R03 – Personal Taxation
2024/2025
Workbook 3
Understanding the UK tax system as applied to individuals –
Capital gains tax
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Contents
Introduction to Capital Gains Tax
4
Introduction to Capital Gains Tax (CGT)
5
Capital Gains Tax
6
Capital Gains Tax (CGT)
7
Disposals
8
Exemptions
10
Disposal proceeds
12
Calculation of the tax
14
Reliefs
15
Shares
18
Calculating gains on life policies
19
Revision exercises
20
Questions
21
Question answers
23
Mock questions
25
Mock questions answers
27
3
Introduction to Capital Gains Tax (CGT)
4
Introduction to Capital Gains Tax (CGT)
In this workbook we will consider Capital Gains Tax (CGT).
What does the examiner expect?
Capital Gains Tax has been the subject of significant change over the past few years and as such if you
have a historic understanding of the subject, but are not a recent practitioner in this area, it is important to
be very clear of the changes. Recent tax years have seen changes, particularly to tax rates and Business
Asset Disposal Relief (formerly Entrepreneur’s relief).
You are expected to be able to perform CGT calculations and to be capable of explaining and listing factual
aspects of the tax regime.
Structure of the workbook
Example questions and model answers are provided at the end of the workbook. Questions will be based
on the material contained in this workbook and the full syllabus. This means that not all answers will be
available from reading this material in isolation.
Please take time to attempt all questions as these will highlight any areas required for further study.
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Capital Gains Tax (CGT)
6
Capital Gains Tax (CGT)
•
CGT is a tax on gains arising from disposals of certain capital assets – Disposal proceeds less
acquisition cost
•
No CGT on asset disposal following the death of an individual. Beneficiaries deemed to acquire assets
at market value on the date of death
•
Annual exemption available
7
Disposals
Disposal includes transfer of ownership and the realisation of capital sum from an asset.
•
Covers sales and gifts (absolute or by way of trust or settlement) and property exchanges
•
Transfers as security for a debt (mortgage) are not disposals
•
Disposals also occur when:
-
Capital sum is received as compensation for damage or injury to assets.
-
Capital sum received under insurance policy for damage, injury or loss of assets.
-
Capital sum received for surrender of rights.
-
Beneficiary under a trust becomes absolutely entitled to settled property against trustees.
-
Asset is destroyed (physically or legally). The result is usually loss, not gain.
Date of disposal
When assets are sold, the date of disposal is the date contract for sale is binding (may be before payment
received). If buyer defaults, disposal is null and void and no tax is due.
Spouses and civil partners
Disposal by one spouse / civil partner to the other does not give rise to a chargeable gain, but when an
asset is disposed of, tax liability is calculated by reference to original cost of acquisition and assessed on
the beneficial owner.
•
Disposal between spouses is ‘no gain no loss’
•
First spouse’s gain is passed to other spouse
•
Transferring asset from higher-rate taxpayer to lower-rate-paying spouse before sale may save tax*
•
Same technique can be used when one spouse has a remaining annual exemption or has losses that
can be set against gains*
•
Inter-spousal transfers only treated like this if spouses live together at some point during tax year
•
Spouses and civil partners are treated as living together unless they have separated:
•
-
Under a court order
-
By a formal Deed of Separation executed under seal (in Scotland a deed should be witnessed)
-
In such circumstances that the separation is likely to be permanent
In each case the marriage or civil partnership must have broken down. If the marriage or civil
partnership has not broken down but the couple do not live in the same house, they are still treated as
living together for Capital Gains Tax purposes.
Where a couple disposes of jointly held asset, each spouse is taxable on the gain on their own share.
Property assets are considered to be held in equal shares unless ownership is tenants in common in
declared unequal shares.
*This is only effective for tax purposes where the transfer is a genuine unconditional transfer of beneficial ownership, i.e. the
person transferring beneficial ownership will not benefit from the proceeds.
