Audley Financial Training AF1: Capital Gains Tax Tax year 2019/20 6 May 2019 Audley Financial Training

Audley Financial Training CGT: Need to know When does a CGT liability arise Exempt assets and disposals Basic calculation Treatment of losses Chattels Principle Private Residence Relief Share matching rules Other reliefs 6 May 2019 Audley Financial Training

Audley Financial Training Basic calculation Fred sold a painting for £200,000 He incurred auction fees of £15,000 He bought it for £80,000 and incurred costs of £8,000. This is his only disposal in 2019/2020 What is the taxable gain? 6 May 2019 Audley Financial Training

Audley Financial Training Sale Price £200,000 Less Sales costs £15,000 £185,000 Purchase Price £80,000 Plus purchase costs £8,000 £88,000 Chargeable gain £97,000 Less annual exemption £12,000 £85,000 6 May 2019 Audley Financial Training

Audley Financial Training What is the rate Her income was £41,000 What is the CGT liability?   6 May 2019 Audley Financial Training

Audley Financial Training And the answer is Income £41,000 Less PA £12,500 Taxable income £28,500 Higher rate threshold £37,500 Less taxable income Remaining basic rate band £9,000 Chargeable Gain £9,000 @ 10% £900 £75,000 @ 20% £15,000 £15,900 6 May 2019 Audley Financial Training

Audley Financial Training CGT Principles Income above HRT. Gain is taxed at 20% Income below HRT. Chargeable Gain does not take you into HRT rate is 10% Income below HRT. Gain is taxed at 10% & 20% 6 May 2019 Audley Financial Training

Audley Financial Training Dealing with losses Susan sold asset A for £25,000 having bought it for £8,000 In the same tax year she sold asset B for £15,000 having acquired it for £25,000. What is the chargeable gain? 6 May 2019 Audley Financial Training

Loss and Gain in same tax year Sale Price Asset A £25,000 Acquisition Price Asset A £8,000 £17,000 Sale Price Asset B £15,000 Acquisition Price Asset B Loss (£10,000) Chargeable gain £7,000 6 May 2019 Audley Financial Training

Audley Financial Training Dealing with losses 2 An asset was sold for £20,000 having bought it for £4,000 There is an available carried forward loss of £15,000 What is the CGT liability How much can be carried forward to 20/21 6 May 2019 Audley Financial Training

Audley Financial Training Carried Forward Loss Sale Price asset £20,000 Acquisition Price asset £4,000 Net Gain £16,000 Less Annual exemption £12,000 Chargeable gain Carried forward loss £15,000 Offset Amount due to CGT Nil Loss carried forward £11,000 6 May 2019 Audley Financial Training

Audley Financial Training How to deal with losses Loss and Gain in same tax year Deduct loss before annual exemption Loss carried forward from previous year Deduct loss after annual exemption You cannot offset losses on exempt assets 6 May 2019 Audley Financial Training

Property and non property losses Tamsin makes a gain of £200,000 on a BTL property, a loss of £40,000 and a gain of £80,000 on some shares Since residential property is taxed at a higher rate it is better to offset the £40,000 loss against the property gain. This is allowed She can also offset the annual exemption against property gain. Her gain is £200,000 less £40,000 less £12,000 = £148,000 @ 28% = £41,440 Plus £80,000 @ 20% = £16,000 6 May 2019 Audley Financial Training

Audley Financial Training BUT Dave has an income of £40,000 (£10,000 less than the HRT) He has net gains of £22,000 on a BTL property and £10,000 on shares. The non-property gain must be used first against the remainder of his basic rate band. His liability will be: £10,000 @ 10% = £2,000 £22,000 @ 28% = £6,160 6 May 2019 Audley Financial Training

Audley Financial Training Chattels Tangible & moveable object If sale proceeds less than £6,000 they are exempt from CGT Gains can be restricted to 5/3 of (sale proceeds less £6,000) 6 May 2019 Audley Financial Training

