Week 7

• •Capital gains tax (CGT) was introduced in 1965 with the aim of taxing gains arising from the disposal of capital assets•

  •Prior to this, capital gains were tax-free and there was a strong incentive to devise tax avoidance schemes which disguised income as capital gains and so avoided tax altogether
• A CGT liability arises when a "chargeable person" makes a "chargeable disposal" of a ”chargeable asset”.
• All assets are chargeable assets except those which are specifically exempted from CGT.
• Assets specifically exempt from CGT cont.

  winnings from pools, lotteries, betting etc.

  damages and compensation received for personal or professional injury

  National Savings Certificates, Premium Bonds and gilt-edged securities
• The main categories of persons who are chargeable to CGT are as follows:

  §Individuals who are resident in the UK

  Business partners, who are each responsible for their share of the CGT due on the capital gains of a partnership
• The main categories of persons who are chargeable to CGT are as follows:

  §The trustees of a trust or settlement

  §The personal representatives of a deceased person
• Chargeable disposals

  •the sale of an asset (other than the sale of stock or inventory in the course of trade)

  the sale of part of an asset
• Chargeable disposals

  •the gift of all or part of an asset

  •the loss or destruction of an asset

  •the receipt of a capital sum derived from a chargeable asset
• Non-chargeable disposals

  •The sale of trading stock or inventory in the course of trade

  •Gifts to charities, art galleries or museums
• Non-chargeable disposals

  •Disposals caused by the death of the taxpayer

  •Disposals between a husband and wife (or civil partners) who live together at any time during the tax year in which the disposal occurs
• Non-chargeable disposals

  Still really a chargeable disposal but such disposals are deemed to occur at a disposal value such that neither a chargeable gain nor an allowable loss arises on the disposal.

  These disposals are referred to as “Nil Loss, Nil Gain”
• •A person's CGT liability for a tax year is based upon the chargeable disposals made by that person during the tax year
• •The capital gain or allowable loss on each disposal is calculated separately
• •Net gains = total gains – total losses
• •CGT is payable on the excess of net gains over the annual exemption for the year
• •If an asset is sold, disposal value is generally equal to sale proceeds, but the market value of the asset may be used instead if the disposal is not at "arm’s length"
• •Market value will normally also be used as disposal value if an asset is gifted or if it is disposed of to a "connected person"
• •Connected persons include:

  spouse (husband or wife)

  relatives and their spouses-spouse’s relatives and their spouses

  business partners and their spouses and relatives
• •The disposal of some part of an asset is a disposal for CGT purposes.
• •The allowable expenditure of the whole asset must be apportioned (cost) using the formula below

  value of the part disposed of/value of the part disposed of + value of the part remaining x original cost
• Every  taxpayer has a right to an Annual Exemption which is the same for all taxpayers,  no matter what tax band they are in
• For tax year 2024-25, the Annual Exemption (AE) is £3,000.
• This Annual exemption reduces chargeable gain.
• •For 2023-24, capital gains are generally taxed at the standard rate of 18% or at the higher rate of 24%, depending upon the size of the individual’s taxable income
• •Gains are taxed at 18% to the extent that they do not exceed any unused part of the basic rate band (£37,700) and at 24% otherwise.

  •But the basic rate might he extended if the taxpayer made charitable donations or paid to personal pension.
• •Residential property gains are taxed at 18% and 28% depending upon the size of the individual’s taxable income
• •Gains are taxed at 18% to the extent that they do not exceed any unused part of the basic rate band (£37,500 or extended if donations, personal pension) and at 28% otherwise.•Generally arising when selling a residential house which was not occupied by a taxpayer but not a holiday flat/home.
• •Gains which qualify for ‘business asset disposal relief’ (BADR) are always taxed at 10%, no matter what other income/tax band

  •What it is?••In general it is disposal of business.
• Determining an individual’s CGT liability

  Each gain or loss is calculated separately

  2.They are then combined

  3.Determine an overall net gain, if any

  4.Minus Annual Exemption- The Annual Exemption (AE) can be applied to any rate first- ie. used in the most tax efficient way for the taxpayer.

  5.= CGT assessment
• Order for taxing gains

  1.Apply Annual Exemption of £6,000

  2. Gains which qualify for BADR are taxed first at 10%

  3. Then the unused part of the Income Tax basic rate band (£37,700 after personal allowance) is used to tax gains at the standard rate 10% or 18% (if residential property). Remember that basic band can be extended if taxpayer gift aided or paid into private pension.

  4. Once the £37,700 limit is reached gains are taxed at the higher rate of 20% or 28% (if residential property).
• Calculating CGT if there are losses

  Each gain or loss is calculated separately for a tax year

  They are then totalled.

  If there is an overall net loss, then:

  The capital loss is carried forward to offset against the first available net capital gains

  In the following years the losses are offset against any Gains which are to be taxed (after applying the annual exemption first every year).
• Taxpayers are not required to fill in the CGT pages of the tax return if:

  a)Total disposal proceeds in the year do not exceed four times the amount of the annual exemption (£24,000 for 2023-24), and

  b)Total gains for the year do not exceed the annual exemption (£6,000 for 2023-24)
• CGT is payable on 31 January following the end of the tax year (POAs are not required)
• If disposal proceeds are received in instalments, the taxpayer may make a claim to pay the related CGT in instalments
• •A CGT liability arises when a "chargeable person" makes a "chargeable disposal" of a ”chargeable asset”.
• •All assets are chargeable assets except those which are specifically exempted from CGT.
• •A chargeable disposal occurs when all or part of a chargeable asset is sold or given away, lost or destroyed.
• •Every  taxpayer has a right to an Annual Exemption of £6,000 in 2023-24.
• •CGT is generally payable at the standard rate of 10% or at the higher rate of 20%. Residential property at rates 18% and 28% and BADR at 10%.
• •Allowable costs include an asset’s acquisition cost, incidental cost, enhancement expenditure, cost of defending the owner’s title and valuation fees.