What is the 6 step process to work out CGT
Step 1 - DIsposal proceeds Step 2 - Deduct buying/selling costs + enhancement Step 3 - Deduct current year losses Step 4 - " previous year " Step 5 - Deduct AEA Step 6 - add gain to taxable income
Order of disposal of shares to prevent bed and breakfast
What is B&B
Alternatives to B&B
- Shares bought on same day
- Shares bought within next 30 days
- Shares in share pool
Bed & ISA
Bed & pension
spouse no gain/no loss rule
Exempt assets for CGT
- Property
- Investment
- Other
Property - Main residence, private car, decorations valour, currency, woodlands
Investments - Premium bounds, NS&I certs, ISA, VCT, EIS, SEIS, employee shares - incentive plan
Other - repaying debt, gambling winnings, workplace compensation ,cash back, gifts to charity, national interest
PPR Exemptions (8)
- 1st year -if gap between buy and move in (exceptional up to 2 years)
- Any before 1 April 1982
- Gap of 3 years any reason - sandwich
- Last 18 months / 36 months - sandwich
- Gap of 4 years working elsewhere in UK - sandwich
- Any length overseas
- Any length due to living in work accommodation if plan to return to main residence
What are the main CGT Reliefs
- Holdover relief
- Entrepreneur relief
- Investor relief
- Business rollover relief
- Incorporation rollover relief
Holdover Relief
- Qualifying Gifts (4)
- Business asset must be (3)
- Shares must be
- Benefit
- How and when claimed
- Stop being UK Res
- Business assets , Agricultural Land, Unlisted Shares, CLTs - gifts to charity (CUBA)
- business assets Must be Sole trader, partnership or >5% voting rights known as personal company
- Shares must be unlisted or from personal company
- No CGT payable by donor on disposal. Donee takes original acquisition cost
- Both claim (jointly) via self assessment. Within 4 years from e.o tax year
- Stop being UK Res in 6 years - CGT chargeable. HMRC recipient 1st,
Business Asset Rollover
- When used
- Who can use (3)
- Conditions - Relief can be claimed when individual is either …(3)
- New assets must be acquired - when
- Claim periods
- When - On sale of business assets when proceeds used to buy new assets
Examples- Trading, business of furnished holiday lets or professional, vocation , office or employment - Who - Sole trader, partnership or Ltd company
- Conditions - Trading (active business), holiday letting, carrying on professional vocation, office or employment
1-3 Year rule - Acquired 1 year before new assets or 3 years after disposal of old assets
- Claim 4 years after tax year end of later - disposal of old assets or acquisition of new
Building , land or plant and machinery
Entrepreneurs Relief
- When used
- Eligibility. Must be -(2)
- If closing a business , assets must be disposed of within ?
- Benefit
- Monetary Limits
- Time limits
- Claim period
Shares - Criteria
When - Sale of part or all of business an individual owns or close business
- eligibility - Available to individuals not companies
Must be sole trader or business partner, assets owned 2 years plus (qualifying period)
You have been a 1.sole trader, 2. partner 3. officer or employee of the company( don’t need to be company owner)
In this capacity, you have held 5% or more of the share capital of the company and 5% of voting share capital
You haven’t exceeded your £1 million lifetime limit
- Closed business - Disposed of within 3 years
- Benefit 10%
- £10. Million qualifying lifetime gains
_ Must be owned 2 years - Claim by 31st January after tax year disposal took place
If limited company: - Shares - employee /director and meets 5% shareholding test (5% voting rights and shares held) as well as either of 5% profits available for distribution or disposal proceeds of ordinary share capital
Selling shares= individual is employee/ office holder of company = must be trading company
Investors Relief
- Who can use it
- benefit
- Conditions shares ,must meet
- Who - Outside investors in unlisted trading companies (neither employees or directors)
- Benefit 10% on first £10 million (lifetime limit) (in addition to £10m ER limit)
- Newly listed, issued after 16 March 2016, owned for 3 years since 6 April 2016, owned for 3 continuous years prior to disposal
Reinvestment Relief (Deferral relief)
- When Used
- What is benefit
- Time limit
- On death
- What is situation on gain on share purchased
- Difference when SEIS
- Eligibility
- when - reinvesting gain into EIS /SEIS
- Benefit - gain on original disposal is deferred until EIS shares sold
1-3 Year Rule: - Time limit - EIS shares must be bought no earlier than 1 year before and no later than 3 years after sale of original assets
Latest date to claim is 5 years after 31st Jan following tax year shares issued - Death - if EIS shares held until death, the original gain will never be taxed
- If shares held 3 years, no further CGT due on gains of shares themselves.
