This article is relevant to candidates sitting Paper F6 (UK) in an exam in the period 1 April 2015 to 30 June 2016, and is based on tax legislation as it applies to the tax year 2014–15 (Finance Act 2014).
CGT is charged when there is a chargeable disposal of a chargeable asset by a chargeable person.
A chargeable disposal includes part disposals and the gift of assets. However, the transfer of an asset upon death is an exempt disposal. A person who inherits an asset takes it over at its value at the time of death.
Example 1
On 19 May 2000 Jorge purchased an acre of land for £20,200. He died on 20 June 2014, and the land was inherited by his son, William. On that date the land was valued at £71,600.
All forms of property are chargeable assets unless exempted. The most important exempt assets as far as Paper F6 (UK) is concerned are:
In determining whether or not an individual is chargeable to CGT it is necessary to consider their residence status.
Example 2
Explain when a person will be treated as resident in the UK for a particular tax year, and state how a person’s residence status establishes whether or not they are liable to CGT.
Subject to not meeting any of the automatic non–resident tests, the following people will be treated as resident:
A person can also be treated as resident if they have more UK ties than is permitted according to the number of days they are in the UK during a tax year.
A person is liable to CGT on the disposal of assets during any tax year in which they are resident in the UK.
For individuals the basic CGT computation is quite straightforward.
Example 3
Andy sold a factory on 15 February 2015 for £320,000. The factory was purchased on 24 January 1996 for £164,000, and was extended at a cost of £37,000 during March 2006. During May 2008 the roof of the factory was replaced at a cost of £24,000 following a fire.
Andy incurred legal fees of £3,600 in connection with the purchase of the factory, and legal fees of £5,400 in connection with the disposal.
Andy’s taxable gain for 2014–15 is as follows:
£ | £ | ||
---|---|---|---|
Disposal proceeds | 320,000 | ||
Cost | 164,000 | ||
Enhancement expenditure | 37,000 | ||
Incidental costs (3,600 + 5,400) | 9,000 | ||
_______ | (210,000) | ||
Chargeable gain | 110,000 | ||
Annual exempt amount | (11,000) | ||
Taxable gain | 99,000 |
Capital losses are set off against any chargeable gains arising in the same tax year, even if this results in the annual exempt amount being wasted. Any unrelieved capital losses are carried forward, but in future years they are only set off to the extent that the annual exempt amount is not wasted.
Example 4
For the tax year 2014–15 Nim has chargeable gains of £18,000. He has unused capital losses of £16,700 brought forward from the tax year 2013–14.
Nim’s taxable gains for 2014–15 are as follows:
£ | ||
---|---|---|
Chargeable gains | 18,000 | |
Capital losses brought forward | (7,000) | |
Chargeable gains | 11,000 | |
Annual exempt amount | (11,000) | |
Taxable gains | Nil |
The rate of CGT is linked to the level of a person’s taxable income. Taxable gains are taxed at a lower rate of 18% where they fall within the basic rate tax band of £31,865, and at a higher rate of 28% where they exceed this threshold. Remember that the basic rate band is extended if a person pays personal pension contributions or makes a gift aid donation.
CGT is collected as part of the self-assessment system, and is due in one amount on 31 January following the tax year. Therefore a CGT liability for the tax year 2014–15 will be payable on 31 January 2016. Payments on account are not required in respect of CGT.
Example 5
For the tax year 2014–15 Adam has a salary of £40,000, and during the year he made net personal pension contributions of £4,400. On 15 June 2014 Adam sold an antique table and this resulted in a chargeable gain of £17,500.
For the tax year 2014–15 Bee has a trading profit of £60,000. On 20 August 2014 she sold an antique vase and this resulted in a chargeable gain of £19,000.
For the tax year 2014–15 Chester has a salary of £36,000. On 25 October 2014 he sold an antique clock and this resulted in a chargeable gain of £23,900.
Adam
Adam’s taxable income is £30,000 (40,000 less the personal allowance of 10,000). His basic rate tax band is extended to £37,365 (31,865 + 5,500 (4,400 x 100/80)), of which £7,365 (37,365 – 30,000) is unused.