Audley Financial Training Carol buys a painting for £1,000 and sells it for £9,000 Gain is £8,000 but chattels rule can be used 5/3 x (£9,000 - £6,000) = £5,000 But if the painting had been purchased for £5,000 you would use the normal calculation which would be £4,000 6 May 2019 Audley Financial Training

Principle Private Residence Relief 6 May 2019 Audley Financial Training

Audley Financial Training Principles of PPR An individual’s main residence is exempt from CGT. It gets 100% PPR Any other property such as a buy to let or a holiday home will be subject to CGT. There is no PPR But sometimes it might qualify for PPR for some of the time it was owned but not for others Establishing the amount of PPR and therefore the amount of CGT is the key skill in answering any question. 6 May 2019 Audley Financial Training

Audley Financial Training You own two houses You can only claim one house to be your PPR Possible 12 month exception for “overlap” periods If you have two houses you must nominate which one is your PPR within two years of acquiring second home If not HMRC will nominate Where do you spend most of your time? Where is your mail addressed to? Where are you registered to vote? Where is the house in relation to your work? 6 May 2019 Audley Financial Training

Audley Financial Training The Timeline Split the period of ownership into different periods. Peter bought his house on August 1 2004 for £150,000 On August 1 2013 he moved in with his girlfriend He sold the property on August 1 2019 for £310,000 6 May 2019 Audley Financial Training

Audley Financial Training 1/2/18 to 1/8/19 Last 18 months Gets PPR as at some point it was his PPR 1/8/04 to 1/08/13 108 months. Gets PPR as living there 1/8/13 to 31/1/18 54 months Does not get PPR Total period of ownership 180 months. 126 months qualify for PPR 6 May 2019 Audley Financial Training

Audley Financial Training Calculating the gain Gain is £160,000 Total period of ownership 180 months, 126 months get PPR Amount of PPR is £160,000 x 126/180 = £112,000 Chargeable gain is £160,000 less £112,000 = £48,000 Annual exemption is deducted to give £36,000 £36,000 @ 28% = £10,080 6 May 2019 Audley Financial Training

Audley Financial Training 1/8/16 to 1/8/19 Last 36 months exempt as moving into a care home Gets PPR as at some point it was his PPR 1/8/14 to 31/7/16 24 months Does not get PPR 1/8/05 to 1/08/14 108 months. Gets PPR as living there Total period of ownership 168 months. 144 months qualify for PPR 6 May 2019 Audley Financial Training

Audley Financial Training The three year rule You can be absent for up to three years for any reason provided immediately before and after the absence you were living in the house This is cumulative Wendy went to live temporarily with her father after he had a stroke. She was there for two and a half years before moving back This period would get PPR even though she wasn’t living there. 6 May 2019 Audley Financial Training

Other “exempt” periods Absence for up to four years because of UK work provided immediately before and after absence it was occupied by the owner Indefinite period if absent because of working overseas again if before and after absence it was occupied by the owner 6 May 2019 Audley Financial Training

Audley Financial Training The one PPR rule John bought his house on February 1 1991. On August 1 2001 he married Kate and together they bought a house. This house would become his PPR from August 1 2001 John rented out his house so it is not his PPR In 2011 they divorced and on August 1 2011, John moved back to his own home From 1/8/2001 to 1/8/2011 it wasn’t his PPR but he cannot get relief under the 3 year rule as during that period another property was his PPR 6 May 2019 Audley Financial Training

Audley Financial Training Lettings Relief Only available if at some time the property was your PPR and was let commercially whilst you were absent Relief is the lesser of £40,000 The amount of PPR relief The gain made whilst the property was let and did not qualify for PPR Deducted after chargeable gain but before annual exemption Lettings relief cannot create a loss 6 May 2019 Audley Financial Training

Lettings Relief Example Ben owned a property for 20 years (240 months) After 10 years he moved out and the property was let out for the final 9 years before being sold to the then sitting tenants First 10 years get PPR plus last 18 months, 138 months Gain was £200,000 so PPR relief is £200,000 x 138/240 = £115,000 More than £40,000 so we cannot use that figure 6 May 2019 Audley Financial Training