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Disposals
Disposal consideration and valuation
Consideration for disposal of an asset is normally sale proceeds – Can be market value if not sold on a
commercial basis.
Disposals not at arm’s length
Disposal not at arm’s length (using market value) occurs when:
•
Disposal is between individuals with close connection (sales and gifts)
•
Disposals are between unconnected parties (for example, sale undervalue or gift)
Deferred consideration
Sometimes payment (consideration) is not made at the time of sale i.e. Someone sells a business and
received only part payment immediately with the remainder to be paid at a later date.
Deferred consideration can be ascertainable (fixed) or not at time of disposal.
Profit subject to income tax and CGT
When a disposal leads to income tax, the amount on which it is charged is deducted from disposal
proceeds for CGT, preventing double taxation.
CGT and Inheritance Tax (IHT)
There is significant interaction between CGT and IHT
•
CGT values the asset – IHT values the loss to the estate
•
Where an asset is valued for IHT following death, the same value must be used for CGT for the
beneficiary
•
CGT disposal can also be transfer for IHT (for example, gift)
•
If disposal attracts immediate charge to IHT (for example, transfer into trust), CGT holdover relief can
usually be claimed – Then no CGT is payable but the recipient acquires the donor’s base cost. Relief is
available even if IHT charge is nil (nil-rate band)
•
Where no holdover relief is claimed or it does not cover the whole gain, IHT liability can be deducted
when computing a gain, provided the donor pays IHT
•
Where disposal does not attract an immediate IHT charge (for example, exempt gift), CGT is payable as
normal
CGT and Income Tax
Where it can be seen that someone is ‘trading’, for example selling assets a short time after acquisition for
a profit, sale will be subject to income tax as opposed to CGT.
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Exemptions
Not every gain is chargeable.
•
Annual CGT exemption is £3,000 (2024/25) – This is deducted from the whole of an individual’s
chargeable gains after deducting losses. Exemptions cannot be carried forward.
Some disposals are CGT exempt, including:
•
Private motor vehicles.
•
NSC’s and premium bonds.
•
Government and corporate bonds.
•
Most life policies.
•
Chattels if value at disposal does not exceed £6,000. Where the value exceeds £6,000, chargeable
gains cannot exceed 5/3 of the excess. (i.e. do 2 calculations – One for a standard CGT calculation and
one for calculation of 5/3rds of excess over £6,000 and see which gives the lower tax liability).
•
Tangible moveable property which is a wasting asset (expected life < 50 years).
•
Decorations for valour disposed of by original owner.
•
Foreign currency for personal use.
•
Debts repaid to original creditor.
•
Gambling winnings.
•
Compensation or damages for wrong or injury suffered in profession/vocation.
•
Shares in Venture Capital Trusts (VCTs).
•
Shares in Enterprise Investment Schemes (EISs).
•
Shares in Seed EIS.
•
Woodlands.
•
Cash backs given as inducement to purchase.
•
Disposals to charity.
•
Claims can be made for exemption on disposals of art works, historic houses and other assets of
national interest.
•
Shares held by employees in share incentive plan up to the date transferred to employee.
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Exemptions
•
A Principal private residence is exempt, subject to conditions:
-
Part of gain may be taxable if the seller has not occupied the property as their main residence
throughout ownership, i.e.