Adam’s taxable gain of £6,500 (17,500 less the annual exempt amount of 11,000) is fully within the unused basic rate tax band, so his CGT liability for 2014–15 is therefore £1,170 (6,500 at 18%).
Bee
Bee’s taxable income is £50,000 (60,000 – 10,000), so all of her basic rate tax band has been used. The CGT liability for 2014–15 on her taxable gain of £8,000 (19,000 – 11,000) is therefore £2,240 (8,000 at 28%).
Chester
Chester’s taxable income is £26,000 (36,000 – 10,000), so £5,865 (31,865 – 26,000) of his basic rate tax band is unused. The CGT liability for 2014–15 on Chester’s taxable gain of £12,900 (23,900 – 11,000) is therefore calculated as follows:
£ | ||
---|---|---|
5,865 at 18% | 1,056 | |
7,035 at 28% | 1,970 | |
3,026 |
In each case, the CGT liability will be due on 31 January 2016.
A reduced CGT rate of 10% applies if a disposal qualifies for entrepreneurs’ relief. This rate applies regardless of the level of a person’s taxable income. Entrepreneurs’ relief can be claimed when an individual disposes of a business or a part of a business as follows:
The relief covers the first £10 million of qualifying gains that a person makes during their lifetime. Gains in excess of the £10 million limit are taxed as normal at the 18% or 28% rates.
The qualifying conditions must be met for a period of one year prior to the date of disposal in order for entrepreneurs’ relief to be available.
Example 6
On 15 October 2014 the four shareholders of Alphabet Ltd, an unquoted trading company, all sold their shares in the company. Alphabet Ltd has a share capital of 100,000 £1 ordinary shares.
Aloi had been the managing director of Alphabet Ltd since the company’s incorporation on 1 January 2004. She had held 60,000 shares since 1 January 2004.
Bon had been the sales director of Alphabet Ltd since 1 February 2014, having not previously been an employee of the company. She had held 25,000 shares since 1 February 2014.
Cherry had never been an employee or a director of Alphabet Ltd. She had held 12,000 shares since 27 July 2007.
Dee had been an employee of Alphabet Ltd since 1 May 2005. She had held 3,000 shares since 20 June 2006.
Example 7
On 25 January 2015 Michael sold a 30% shareholding in Green Ltd, an unquoted trading company. The disposal resulted in a chargeable gain of £800,000. Michael had owned the shares since 1 March 2008, and was an employee of the company from that date until the date of disposal.
He has taxable income of £8,000 for the tax year 2014–15.
Michael’s CGT liability for 2014–15 is as follows:
£ | ||
---|---|---|
Chargeable gain | 800,000 | |
Annual exempt amount | (11,000) | |
789,000 | ||
Capital gains tax: 789,000 at 10% | 78,900 |
Although chargeable gains that qualify for entrepreneurs’ relief are always taxed at a rate of 10%, they must be taken into account when establishing which rate applies to other chargeable gains. Chargeable gains qualifying for entrepreneurs’ relief therefore reduce the amount of any unused basic rate tax band.
The annual exempt amount and any capital losses should be initially deducted from those chargeable gains that do not qualify for entrepreneurs’ relief. This approach will save CGT at either 18% or 28%, compared to just 10% if used against chargeable gains that do qualify for relief.
There are several ways of presenting computations involving such a mix of gains, but the simplest approach is to keep gains qualifying for entrepreneurs’ relief and other gains separate.
Example 8
On 30 September 2014 Mika sold a business that she had run as a sole trader since 1 January 2008. The disposal resulted in the following chargeable gains:
£ | ||
---|---|---|
Goodwill | 260,000 | |
Freehold office building | 370,000 | |
Freehold warehouse | 170,000 | |
800,000 |
The warehouse had never been used by Mika for business purposes.
Mika has taxable income of £4,000 for the tax year 2014–15. She has unused capital losses of £28,000 brought forward from the tax year 2013–14.
