acquisition cost of the replacement asset to give a lower acquisition cost for subsequent CGT calculations	Claim must be submitted no more than 4 years after the end of the tax year in which the replacement asset is acquired	The annual exemption cannot be set against the gain before it is rolled over
Hold-over relief on gifts (and the gift element in sales at an undervalue) of business assets TCGA 1992 s.165 & Sch 7	(Like roll-over relief) Postpones GCT liability to allow business assets to be given away without a charge falling on the donor	1. Gift or gift element 2. Chargeable business assets (used in the donor’s trade, unlisted shares, shares in a personal trading company, assets owned by a shareholder in a personal trading company 3. Donor and donee have elected	The chargeable gain will be deducted from the market value of the asset to establish the artificially low acquisition cost for the donee. This will be deducted from the future sale price	Must elect no more than 4 years after the end of the tax year of the disposal	The donor’s annual exemption cannot be set against it before it is held over. May lead to eventual charges of both IHT (PET) and CGT (disposal) IHT paid by the donee can be added to the acquisition cost to reduce the gain on disposal
Roll-over relief on incorporation of a business TCGA 1992 s.162	Postpones the CGT payable on the disposal given that no cash has been realised with which to pay the tax arising	1. Must be a going concern 2. The consideration must be wholly in shares issued by the company 3. The business must be transferred with all of its assets	The gain is notionally deducted from the acquisition cost of the shares	HMRC will apply it automatically unless the taxpayer elects not to use it. Must elect before January 31^st 2 years after disposal	The annual exemption cannot be used to reduce the gain before it is rolled over
Entrepreneurs’ relief TCGA 1992 ss. 169H-169S		Must be a qualifying business disposal. This varies depending on the type of interest being disposed (see below)	The gains will have a special tax rate of 10%. There is a lifetime restriction of 10 million	Must be made before January 31^st one year after disposal	Can be used in conjunction with the annual exemption
Investors’ relief TCGA 1992 ss. 169VA-169VR & Sch 7ZB		1. Qualifying shares (fully paid or ordinary shares issued in return for case and held for at least 3 years) 2. In unlisted trading companies	The gains will have a special tax rate of 10%. There is a...

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