Lecture 6- Capital gains tax

Capital gains tax- Tax levied on [blank_start]capital gains[blank_end]. Liability to tax only arises when [blank_start]asset[blank_end] is [blank_start]disposed[blank_end] of

Capital gain- [blank_start]Increase[blank_end] in value of an [blank_start]asset[blank_end] on its [blank_start]disposal[blank_end] by an individual or company

Capital gains tax was introduced in [blank_start]1965[blank_end]. In [blank_start]1982[blank_end], there was amendment to allow for effects of [blank_start]inflation[blank_end] on gains by way of [blank_start]indexation[blank_end]. In [blank_start]1985[blank_end], there was slight amendment to [blank_start]indexation[blank_end]. In [blank_start]1988[blank_end], tax was rebased so that gains before [blank_start]31/03/1982[blank_end] would no longer be [blank_start]liable[blank_end] to capital gains taxation. In [blank_start]1992[blank_end], all various legislation relating to capital gains tax was brought into [blank_start]Consolidation Act[blank_end]. In [blank_start]1998[blank_end], indexation was abolished for [blank_start]individuals[blank_end] but kept for [blank_start]companies[blank_end] (taper relief formed for [blank_start]individuals[blank_end]- only lasted for 10 years until [blank_start]01/04/2008[blank_end]). Instead, there was general rate of tax on gain of [blank_start]18%[blank_end]. On [blank_start]23/6/2010[blank_end], there was additional rate of [blank_start]10%[blank_end] if you are higher rate taxpayer. On [blank_start]06/04/2016[blank_end], general rate reduced to [blank_start]10%[blank_end] & [blank_start]20%[blank_end], except for sales of residential property, which remains at [blank_start]18%[blank_end] or [blank_start]28%[blank_end]

[blank_start]Individuals[blank_end] ([blank_start]resident[blank_end] in UK) are liable to capital gains tax. If you aren't [blank_start]resident[blank_end] in UK, you are liable to capital gains tax at present on [blank_start]property[blank_end]

[blank_start]Business partners[blank_end] are liable to capital gains tax. [blank_start]Partner[blank_end] owns proportion of assets held within [blank_start]partnership[blank_end] & would be liable to capital gains tax if part of assets are [blank_start]sold[blank_end]

[blank_start]Trustees[blank_end] (look after assets in [blank_start]trust[blank_end]) are liable to capital gains tax

[blank_start]Personal representatives[blank_end] (in position of winding up person's [blank_start]estate[blank_end]) are liable to capital gains tax

[blank_start]Pension[blank_end] schemes, [blank_start]charities[blank_end] & [blank_start]companies[blank_end] itself are not liable to capital gains tax

All [blank_start]assets[blank_end] are liable to capital gains tax unless they are specifically exempt such as [blank_start]principle private residence[blank_end], motor [blank_start]cars[blank_end], [blank_start]chattels[blank_end] (sold for < £6,000), wasting [blank_start]chattels[blank_end], winnings from [blank_start]pools[blank_end] or [blank_start]lottery[blank_end], [blank_start]ISA[blank_end] holdings & [blank_start]shares[blank_end] acquired from employer via employee shareholder status

Chargeable disposals include sale of an [blank_start]asset[blank_end] but also sale of [blank_start]part[blank_end] of chargeable asset, [blank_start]gift[blank_end] of chargeable asset, [blank_start]loss/destruction[blank_end] of chargeable asset & [blank_start]receipt[blank_end] of capital sum [blank_start]derived[blank_end] from chargeable asset

Non-chargeable disposals include gifts to [blank_start]charity[blank_end], gifts on [blank_start]death[blank_end] & gifts from [blank_start]husband[blank_end] to [blank_start]wife[blank_end] or vice versa)

Although [blank_start]sales[blank_end] of capital assets can occur at any time for individuals, all [blank_start]sales[blank_end] or [blank_start]disposals[blank_end] or [blank_start]chargeable[blank_end] events for capital gains tax are combined within tax year. You would work out [blank_start]separate[blank_end] capital gain or loss for each [blank_start]sale[blank_end] or [blank_start]gift[blank_end] & [blank_start]aggregate[blank_end] them to arrive at total gain or loss within tax year. Net gain during year liable to [blank_start]capital gains[blank_end] tax & net loss, can be carried [blank_start]forward[blank_end] & set against future [blank_start]gains[blank_end] in future tax years

Once you have calculated [blank_start]aggregate[blank_end] gain for year, you deduct [blank_start]annual exemption[blank_end] (£12,300). This gives [blank_start]chargeable gains[blank_end] for year

Losses during year gave to be deducted from [blank_start]gains[blank_end] during same year but losses brought forward are only utilised to [blank_start]reduce[blank_end] net gain for year down to amount equal to [blank_start]annual exemption[blank_end] if there are enough [blank_start]losses[blank_end] to do so

Losses for individual in year of [blank_start]death[blank_end] (any sales from 6th April to date of their death) will be [blank_start]taxed[blank_end] in usual way. There is no possibility of carrying loss [blank_start]forward[blank_end] so loss in year of [blank_start]death[blank_end] can be carried back for [blank_start]3[blank_end] years & will be utilised under [blank_start]LIFO[blank_end] basis