-
Period of occupation / Total period of ownership X total gain = part of property CGT exempt
-
The following periods of absence are ignored:
-
ô
Delay of up to year between acquisition and taking up residence
ô
Any period before 1 April 1982
ô
Periods totalling up to 3 years if preceded and followed by residence
ô
The last 9 months of ownership, providing property was used as main residence at some time
ô
Up to 4 years when employment elsewhere in UK prevented residence, if preceded and
followed by residence
ô
Any periods working abroad, if preceded and followed by residence
ô
Any period of living in job-related accommodation, where there is intention to return to main
residence
Anyone with more than 1 home can make election to determine which is the ‘main’ residence:
ô
Election is made within 2 years of acquisition of additional property
ô
Can be changed, but not backdated more than 2 years
ô
If no election, HMRC can decide based on the facts
ô
Married couples or civil partners living together can only claim exemption for 1 property at a
time
ô
Owners can only make election if actually residing in both properties
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Disposal proceeds
For commercial basis and disposal not at arm’s length:
•
Commercial sale proceeds are used
•
If given away, then the market value at the time of the gift is used
•
Disposals to a connected person, market value is used
•
Market value also used for disposal not at arm’s length (for example, deliberately undervalued)
Acquisition base cost
Acquisition cost is deducted from proceeds:
•
If it is bought on a commercial basis, use purchase price
•
If it is a gift, use the market value unless holdover relief is claimed, in which case donor’s acquisition
cost
•
If asset is created by the taxpayer, capital expenditure incurred wholly in creation can be deducted
Other costs
Incidental costs of purchase and sale are deductible. Further deductions are allowed for expenditure on
the asset to increase its value. Expenses claimed against income are not allowed.
Losses
Losses on disposals can be set against any gains in same tax year.
•
If gains are insufficient to absorb the loss, excess losses can be carried forward and set against gains in
subsequent years indefinitely
•
One spouse’s loss cannot be set against the other’s gains
•
Losses must be claimed within 4 years of the end of the tax year in which they were made
•
Losses must be set against gains of same tax year even if this reduces total gains to below the
exemption
•
When losses are set against gains of later years, it is only necessary to use enough losses to reduce
gains to the level of the annual exemption
A loss need not be reported to HMRC unless disposal proceeds are more than 4 times the annual
exemption and/or taxpayer wishes to set loss off against capital gains.
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Disposal proceeds
1982 value
Where an asset has been held since prior to 1982, its base cost is normally deemed to be the market
value on 31 March 1982. No deductions are allowed for incidental costs of acquisition or enhancement
expenditure before 31 March 1982.
Part disposals
Where a disposal is only of part of an asset, the cost is calculated using:
•
Part disposal proceeds – (Original cost of whole x (Part disposal proceeds / (Part disposal proceeds +
Market value of retained part)))
Expenditure that relates:
•
Wholly to the part disposed of is deductible in full
•
Wholly to the part retained is not deductible
•
To both parts is deductible using the formula above
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Calculation of the tax
•
Add up all the gains on disposals in tax year to arrive at net chargeable gains.
•
If chargeable gains exceed £3,000 (2024/25), the excess is treated as top slice of income. Any part
that falls within basic rate band (when added to other income) is taxed at 10%. Gains in excess of the
basic rate threshold are taxed at 20%. Except gains on disposals of residential property that don’t
qualify for principal private residence relief – The rates are then 18% and 24% respectively.
•
Where gains straddle the basic and higher rate band part will be taxed at 10% and the remainder at
20%.
•
Special rules apply for calculating the total income for CGT purposes where the individual also has a
chargeable gain on a life assurance policy in same tax year:
-
Total income is required in order to calculate tax on capital gain
-
Top sliced gain counts as income, not total life assurance gain
-
Top sliced gain is normally calculated by dividing the gain by the number of complete years the
policy in force
-
Top sliced gain precedes capital gain in the calculation
-
See workbook 2 for more information in this area
•
Any unused income tax personal allowance cannot be used against CGT.
•
Annual exemptions cannot be rolled forward.
Reporting Capital Gains on Residential Property
Residential property sold in the UK on or after 6 April 2020 must be reported and any Capital Gains Tax
paid within:
•
60 days of selling the property if the completion date was on or after 27 October 2021
•
30 days of selling the property if the completion date was between 6 April 2020 and 26 October 2021
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Reliefs
Gains may qualify for one of five CGT reliefs.
Holdover relief
Individuals can hold over the gain on disposals of certain assets. Main categories that qualify for holdover
relief are transfers chargeable to IHT and disposals of trading assets
•
Transfers that attract immediate charge to IHT, mainly gifts into discretionary and other trusts, qualify
for holdover relief – Even if no IHT is payable due to the nil-rate band.
