Tax Lecture 3
Capital Gains Tax
See chapters 6 & 7
The basics
• Tax arises on disposal of a capital
asset
• e.g. Buy holiday home for £100,000
• Sell it later for £150,000
• Capital Gain made of £50,000
• Various reliefs/exemptions may
reduce or eliminate the gain
• Taxed as if top slice of income
Must be a disposal
• Disposal = change of ownership or loss of
interest, e.g. by sale, exchange or gift
• If a part disposal, then apportion (p 27)
• Includes receiving capital sum as payment
for loss, damage, etc (p 28)
• Value shifting, e.g. changing rights on
shares
• Loss or destruction, or asset becomes
valueless
Chargeable asset
• All forms of property, whether in UK or
not
• Includes options and other incorporeal
property, foreign currency and created
property (eg goodwill)
• See list of exempt assets, especially
‘principal private residence’, betting
winnings, damages for personal injury,
chattels sold for less than £6,000
‘Gain’ = profit
• CGT is payable on the gain made on
disposal
• Gain = what it sold for less what it cost
• e.g. country cottage bought for
£100,000, sold for £150,000. Gain is
£50,000
• But can reduce gain by taking into
account incidental costs, cost of
improvements, etc
Calculating the gain (p 28)
• Consideration on disposal (or
market value)
• Less deductible expenditure
– Initial expenditure
• cost of acquisition
• incidental expenses
– Subsequent expenditure
• e.g.improvements
– Incidental costs of disposal
Example (country cottage)
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Consideration on disposal =
Less
Cost of acquisition
Incidental acquisition costs
Extension
Incidental disposal costs
Total allowable expenditure
Gain =
150,000
100,000
1,000
28,000
2,000
131,000
19,000
Exemptions and reliefs
• See Introduction to Tax chapter 7 p 31
Indexation p 31
• Allowance against effects of inflation
between 1982 and 1998 - frozen in 1998.
• All allowable expenditure can be indexed
from the date in which it was incurred (or
1982, if later) until 31.3.98
• The allowance is calculated by a formula
related to the Retail Price Index (RPI)
• In practice, now use Table - see front of
manual
Example p 32
• Asset acquired August 1990 for
£150,000
• Enhancement expenditure January
1991 of £20,000
• Sold June 2007 for £280,000
Unindexed gain
• Consideration received
280,000
• Less
– acquisition cost
– enhancement
– total
(150,000)
(20,000)
(170,000)
• Unindexed gain
110,000
Indexation allowance
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Unindexed gain =
110,000
Indexation allowance
Look in the table for the multipliers
1. Acquis’n cost:150,000 x 0.269 = (40,350)
2. Enhancement: 20,000 x 0.249 =
(4,980)
Taxable indexed gain =
64,670
Tapering p 33
• Replaces indexation as from 5.4.98
• (If asset owned before then both
indexation and tapering apply)
• Reduces the gain because only a
percentage of it is taxable
• Use tapering after indexation
• To calculate, need to work out number of
full years asset held since 6.4.98 then
refer to table
See example p 33 - 34
(follows on from indexation example)
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Indexed gain = £64,670
Asset sold June 2007 so
No. of years held since 5.4.98 = 9
If business asset, 9 years means 25%
chargeable
• Gain = £64,670 x 25% = £16,167.50
• If non-business, 10 years means 60%
chargeable
• Gain = £64,670 x 60% = £38,802.00
Note combined effect of
indexation and tapering
• Unindexed gain = £110,000
• After indexation = £64,670
• After tapering = £38,802.00 or
£16,167.50
• Note, too, how much more leniently
business assets are treated.
Annual exemption
• Eg £16,167.50 brought forward
• Apply annual exemption £9,200
(Each taxpayer receives tax free
gains)
• Leaves £6,967.50
How much tax?
• The gain is added to her income for
the year
• If the combined figure is within the
basic rate, the CGT rate is 20%
• To the extent that the gain falls
within the higher rate band, it is
taxed at 40%
• When payable?
Finishing off
• Assume higher rate taxpayer (ie at
40%)
• So £6,967.50 x 40% = £2,787
• Tax to be paid is £2,787
Practice question
• Sofia sold a beach house in Cornwall
in August 2007 for £320,000
(second home, non-business asset)
• She purchased it in February 2000
for £100,000
• Calculate the CGT payable on the
profit she has made, assuming the
gain all falls within the higher rate
band (40%)
Answer
1. Consideration received
Less initial cost
320,000
100,000
220,000
2. No indexation as no ownership prior to 5/4/98
3. Taper – 7 years non-business asset
75% of the £220,000 chargeable = 165,000
4. Less annual exemption £9,200 = 155,800
5. Calculate CGT – 40% of 155,800 = £62,320
Other general reliefs p 35
• Principle private residence - Must be
the taxpayer’s only or main
residence
Taxpayer may choose which
property is principal residence if
they own more than one
• Transfers between spouses (hold
over)
• Death of an individual
Business Reliefs
• Introduction to Tax ch 7 page 37
Replacement of business
assets
• E.g. sell business premises and buy new
premises (see list of assets covered)
• Any gain made on the sale is subject to
CGT, but no tax payable at that time
• Gain is ‘rolled over’ into new asset, and
CGT will be payable when new asset is sold
• Time limits: acquisition of new asset must
be within one year before or four years after
disposal of old asset
Example
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Premises bought in 1990 for £100,000
Sold 2002 for £150,000. Gain = £50,000
Buy new premises for £220,000 in 2002
Sell in 2006 for £300,000. Gain = £80,000
If first gain rolled over, no CGT in 2002
On sale of second premises, acquisition cost
deemed to be 220,000 - 50,000 = 170,000
• Gain = 300,000 - 170,000 = 130,000
• (Greater gain = more tax at that time)
Transfer business to
company
• Changing a sole trader or partnership
business into limited company
• Sell all assets to company in
consideration for shares in that company
• Disposal for CGT but no CGT payable
• Gain rolled over until shares in new
company sold
• Base value of shares reduced by amount
of held over gain
Entrepreneur relief
• Roll over CGT liability on any capital gain by
buying qualifying shares (with no financial
limit)
• Original gain rolled over until the shares are
sold
• Introduced to encourage wealthy individuals
to invest in growing private companies
• (see tax handbook for other types of CGT
relief and income tax relief under this head)
Gifts of business assets
s.165 TCGA 1992 pg 39
• NB CGT payable on sales at an
undervalue and gifts, e.g. parent gives
family business to children or sells it to
them for less than its market value
• But gain may be held over until transferee
disposes of the assets
• Works like other holdover/rollover reliefs:
the transferee’s acquisition cost is
reduced by the amount of the held over
gain
Next lecture
• Trading Income
• VAT
• Stamp Duty
• Chps 5, 11 and 12