Gain whilst let and did not qualify for PPR Property was let for 108 months but last 18 months got PPR Therefore 90 months are eligible for lettings relief £200,000 x 90/240 = £75,000 Therefore the lettings exemption will be £40,000 If it had been let for 24 months (which didn’t overlap with the last 18 months) the relief would be: £200,000 x 24/240 = £20,000 6 May 2019 Audley Financial Training

How to show in a calculation Chargeable Gain £85,000 Less Lettings Relief £40,000 £45,000 Less Annual Exemption £12,000 Taxable gain £33,000 6 May 2019 Audley Financial Training

Audley Financial Training In the exam Always draw a time line Remember the “top and tail” approach Watch out for the lettings relief Remember that the rate will either be 18% or 28% 6 May 2019 Audley Financial Training

Audley Financial Training Share Matching Rules 6 May 2019 Audley Financial Training

Audley Financial Training Why we need these rules 6 May 2019 Audley Financial Training

Audley Financial Training Shares are different Shares aren’t numbered Neither are unit trusts or OEICS When a share is sold we need to know its acquisition price If a block of shares was purchased on one particular day this is straightforward 6 May 2019 Audley Financial Training

Audley Financial Training If he sold 5,000 shares he would have received £12,500 He had sold half his holdings so the acquisition price would be £5,000 and the gain would be £7,500 Barry bought 10,000 shares in ABC PLC for £10,000. He then sold them all for £25,000 ten years later so his gain is £15,000 6 May 2019 Audley Financial Training

Audley Financial Training Clara bought shares in the same company at different dates as follows: Transaction date Number of Shares Acquisition price 1/10/09 3,000 £5,250 1/11/12 3,500 £7,000 1/12/14 1,500 £5,000 12/8/16 4,000 £12,000 Total 12,000 £29,250 She sells 5,000 shares on 1/10/19 for 400p a share giving her £20,000 Which shares did she sell and what was the gain? 6 May 2019 Audley Financial Training

Audley Financial Training Transaction date Number of Shares Acquisition price 1/10/09 3,000 £5,250 1/11/12 3,500 £7,000 1/12/14 1,500 £5,000 12/8/16 4,000 £12,000 Total 12,000 £29,250 £29,250/12,000 = 243.75p 5,000 @ 243.75p = £12,187 Gain is £20,000 less £12,187 = £7,813 6 May 2019 Audley Financial Training

Audley Financial Training Share pooling Technical term is a Section 104 holding. Each time you buy a share in a a company you create a new pool. Bill has holdings in five companies, so he has five different share pools When shares in the same company are purchased on different dates at different prices The acquisition price of every share in the pool is the amount paid for all the shares divided by the number of shares 6 May 2019 Audley Financial Training

Audley Financial Training Let’s return to Clara She had 12,000 shares in her pool. She sold 5,000 so the pool reduced to 7,000 shares If she then bought a further 12,000 shares the pool would increase to 19,000 shares What’s the effect of these transactions on the acquisition price of the pool? When shares are sold they are taken from the pool but the average price remains the same. When new shares are purchased, they enter the pool and change the average price 6 May 2019 Audley Financial Training

Taking shares out of the pool 4,000 shares sold for 120p a share 10,000 shares @40p a share 6,000 shares @40p a share Taking shares out of a pool will not change the acquisition price of the remaining shares Gain is £4,800 less £1,600 = £3,200 6 May 2019 Audley Financial Training

Adding shares to the pool 4,000 shares purchased for 120p a share Adding shares to the pool changes the average price per share for further disposals 10,000 shares @40p a share In this case 10,000 x 40p = £4,000 4,000 x 120p = £4,800 £8,800/14,000 = 62.85p 6 May 2019 Audley Financial Training

Sale first followed by repurchase 5,000 shares bought for 100p 4,000 shares sold for 120p a share 10,000 shares @40p a share New acquisition price 6,000 x 40p = £2,400 5,000 x 100p = £5,000 £7,400/11,000 = 67.28p 6,000 shares @40p a share 6 May 2019 Audley Financial Training