Losses to [blank_start]connected[blank_end] persons can only be set against future [blank_start]gains[blank_end] on disposal to [blank_start]same[blank_end] person

Losses are not allowed if [blank_start]deemed[blank_end] to be as a result of arrangements made by [blank_start]taxpayer[blank_end] to [blank_start]artificially[blank_end] create loss

If there is sale to connected parties, [blank_start]disposal value[blank_end] for capital gains tax will be [blank_start]market value[blank_end] at that date. This is because connected parties are [blank_start]spouse[blank_end]/civil partners, [blank_start]siblings[blank_end], direct [blank_start]ancestors[blank_end] & direct [blank_start]descendants[blank_end], [blank_start]spouse's[blank_end] relatives & their [blank_start]spouses[blank_end] & business [blank_start]partners[blank_end] & business [blank_start]partners[blank_end] spouses & relatives. Therefore, you are more likely to sell at [blank_start]undervalue[blank_end] to these people or make [blank_start]gift[blank_end]

Market value of [blank_start]share[blank_end] for capital gains tax is lower of [blank_start]average of marked bargains[blank_end] & [blank_start]quarter up[blank_end]

Chattel- [blank_start]Tangible movable[blank_end] property such as [blank_start]furniture[blank_end], [blank_start]machinery[blank_end], [blank_start]pictures[blank_end], etc

Wasting asset- Asset with an expected life [blank_start]< 50 years[blank_end]

Wasting chattel- [blank_start]Tangible movable[blank_end] property with an expected life [blank_start]< 50 years[blank_end]

General exemption for chattels is if sold for < or = £6,000 gain is [blank_start]exempt[blank_end]. £6,000 is [blank_start]gross[blank_end] disposal value. If sold for > £6,000, maximum gain is [blank_start]5/3 *[blank_end] (proceeds- £6,000). If bought for > £6,000 & sold for < £6,000, calculate [blank_start]loss[blank_end] as if proceeds is £6,000

Wasting chattels include [blank_start]yacht[blank_end], [blank_start]race[blank_end] horses, antique [blank_start]watches[blank_end], [blank_start]clocks[blank_end], vintage [blank_start]motor bikes[blank_end] & [blank_start]cars[blank_end]. All wasting chattels are [blank_start]exempt[blank_end]. Only time when wasting chattels will be liable to capital gains tax is if [blank_start]capital allowances[blank_end] had been claimed. If these items are sold for < cost, deduct [blank_start]proceeds[blank_end] from capital allowances pool but if sold for > cost, deduct [blank_start]original cost[blank_end] from capital allowances pool. [blank_start]Capital gain[blank_end] will be excess of proceeds over original cost

Other wasting assets include [blank_start]intangible[blank_end] assets such as [blank_start]copyrights[blank_end] or [blank_start]options[blank_end]. These are liable to capital gains tax but [blank_start]cost[blank_end] is written down on [blank_start]straight line[blank_end] basis over its life

Negligible value claim usually applies to [blank_start]shares[blank_end] so company has gone into [blank_start]receivership[blank_end]/[blank_start]liquidation[blank_end] but not yet complete (still own shares but they are worth nothing). Letter from [blank_start]liquidator[blank_end] person administering winding up to say you won't be getting anything for [blank_start]shares[blank_end]. You can claim that [blank_start]shares[blank_end] are worth nothing & can set this [blank_start]loss[blank_end] off against gains. If there are any [blank_start]proceeds[blank_end] from shares in subsequent years [blank_start]cost[blank_end] is treated as nothing

House you are living in is [blank_start]exempt[blank_end] from capital gains tax. You need to have actual [blank_start]residence[blank_end] (actually [blank_start]lived[blank_end] in house) however, there is exemption if you have to live in [blank_start]job related[blank_end] accommodation. You can only have [blank_start]one[blank_end] principal private residence at any [blank_start]one time[blank_end]. If you have more than [blank_start]one property[blank_end], you need to elect which is going to be your principle private residence. Also, you can only have [blank_start]one[blank_end] principle private residence per couple. Exemption includes [blank_start]garden[blank_end]

In some cases you can claim [blank_start]partial[blank_end] exemption for capital gains tax. You have to calculate what part is [blank_start]taxable[blank_end] & what part is [blank_start]exempt[blank_end], look at [blank_start]length[blank_end] of residence/ownership, ignore anything before [blank_start]31/3/1982[blank_end], last [blank_start]9[blank_end] months treated as if you were resident (changed to [blank_start]18[blank_end] months since April 2020). You can also claim [blank_start]deemed[blank_end] residence & treat those as if you are actually [blank_start]living[blank_end] there

Deemed residence includes any period of [blank_start]time[blank_end] when you are working [blank_start]abroad[blank_end]. You can also claim up to [blank_start]4[blank_end] years working elsewhere in UK. Also, you can claim any other absence of up to [blank_start]3[blank_end] years. To claim deemed residence, you need to have actual [blank_start]residence[blank_end] before & after deemed residence