Mika’s CGT liability for 2014–15 is as follows:
£ | |||
---|---|---|---|
Gains qualifying for entrepreneurs’ relief | |||
Goodwill | 260,000 | ||
Freehold office building | 370,000 | ||
630,000 | |||
Other gains | |||
Freehold warehouse | 170,000 | ||
Capital losses brought forward | (28,000) | ||
142,000 | |||
Annual exempt amount | (11,000) | ||
131,000 | |||
Capital gains tax: | 630,000 at 10% | 63,000 | |
131,000 at 28% | 36,680 | ||
Tax liability | 99,680 |
Transfers between spouses do not give rise to any chargeable gain or capital loss. The same treatment applies to transfers between same-sex partners in a registered civil partnership.
Example 9
Bill and Cathy Dew are a married couple. They disposed of the following assets during the tax year 2014–15:
Bill and Cathy each have taxable income of £50,000 for the tax year 2014–15.
Jointly owned property
Bill Dew – CGT liability 2014–15 | ||
---|---|---|
£ | ||
House | 45,000 | |
Annual exempt amount | (11,000) | |
34,000 | ||
Capital gains tax: 34,000 at 28% | 9,520 |
Cathy Dew – CGT liability 2014–15 | |||
---|---|---|---|
£ | £ | ||
House | 45,000 | ||
Ordinary shares in Elf plc | |||
Disposal proceeds | 70,000 | ||
(48,000) | |||
22,000 | |||
67,000 | |||
Annual exempt amount | (11,000) | ||
56,000 | |||
Capital gains tax: 56,000 at 28% | 15,680 |
It may be the case that one spouse has not utilised their annual exempt amount and/or basic rate tax band for a particular tax year. It could therefore be beneficial to transfer an asset to that spouse before its disposal, or to put an asset into joint names prior to disposal.
Example 10
For the tax year 2014–15 Jane is a higher rate taxpayer, but her husband Claude does not have any taxable income. During March 2015 Jane is going to dispose of a house, and this will result in a chargeable gain of £120,000.
If 50% ownership of the house is transferred to Claude prior to its disposal, this will enable his annual exempt amount and basic rate tax band for 2014–15 to be utilised. The CGT saving for the couple will be £6,266 as follows:
£ | |||
Annual exempt amount | 11,000 at 28% | 3,080 | |
Lower rate tax saving | 31,865 at 10% (28% – 18%) | 3,186 | |
6,266 |
When just part of an asset is disposed of then the cost must be apportioned between the part disposed of and the part retained.
Example 11
On 16 February 2015 Joan sold three acres of land for £285,000. She had originally purchased four acres of land on 17 July 2013 for £220,000. The market value of the unsold acre of land as at 16 February 2015 was £90,000.
With part disposals, care must be taken with enhancement expenditure and incidental costs as these may relate to the whole asset or just to the part being disposed of.
Example 12
On 20 February 2015 Fergus sold an acre of land for £130,000. He had originally purchased four acres of land on 13 April 2003 for £210,000. During January 2015 Fergus spent £22,800 clearing and levelling all four acres of land. The market value of the unsold three acres of land as at 20 February 2015 was £350,000. Fergus incurred legal fees of £3,200 in connection with the disposal.
Fergus’ chargeable gain for 2014–15 is as follows:
£ | £ | ||
---|---|---|---|
Disposal proceeds | 130,000 | ||
Cost | 56,875 | ||
Enhancement expenditure | 6,175 | ||
Incidental costs | 3,200 | ||
_______ | (66,250) | ||
63,750 |
Special rules apply to chattels. A chattel is tangible moveable property.
Example 13
On 18 August 2014 Gloria sold an antique table for £5,600 and an antique clock for £7,200. The antique table had been purchased on 27 May 2013 for £3,200, and the antique clock had been purchased on 14 June 2013 for £3,700.
Where a chattel is sold at a loss and the sale proceeds are less than £6,000, then the amount of allowable capital loss will be restricted. If capital allowances have been claimed then no capital loss will be available at all.
Example 14
Giles sold the following assets during the tax year 2014–15:
Table
Machinery
A wasting asset is one which has a remaining useful life of 50 years or less. The cost of such an asset must be adjusted for the expected depreciation over the life of the asset.
Example 15
On 31 March 2015 Mung sold a copyright for £9,600. The copyright had been purchased on 1 April 2010 for £10,000 when it had an unexpired life of 20 years.