- SEIS
Benefit 50% gain on original disposal exempt. 50% is deferred
£100k limit on SEIS
Eligibility - Individual must be resident or ordinarily resident in UK
Claim- completes form attached to EIS certificate. Must claim 5 years after 31st January following tax year in which shares issued.
What are badges of trade (6)
- Seller gets no personal enjoyment
- held for short time
- seller buys items in bulk and regularly sells for profit
- Seller adapts items to improve profitability
- Operates in business like way
- Seller borrows money to buy items and repays once sold
When does disposal take place
Gifts?
When item is sold?
When are capital gains taxed
What happens when asset bought prior to 31 March 1982
- Capital gains taxed in year of disposal
- Gifts - date of gift
- Sold - is the date the contract for sale becomes binding\
- If prior tp 31 / 1982, value at that date taken
Define
- Deferred consideration
- Ascertainable consideration
- Unascertainable consideration
- Contingent consideration
- Deferred - some payable now and some in the future eg £10k now, £10k in 6 months .Full £20k due at contract date (refund available if deferred amount not paid)
- Ascertainable - If future amount is known. If unascertainable, market value of further payment used
- Contingent - dependant on something happening.
How are disposal proceeds valued
- No relationship
- Close connection
- death
- No relationship - Sale proceeds
- “not at arms length” - market value
- death - Recipients acquisition cost is market value at date of death
No CGT on death ie any gains made during lifetime are not charged to CGT. “CGT uplift”
Wasting assets & Chattels
- What is a wasting asset. CGT treatment?
- Legal definition of chattel
- CGT treatment of chattels
Wasting asset - item that has a predictable life of 50 years or less. Usually exempt
Chattel - Tangible moveable property (something you can touch and move). Personal possessions usually referred to as chattels.
- < £6,000 CGT exempt
-> £6,000. 2 ways to calculate. Actual gain or 5/3 x amount over £6k whichever lower.
NB For married couple, both can use their chattel relief on share of jointly held chattel.
Part Disposal formula
Formula for working out buying cost of part sold:
A
______ X. original cost
A + B
A= proceeds of part disposed B= Value of part kept
PPR
Formula to work out amount of gain that is exempt
-Layout for doing calculation
- Other factors relating to PPR
Amount of gain that is exempt =
Total gain x (period of occupation/total period of ownership)\
Layout :
Time period. Exempt Months. Chargeable Months. Total Months
Work out total exempt months / total months
Other factors related to PPR
- MAin residence can cover up two 5,000m2 (house and garden)
- PPR can be claimed on death, if residence lived in by person inheriting it as main residence before and after owners death
- property used for business purpose not eligible
Step 3 Deduct current year losses
- What is situation re current year loss
- Deadline for claiming loss
- What is situation if more than one gain in tax year
- Current year losses - whole amount has to be deducted from the gain. This is even if means loss reduces gain to £0 and AEA is wasted,
- Deadline for claiming loss - Claimed to HMRC within 4 years of end of tax year in which made
- Where more than one gain, can set against gain subject to 18% or 28% instead of %10% or 20%
- Losses on exempt assets can’t be used
How do you pay CGT and when
- What happens when gain is made over AEA
- paid via self assessment. Paid in one lump sum on 31st January following end of tax year in which gain made.
- Once individual makes gain over AEA, they should report to HMRC within 6 months of the end of the tax year in which it was made,
What is a personal company
If the business is owned by a company in which you dispose of the shares or securities, then throughout the qualifying period of 1 year the company must be:
your personal company (see below)
either a ‘trading company’ or the holding company of a ‘trading group’
You must be either an officer or employee of that company (or an officer or employee of one or more members of the trading group).
For disposals prior to 29 October 2018, a company is your personal company if you hold at least 5% of the ordinary share capital and that holding gives you at least 5% of the voting rights in the company. From 29 October 2018 in addition to the existing conditions you must also have an entitlement to either of at least 5% of the:
profits available for distribution and 5% of the distributable assets on a winding up of the company, which must come from your holding of ordinary share capital
proceeds in the event of a company sale
How does HMRC treat failure to report accurately a capital gain
- May charge penalty/fine
- If they believe due to inaccurate reporting or lack of reasonable care
- Penalty will be a percentage of correct tax due
- Increased if HMRC believe inaccuracy deliberate
- penalty reduced/waived if individual tells HMRC about error
- cooperates With HMRC in establishing correct tax
- Tax must be paid
Reinvestment relief EIS
- When is gain “unfrozen”. (Chargeable event)
- Conditions
- Sale of shares (disposal to spouse is ok)
- Investor becomes non resident within 3 years
- EIS shares cease to be eligible
- Conditions Uk resident, Qualifying investment (unquoted, in UK carrying on. A qualifying trade)