Purchase first followed by sale 15,000 shares @ 60p 5,000 shares bought for 100p 4,000 shares sold for 120p a share New acquisition price 10,000 x 40p = £4,000 5,000 x 100p = £5,000 £9,000/15,000 = 60p 11,000 shares @ 60p 10,000 shares @40p a share Gain on sale 4,000 x 120p = £4,800 4,000 x 60p = £2,400 £2,400 6 May 2019 Audley Financial Training

Using your annual exemption Gain £75K £125K Gain £65K £80K Gain £55K £70K £60K £50K Gain £45K 6 May 2019 Audley Financial Training

Audley Financial Training Bed and Breakfasting He decides to sell making a gain of £10,000 which is within his annual exemption Tom owns 20,000 shares that he bought for 50p (£10,000) Two weeks later he uses the sale proceeds to buy further shares at 105p a share. He believes this will be the new acquisition price but he is wrong They are currently trading at 100p. Tom believes the prospects are good and considers them a long term investment This is known as “Bed and Breakfasting” but would not be effective as the shares were repurchased within 30 days of the sale 6 May 2019 Audley Financial Training This Photo by Unknown Author is licensed under CC BY-SA

Audley Financial Training The 30 day rule Applies when shares in a company are sold and then repurchased with the aim of using up the annual exemption and resetting the acquisition price If the investor buys the same company’s shares more than 30 days after the sale the sold shares are taken from the pool and the purchased shares enter the pool and a new acquisition price is set If the investor buys them within 30 days of the sale, the sold shares are not taken from the pool nor are the purchased shares placed in the pool . The acquisition price for future sales remains the same 6 May 2019 Audley Financial Training

Audley Financial Training The 30 day rule 10,000 shares bought @ 96p POOL 10,000 shares @ 96p POOL 10,000 shares @ 50p Disposal 10,000 shares @ 100p 10,000 shares bought @ 96p 30 days 6 May 2019 Audley Financial Training

Audley Financial Training Repurchase after 30 days 20,000 shares @ 50p =£10,000 20,000 shares @ 90p =£18,000 A new pool is created that will be the new acquisition price November 1 Tom sells all these shares for 100p December 2 Tom repurchases 20,000 shares for 90p a share 6 May 2019 Audley Financial Training

Repurchase within 30 days The repurchased shares are matched with the sold shares 20,000 shares sold @ 100p =£20,000 20,000 shares @ 90p =£18,000 20,000 shares @ 50p =£10,000 November 1, Tom sells all these shares for 100p No shares are taken from the original pool therefore this remains the same for all future disposals November 14, Tom repurchases 20,000 shares for 90p a share 6 May 2019 Audley Financial Training

Buying back more shares than were sold within 30 days The pool is now 20,000 shares @ 50p 8,000 shares @ 80p Average price 58.86p 8,000 shares @ 80p = £6,400 12,000 of the new shares are matched with the sold shares and 8,000 shares are added to the pool 12,000 shares sold @ 100p =£12,000 12,000 shares @ 90p =£10,800 20,000 shares @ 50p =£10,000 November 1, Tom sells 12,000 of these shares for 100p 8,000 shares @50p = £4,000 November 14, Tom buys 20,000 shares for 80p a share 6 May 2019 Audley Financial Training

Repurchasing fewer shares within 30 days 10,000 of the new shares are matched with the sold shares but 6,000 are matched to original acquisition price 6,000 shares sold @ 100p = £6,000 6,000 shares @ 50p = £3,000 20,000 shares @50p = £10,000 The pool is now 14,000 shares @ 50p Gain £3,000 November 1 , Tom sells 16,000 of these shares for 100p 10,000 shares sold @ 100p =£10,000 10,000 shares @ 90p =£9,000 10,000 shares @ 50p = £5,000 Gain £1,000 November 14 , Tom buys 10,000 shares for 80p a share 4,000 shares @50p = £2,000 6 May 2019 Audley Financial Training