The chargeable gain on the copyright is as follows:
£ | ||
---|---|---|
Disposal proceeds | 9,600 | |
Cost (10,000 x 15/20) | (7,500) | |
2,100 |
If an asset is lost or destroyed then the receipt of insurance proceeds is treated as a normal disposal. However, rollover relief is available if the insurance monies are used to purchase a replacement asset within a period of 12 months.
Example 16
On 20 October 2014 an antique table owned by Claude was destroyed in a fire. The table had been purchased on 23 November 2012 for £50,000. Claude received insurance proceeds of £74,000 on 6 December 2014 and on 18 December 2014 he paid £75,400 for a replacement table.
If the insurance proceeds are not entirely reinvested then there will be an immediate chargeable gain.
Example 17
Continuing with example 16, assume that the replacement table only cost £71,500.
If an asset is damaged then the receipt of insurance proceeds is treated as a part disposal. However, if all the proceeds are used to restore the asset then a claim can be made to ignore the part disposal rules.
Example 18
On 1 October 2014 an antique carpet owned by Juliet was damaged by a flood. The carpet had been purchased on 17 November 2010 for £69,000. Juliet received insurance proceeds of £12,000 on 12 December 2014, and she spent a total of £13,400 during December 2014 restoring the carpet. Juliet has made a claim to ignore the part disposal rules.
A gain on the disposal of a principal private residence is exempt where the owner has occupied the house throughout the whole period of ownership. The final 18 months of ownership are always treated as a period of ownership. The following periods of absence are also deemed to be periods of occupation:
These deemed periods of occupation must normally be preceded and followed by actual periods of occupation.
Example 19
On 30 September 2014 Hue sold a house for £381,900. The house had been purchased on 1 October 1994 for £141,900.
Hue occupied the house as her main residence from the date of purchase until 31 March 1998. The house was then unoccupied between 1 April 1998 and 31 December 2001 due to Hue being required by her employer to work elsewhere in the UK.
From 1 January 2002 until 31 December 2008 Hue again occupied the house as her main residence. The house was then unoccupied until it was sold on 30 September 2014.
The chargeable gain on the house is as follows:
£ | ||
---|---|---|
Disposal proceeds | 381,900 | |
Cost | (141,900) | |
240,000 | ||
Principal private residence exemption | (189,000) | |
51,000 |
Exempt months | Chargeable months | |
---|---|---|
1 October 1994 to 31 March 1998 (occupied) | 42 | |
1 April 1998 to 31 December 2001 (working in UK) | 45 | |
1 January 2002 to 31 December 2008 (occupied) | 84 | |
1 January 2009 to 31 March 2013 (unoccupied) | 51 |
|
1 April 2013 to 30 September 2014 (final 18 months) | 18 | __ |
189 | 51 |
Letting relief will extend the principal private residence exemption where a property is let out during a period that does not otherwise qualify for exemption.
Example 20
Continuing with example 19, assume that Hue let her house out during the periods that she did not occupy it.
The chargeable gain on the house will now be as follows:
£ | ||
---|---|---|
Disposal proceeds | 381,900 | |
Cost | (141,900) | |
240,000 | ||
Principal private residence exemption | (189,000) | |
Letting relief exemption | (40,000) | |
11,000 |
The letting relief exemption is the lower of:
Where part of a house is used exclusively for business use then the principal private residence exemption will be restricted.
Example 21
On 30 September 2014 Mae sold a house for £186,000. The house had been purchased on 1 October 2004 for £122,000. Throughout the period of ownership the house was occupied by Mae as her main residence, but one of the house’s eight rooms was always used exclusively for business purposes by Mae.
The chargeable gain on the house is as follows:
£ | ||
---|---|---|
Disposal proceeds | 186,000 | |
Cost | (122,000) | |
64,000 | ||
Principal private residence exemption | (56,000) | |
8,000 |
The second part of the article will cover shares, reliefs, and the way in which gains made by limited companies are taxed. It also contains some guidance for when you are answering a chargeable gains question in the exam, plus a test of your understanding.
Written by a member of the Paper F6 (UK) examining team