•
If holdover relief is claimed, no tax is payable at the time of the gift but the acquisition cost to the donee
is reduced by the amount of held-over gain – This increases the amount of gain made by donee on any
subsequent disposal.
•
Relief given only if donor and donee jointly claim it.
•
Only available for gifts to persons resident in UK. If donee ceases to be UK resident within 6 years, gain
crystallises and tax may be payable. If donee fails to pay, donor may be liable.
•
Relief not available for transfers of shares to a company.
Relief is not available for transfers of assets to a trust in which a settlor has an interest.
•
Settlor has interest if they or their spouse can benefit from trust property now or in future.
•
Holdover relief given may be clawed back if settlor obtains an interest or will later. Clawback period
ends 6 years after end of year of assessment when transfer takes place.
•
Holdover relief not restricted on transfers to certain trusts for disabled beneficiaries.
Tax is effectively being deferred rather than avoided altogether.
Business rollover relief
Businesses can claim relief if they sell assets used in the business and then buy more assets.
•
The company must be trading
•
The assets sold must have been used for trading purposes
•
Sale price has to be reinvested in new assets for use in the trade
•
New assets must be bought in the period starting 1 year before and ending 3 years after disposal of old
assets
Relief defers gain until disposal of the new assets. Relief available for land and buildings, fixed plant and
machinery, ships, aircraft and goodwill. On disposal of new assets, taper relief is based only on holding
period for new assets.
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Reliefs
Rollover relief in incorporation of a business
If an unincorporated business is transferred to limited company in exchange for new shares in that
company, relief is available by deducting the gain from the issue price of shares.
•
Defers chargeable gain until shares are disposed of by reducing base cost of shares by amount of gain
•
All business assets must be transferred to new company and business transferred as going concern
•
Partial rollover relief given where business is transferred partly for shares and partly for cash
•
Relief is given without making a claim. It is possible to opt out of relief
Reinvestment into EIS shares
Relief is available where gains are reinvested into EIS shares.
•
Relief may be claimed on disposal of assets if gain is invested in shares that qualify under EIS –
investment must be made in the period starting 12 months before and ending 3 years after disposal
subject to CGT.
•
Gains on original disposal are deferred until disposal of EIS shares.
•
Investment in EIS shares may qualify for 30% income tax relief, though conditions are slightly different.
Higher-rate taxpayer could get CGT relief as well as 30% income tax relief on reinvestment.
•
Gain on original asset is only deferred and will crystallise on disposal of EIS shares. At that point, original
gain will be taxable – subsequent gain on EIS shares is normally exempt.
•
Original gain is not taxed if held until death.
Reinvestment into Seed EIS shares
Exemption from CGT is allowed on 50% of any gain reinvested into Seed EIS shares. The reinvestment
must be made in the same tax year as the disposal.
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Reliefs
Business Asset Disposal Relief
For disposals on or after 11 March 2020, Entrepreneurs’ Relief (or, Business Asset Disposal Relief, as it
became known from the 2020/21 tax year onwards) claims will be limited to the first £1million of lifetime
gains – meaning any individual who has already claimed Entrepreneurs’ Relief on gains of £1million or more
will no longer qualify for the relief on any future disposals. Similarly, even for those who have never made
a claim to the relief previously, only the first £1million will be taxable at 10%, with the remainder subject to
capital gains tax at the prevailing main rate, currently 20% (2024/25 rates). At current rates, this makes the
relief now worth £100,000, down from £1million at the previous limit.
Previously, Entrepreneur’s relief could be claimed on the disposal of a qualifying business with effect from
6 April 2008. The relief is in respect of:
•
Gains made on disposal of all or part of a business, or
•
Gains made on disposals of assets following the cessation of a business
•
By certain individuals who were involved in running the business
Claims for relief can be made on more than one occasion, but with a lifetime total of £10 million for assets
disposed of after 6 April 2011 (£5 million for disposals between 23 June 2010 and 5 April 2011, £2 million
between 6 April 2010 and 22 June 2010 and £1 million between 6 April 2008 and 5 April 2010). The rate for
gains of up to the lifetime limit is 10%, with the excess being added to other income and taxed according
the main CGT rates, i.e. 10% and 20%.