How to avoid the 30 day rule Pension ISA Like for Like 6 May 2019 Audley Financial Training

Audley Financial Training Entrepreneur’s relief Business Asset Rollover Relief Incorporation Relief Gift Holdover relief Reliefs 6 May 2019 Audley Financial Training

Entrepreneur’s relief Applies to the sale of a trading business owned as a sole trader or shares The seller must have owned the business or shares for at least two years before the sale This reduces the rate to 10% There is a lifetime allowance of £10 million 6 May 2019 Audley Financial Training

Selling shares in the business If shares are sold the seller must: have been an employee or office holder own at least 5% of the share capital and be beneficially entitled to either: to 5% of the sale proceeds had the whole of the ordinary share capital been sold on the date of disposal Or 5% of the profits and assets available to equity holders on a winding up of the company. 6 May 2019 Audley Financial Training

Audley Financial Training Alan has decided to sell his café. He operated as a sole trader The gain is calculated at £2,000,000 and this will be charged at 10% If he then starts a new business and some years later sells that, he only has £8,000,000 of entrepreneur’s relief available 6 May 2019 Audley Financial Training

Entrepreneur Investment Relief May be referred to as Investment or Investor’s relief Rate is 10% but no need to be an employee or office holder. No need to own at least 5% of the shares. It applies to the sale of shares in unlisted trading company The shares must be ordinary shares subscribed for and fully paid in cash and held for at least three years from 6 April 2016 There is a lifetime limit of £10 million 6 May 2019 Audley Financial Training

Business Asset Rollover Relief Uses the proceeds to buy larger premises No CGT on first sale Acquisition cost on sale of new premises will be acquisition price of first property Sells 6 May 2019 Audley Financial Training

Business Asset Rollover Relief Asset sold must be land or buildings, Fixed plant or machinery Sale 1 Year 3 Years 6 May 2019 Audley Financial Training

Audley Financial Training Incorporation Relief Applies when a sole trader (or partnership) turns the business into a limited company Technically this is a disposal so CGT would be payable. No CGT is payable at this time The value of the shares received at incorporation is deducted from the value of these shares when they are sold 6 May 2019 Audley Financial Training

Audley Financial Training Holdover relief If we don’t agree she will have to pay CGT and the acquisition price when we come to sell it will be £100,000. If we agree the donor will not pay CGT but the acquisition price when we come to sell will be £20,000 I have an asset worth £100,000 that I acquired for £20,000 that I am going to gift. If Holdover relief is available, rather than pay CGT I can ask the recipient to accept it at the acquisition price of £20,000 Here’s how it works I want to make a gift of an asset of £100,000. The gain is £80,000 so if I pass it on as a gift I am liable to CGT But if I give it into a trust I can ask the trustees to use holdover relief. If the trustees don’t agree the donor will have to pay the CGT. The trustees will have deemed to acquire it at £100k which they will use as the base price when they sell or dispose it But if they agree the donor won’t pay CGT but the acquisition price when the trustees sell it will be £20,000 Holdover Relief is only available in two circumstances: Business Holdover Relief Gift into a Trust 6 May 2019 Audley Financial Training

Gift Hold-Over Relief (Business) This applies when someone gives a business or shares (at least 5%) No CGT is payable The recipient pays the tax when they sell or dispose of the gift. It can also be claimed if the asset is sold for less than its market value Kim sells a shop worth £81,000 to his daughter for £40,000. He had purchased the shop for £23,000. He pays CGT on £17,000 (£40,000 less £23,000) Hold-over relief can be claimed on £41,000 which will be the acquisition value when his daughter sells it 6 May 2019 Audley Financial Training

Gift Hold-over relief (Trusts) Applies to lifetime gifts into all trusts other than a bare trust Trustees have to agree to accept hold-over Trustees can also apply holdover if they gift assets to a beneficiary Beneficiary accepts the asset at the trustees’ acquisition price or even settlor’s acquisition price 6 May 2019 Audley Financial Training