CALCULATING CAPITAL GAINS TAX Taxation of Chargeable Gains Act 1992 1 Identify chargeable disposal what activities trigger

r CGT?

STEPS 1-3, EACH ITEM SEPERATLY AND CHECK IF LL ELIGIBLE FOR CGT, THEY STATED THEM FOR A REASON!!! CGT is charged on the chargeable gains made by a chargeable person on the disposal of chargeable assets in a tax year. a. Chargeable person i. Any individual resident or ordinary resident in the UK. ii. Trustee charged on the trust that they administer. iii. Personal Representative who deals with property once person has died. iv. Individual partners of a company in respect of shares of partnership gains. v. Partnership: Retirement subject to CGT. New partner partners disposed of existing shares to new partner so subject to CGT. vi. NOT companies. vii. NOT between husband and wife. b. Disposal i. Sale (for cash). ii. Exchange (for another asset) iii. Gift (market value) iv. Death ONLY IF value increased since time of death c. Chargeable assets i. Tangible/intangible ii. Acquired or created iii. EXEMPT: Private motor vehicles. National savings certificates. Sterling. iv. NOT STOCK v. GOOD WILL APPLIES HERE!

Calculate the gain/loss a. If calculation loss, start with sale price and then minus aqusition and other expenditures etc. b. Proceeds of disposal (just the number, the explanation is above!) i. Sale/value price at disposal

LESS c. Allowable expenditures i. Costs incurred for disposal of asset ii. Initial expenditure iii. Subsequent expenditure

Any money spent enhancing the value of the asset NOT if income in nature e.g. redecoration

d. If there is a loss, can only be set against current year, until gains are zero, when zero that year then can be carried forward. i. Does not benefit from the annual exemption that year ii. Benefits from annual exemption when carried forward. Eg. Carried forward amount us used to reduce the gains to the level of annual exemption and remaming balance, if any, is carried forward again.

Apply reliefs a. Non-business assets 100% relief i. Principle private dwelling/main residence ii. Chattels wasting assets predictable life of 50 years or less non wasting assets disposal 6000 or less iii. Gifts government stocks iv. Spouse [a disposal between spouses (or civil partners) is deemed to be for such consideration as gives rise to neither a gain nor a loss The person disposing of the item is deemed to have made a gain of nil and so cannot use his annual exemption in the tax year of the disposal. The person receiving the item takes over the original acquisition cost for CGT purposes and when they sell that item, the original acquisition cost will be used, not the cost at the time of disposal.

b. Specific business reliefs i. Roll-over relief on replacement of qualifying business assets (TCGA1992 ss152159) Designed to encourage business to expand and grow by postponing CGT. Conditions 1. Land, buildings and goodwill qualifying assets, s155; 2. Assets must be used in trade of business; 3. Assets do not have to be in the same business; 4. Fixed plant and machinery are restricted if wasting assets s154; Not fixed if moveable/intended to enable changes to layout of workplace. 5. Can be owned by sole trader but must be used in his trade; 6. Can be owned by individual partner but must be used in partnership trade; 7. Can be owned by partnership but must be used in partnership trade; 8. Can be owned by individual shareholder (min. 5% ownership) but must be used in trade of the company; 9. Time limit must be reinvested within 1 year before or 3 years after; and 10. Company shares are NOT qualifying assets for relief (partnership shares do apply). Application 1. Cannot use annual exemption. 2. Roll over until asset is disposed of when disposed, the acquisition value will be treated as reduced by deducting the gain that was rolled over. 3. Cannot be used in conjunction with other reliefs. 4. Tax deferred 5. Gain is deducted from acquisition cost of replacement asset

ii. Hold-over relief when certain business assets are given away (TCGA 1992, s165 Sch 7) Individual disposes of business assets by way of gift by sale at undervalue, deferres CGT. Conditions 1. Only gift/gift element; 2. Both donee and doner must elect for the relief; and 3. Only the gain is held over Application 1. Chargeable gain calculated and deducted from market value = artificially low acquisition cost. i.e. Gain of X rolled over, when evaluating gain at disposal, the original value is reduced by X and then the gain is calculated. 2. If done dies without disposing of the asset, all gains accumulated will escape CGT. 3. Cannot be used in conjunction with other reliefs. 4. Cannot use annual exemption iii. Roll-over relief on incorporation of a business (TCGA 1992, s162) Where a business is transferred by a sole trader or an individual partner to a new or established company in return for shares in the company CGT deferred. Conditions 1. Business must remain ongoing albeit a different owner. 2. Whole gain can be rolled over only if full consideration is shares. 3. Business is transferred with all of its assets. Application relief 1. Gain deducted from acquisition cost. 2. When dispose of shares, their value will decrease by the amount that was gained originally. i.e. Gain of X rolled over, when evaluating gain at disposal, the original value is reduced by X and then the gain is calculated. 3. Can be used in conjunction with entrepreneurs relief and annual exemption. iv. Entrepreneurs relief Condition 1. Must be a qualifying business disposal 2. Sole trader or partnership interests: Disposal of whole or part of a business 1. Business/part is a going concern; OR 2. Assets disposed of following cessation of the business. Interest in the business must be owned 1. Throughout the period of 1 year ending with date of disposal; OR 2. Throughout the period of 1 year ending with cessation of the business. Disposal of sole trader or partnership interest, only assets used for the purpose of business carried on by the individual or partner are eligible for relief. 1. Excluded company shares and securities and other assets held as investments. 3. Company shares: Disposal qualifies if 1. It is a trading company and his personal company hold 5% shares and votes; AND 2. Is an employee or an officer. Conditions above must be satisfied:

1. Throughout the period of 1 year ending with the date of disposal; OR 2. Throughout the period of 1 year ending with the date of the company ceased to be a trading company. Definition of trading company 1. Must not have activities that includes to a substantial extent activities other than trading activities. 4. Associated disposals Assets owned by individual outside of business, used for purposes of the business 1. Partnership individual is a partner 2. Company individual has qualifying shares. Disposal of assets associated with qualifying disposal of individual interest in partnership/company shares Asset must be used throughout 1 year ending with the earlier of: 1. Disposal of interest/shares that is associated; OR 2. The cessation of the business if the partnership/company which used the asset. Application 1. Special tax rate of 10% 2. No more than 10 million per lifetime per individual 3. Must be made on/before 31 January following tax year of qualifying disposal 4. Can use annual exemption 10,600 do this first then apply relief. 5. Cannot use any other relief v. Enterprise Investment Scheme (EIS) TCGA s150C and Sch5B Designed to encourage investment in smaller companies. Condition 1. Certain asset-based activities are excluded share dealing, property development, farming, shipbuilding and coal and steel production. 2. Must not be connected with the company during 2 years before and 3 years after subscription. 3. Combined shareholding of investor and associate must not exceed 30% 4. Shareholder and associate not permitted to be paid employees or directors. 5. Can subscribe up to 1 million each tax year in ordinary shares 6. Must comply for next 3 years. Application 1. Gains on disposal exempt from CGT. 2. Loss on shares may be set against capital gains. vi. Seed Enterprise Investment Scheme Conditions same as EIS, but 1. Small start-up companies with 25 or less employees. 2. Assets of up to 200,000. 3. Maximum investment of 100,000. 4. Must comply for more than 3 years. Application 1. Exempt from CGT vii. Deferral relief on re-investing in shares in an EIS company Condition 1. When EIS shares are acquired 1 year before or 3 years after disposal. 2. Subscribe wholly for cash for shares in a company that qualifies as an EIS - see above definition of EIS.

Application 1. Unlimited deferral 2. Chargeable gain on disposal of asset deferred until disposal of the shares. 3. Deferred gain is taxed at rate applicable to the taxpayer in the tax year of the disposal of the EIS shares. 4. ONLY EXEMPT WHEN if held for 3 years and not connect to company, see above EIS relief.

viii. Venture Capital Trust Quoted company run by professional fund managers as a vehicle to hold shares in a range of unquoted trading companies which match the EIS criteria. Condition 1. Shares must be held for 5 years. 2. Maximum investment of 200,000. Application 1. CGT exempt. c. Other i. Bad bargain s286 Taxation of Chargeable Gains Tax connected persons test. 4 Aggregate gains and losses/deduct annual exemptions

a. Aggregate gains BUT keep gains qualifying for entrepreneurs relief separate. b. Deduct any losses for the tax payer in the best order for the tax payer (so if loss made, can set this against the items not getting taxed under entrepreneurs relief). c. Deduct annual exemption in the best order for the tax payer i. 10,600 Husband and wife both have an annual exemption each, can transfer assets to pay less tax. 5 Apply correct rates of tax CHECK if higher tax rate payer for income a. Check their income tax, whatever is under 34,370 can be taxed at 18% up to 34,370, anything over is taxed at 28% b. All gains qualifying for entrepreneurs relief 10% c. Basic rate threshold - 0 - 34,370 18% d. Exceed threshold 28% e. Those qualifying for entrepreneurs relief are taxed first. Instalment options a. Must be a gift b. Hold-over relief not available c. Land, controlling shareholding or shareholding where shares are unquoted When tax is payable a. 31 January the following year.