Conditions are:
•
Ownership for a year prior to disposal
•
Disposal of whole or part of a business run as a sole trader, on assets used for the purpose of business
•
Disposal of shares in a trading company where the individual had 5% shareholding and is an employee
or director
•
Disposal of a share in a partnership and on associated disposals
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Shares
Special rules apply for calculating chargeable gains on shares of the same type and class acquired at
different times. A strict hierarchy is applied to shares as follows:
•
Acquisitions on the same day
•
Acquisitions within the following 30 days provided the purchaser is UK resident
•
Acquisitions in the share pool
•
Acquired more than 30 days after the acquisition
Other matters
•
A bonus issue of shares of the same class is treated as acquired on the original date. No acquisition
cost as shares issued free.
•
Rights issue - Additional shares come at an additional cost. The value of the new shares and their cost
is added to the share pool.
•
Takeovers - No chargeable disposal where investor receives shares in a new company in exchange for
shares in the company being acquired. New shareholding is treated as if acquired at same time/price
as original.
•
Scrip or stock dividend is paid by company as additional shares – these are treated as new acquisitions.
Employee share schemes
Employees, who acquire shares under both approved and unapproved employee share schemes on same
day and dispose of some, can elect that the shares acquired under the non-approved scheme are treated
first.
Election enables these larger gains are taxed later than smaller gains on unapproved scheme shares.
Election must be made by 1 year after 31 January following end of tax year in which first disposal took place
and applies to all subsequent disposals.
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Calculating gains on life policies
Life policies are usually CGT exempt. But may be liable if sold to 3rd party. i.e. as a Traded Endowment
Policy (TEP).
Where a policy is subject to CGT, the gain is calculated by deducting the acquisition cost from proceeds of
disposal if acquired since 31 March 1982, or market value at that time if the policy was held then.
•
Incidental costs of acquisition or disposal (for example, legal fees) are allowed, as are premiums paid by
assignee since 1982 or acquisition (whichever later)
•
Acquisition cost is the purchase price paid for policy
•
Disposal proceeds are the sum assured, surrender value or market value
•
Disposal proceeds of a deferred annuity are market value of future payments
•
A chargeable event for income tax could also be a disposal for CGT:
-
Any amount charged to income tax is deducted from disposal proceeds (double taxation)
-
Could mean no CGT liability
-
When disposal results in loss, allowable loss is restricted to excess of acquisition costs of person
making disposal over the total payment received for the disposal
CGT on life policies most commonly arises with second-hand policies, when the buyer.
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Revision exercises
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Questions
Complete the statements
1.
A CGT disposal between spouses is a __ ____ __ ____ disposal.
2. If someone does not use their full annual CGT exemption in one year they ______ carry it forward to
the next year.
3. Capital Gains Tax is charged at two rates on non-residential property - __% or __%.
4. Peter acquired a valuable painting on 1 April 1977. If he sells it this year the base cost is deemed to be
the ______ _____ on ____ _____ ____.
5. Business Asset Disposal Relief (formerly entrepreneur’s Relief) is limited to ___ _____ __ million of
________ gains
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Questions
Answer the following questions
1.
How are gains (on non-residential property) liable to CGT generally reported to HMRC?
2. Janice made a gain of £20,000 on her shares which was liable to CGT in the tax year 2024/25. When
must she pay the tax resulting from the gain?
3. Prior to selling her principal private residence this year Alex owned the property for 15 years. During
that time she did not occupy the property for the last 5 years when she lived with her partner. If the gain
on the sale of the property was £100,000, what proportion of the gain is exempt from CGT?
