1. F6 Taxation (UK)

2. 2 Section A: The UK tax system Section B: Income tax liabilities Section C: Chargeable gains Section D: Corporation tax liabilities Section E: Inheritance tax Section F: National insurance contributions Section G: Value Added Tax Section H: The obligations of tax payers and/or their agents Taxation (UK)

3. 3 Designed to give you the knowledge and application of: Section C: Chargeable gains C1. The scope of the taxation of capital gains C2. The basic principles of computing gains and losses C5. Gains and losses on the disposal of shares and securities C6. The use of exemptions and relief in deferring and minimising tax liabilities arising on the disposal of capital assets

4. 4 C6: Use of exemptions and relief in deferring and minimising tax liabilities arising on the disposal of capital assets  Explain and apply entrepreneurs’ relief as it applies to individuals. [2]  Explain and apply rollover relief as it applies to individuals and companies. [2]  Explain and apply holdover relief for the gift of business assets. [2]  Explain and apply the incorporation relief that is available upon the transfer of a business to a company. [2] Learning Outcomes

5. 5 Entrepreneurs’ relief 1.Entrepreneurs’ relief is available when an individual disposes of a business or part of a business. 2.The relief is available on the first £5 million of qualifying gains that a person makes during their lifetime. Hence, this limit is known as the lifetime limit. The £5 million limit is reduced every time an individual makes a qualifying gain. 3.The CGT is calculated normally at two rates: 18% and 28% depending upon the taxable income of an individual. But, the gains that qualify for entrepreneurs’ relief are taxed directly at the rate of 10% without taking into consideration the taxable income of an individual. 4.Conditions to qualify for this relief: a)the asset disposed of should have been owned for one year, prior to the date of its disposal b)the asset disposed of must be a qualifying asset throughout the one year period Refer to Example (John) on page 307

6. 6 Rollover relief  Rollover relief is available to companies and individuals.  Rollover relief: also known as replacement of business asset relief.  Capital gain is deferred where the disposal proceeds of the first asset are re-invested in a new asset.  The deferral is achieved by deducting the capital gain from the base cost of the new asset.  Not automatic, taxpayer has to claim this relief. Conditions 1.The old and the new asset must be qualifying business assets: a)Land and buildings b)Fixed plant and fixed machinery 2.The old and new assets do not need to be in the same category. 3.The purchase of the new asset must take place in the period one year before and three years after the disposal of the old asset. 4.The old and new assets must both be qualifying business assets and used for business purposes. Refer to Example (Victory Ltd) on page 310

7. 7 Holdover relief for the gift of business assets (gift relief) is only available to individuals. When an individual gives a business asset as an outright gift, or sells it at less than market value, disposal proceeds are taken to be market value, even though no proceeds are received. Holdover relief allows a capital gain on the gift of a qualifying asset to be deferred (held over). The relief operates by deferring the gain of the person making the gift by deducting it from the base cost (i.e. market value) of the person receiving the gift. Both the parties have to claim the relief. Assets qualifying for gift relief include the following: a) assets used for business purposes by a sole trader. b) shares in unquoted trading companies (any size of holding). c) shares in a personal company A personal company is a one where an individual can exercise at least 5% of the voting rights. It must be a trading company. Hold over relief Refer to Example (Jack) on page 314

8. 8 Incorporation relief  Incorporation relief is only available to individuals; either as sole traders or partnerships.  Individual is a sole trader and decides to incorporate the business.  Incorporation is achieved by transferring all assets of the sole trader’s business to the company (at market value) in exchange for shares in the company or a mixture of shares and cash (known as the ‘consideration’).  The value of the consideration will equal the total value of the sole trader’s business transferred to the new company.  The assets of the sole trader have therefore been disposed of, and capital gains may arise on some of those assets (those chargeable to capital gains tax). Conditions 1.The transfer must be of a business as a going concern. 2.All of the assets apart from cash must be transferred. 3.The consideration for the transfer must be wholly or partly in the form of shares. If all of the consideration received from the company is in the form of shares, all of the gains can be deferred. If only part of the consideration is in the form of shares, only part of the gains can be deferred: Continued…

9. 9  The balance of the gain is taxable.  The gain (or part of the gain) that may be deferred is deducted from the base cost of the shares.  If conditions are satisfied, incorporation relief can be claimed and given automatically. There is no need to apply for this relief. Refer to Example (Michael) on page 318 Continued…

10. 10 RECAP  Explain and apply entrepreneurs’ relief as it applies to individuals. [2]  Explain and apply rollover relief as it applies to individuals and companies. [2]  Explain and apply holdover relief for the gift of business assets. [2]  Explain and apply the incorporation relief that is available upon the transfer of a business to a company. [2]

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