4. By what means can a couple be treated for CGT purposes as holding joint property in un-equal shares?
5. How can a disposal not at arms-length occur?
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Question answers
Answers - Complete the statements
1.
A CGT disposal between spouses is a no gain no loss disposal.
2. If someone does not used their full annual CGT exemption in one year they cannot carry it forward to
the next year.
3. Capital Gains Tax is charged at two rates on non-residential property - 10% or 20%.
4. Peter acquired a valuable painting on 1 April 1977. If he sells it this year the base cost is deemed to be
the market value on 31 March 1982.
5. Business Asset Disposal Relief (formerly entrepreneur’s Relief) is limited to the first £1million of
lifetime gains.
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Question answers
Answers - Answer the following questions
1.
How are gains (on non-residential property) liable to CGT generally reported to HMRC?
•
As part of self-assessment on the tax return
2. Janice made a gain of £20,000 on her shares which was liable to CGT in the tax year 2024/25. When
must she pay the tax resulting from the gain?
•
31 January 2026 – i.e. 31 January following the end of the tax year in which the gain was made
3. Prior to selling her principal private residence this year Alex owned the property for 15 years. During
that time she did not occupy the property for the last 5 years when she lived with her partner. If the gain
on the sale of the property was £100,000, what proportion of the gain is exempt from CGT?
£100,000 (total gain)
x
129 months (period of occupation)
180 months (total period of ownership)
= £71,666.67
4. By what means can a couple be treated for CGT purposes as holding joint property in un-equal shares?
•
By ownership as tenants in common in declared un-equal shares
5. How can a disposal not at arms-length occur?
•
Where the disposal is between individuals with a close connection
•
Deliberate sale at undervalue or a gift between friends
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Mock questions
1.
Avtar decides to gift his business to his son so that he may retire from day to day activities.
Which relief may be suitable to avoid any immediate liability to CGT for Avtar?
A - Business Asset Disposal relief
B - Holdover relief
C - Business roll-over relief
D - Reinvestment in EIS shares
2.
Roger has already made gains exceeding his CGT annual exemption for the tax year 2024/25,
and then sells a piece of jewellery for £5,500 making a £4,000 gain. As a higher rate tax payer,
what is his liability to CGT?
A - £0
B - £800
C - £1,120
D - £1,600
3.
Which of the following is not an exempt asset for CGT purposes?
A - Lottery winnings
B - Private motor vehicle
C - Gilts
D - A chattel
4.
Mandy has just bought a second home. For CGT purposes she must elect which is her
principal private residence, and ...
A - This must be done within 6 months of purchase of the 2nd home
B - The election cannot be changed
C - The election can be changed but cannot be backdated more than 2 years
D - This must be recorded with the land registry
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Mock questions
5.
Imran is selling his buy to let property. As part of the calculation of the gain, he cannot deduct
which of the following from the disposal proceeds?
A - Acquisition costs
B - Stamp duty paid at acquisition
C - Repair costs
D - Enhancement costs
6.
Lucy wants to invest in assets that will minimise her potential liability to CGT in the future.
Which of the following should she consider for this purpose? (Multiple response)
A - Private motor vehicles
B - National Savings Certificates
C - Shares in an incentive scheme run by her employer
D - Antique jewellery
7.
Which of the following reliefs may be available to Jason who has made a chargeable gain on
the sale of his business at ‘arms-length’ in the tax year 2024/25? (Multiple response)
A - Business Asset Disposal Relief
B - Holdover relief
C - Business roll-over relief
D - Reinvestment in EIS shares
8.
Which of the following conditions apply to business rollover relief? (Multiple response)
A - The company or business must be trading
B - The assets sold must be owned by a company director
C - The sale price must be reinvested in new assets for use in the trade
D - New assets must be bought in the period 1 year before and 3 years after the disposal of the
old assets
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Mock question answers
Standard format
1. B
2. A
3. D
4. C
5. C
Multiple response
6. A B C
7. A D
8. A C D
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