1. Tax Lecture 3 Capital Gains Tax See chapters 6 & 7

2. 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

3. 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

4. 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

5. ‘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

6. 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

7. Example (country cottage) Consideration on disposal = 150,000 Less Cost of acquisition100,000 Incidental acquisition costs1,000 Extension28,000 Incidental disposal costs2,000 Total allowable expenditure131,000 Gain =19,000

8. Exemptions and reliefs See Introduction to Tax chapter 7 p 31

9. 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

10. Example p 32 Asset acquired August 1990 for £150,000 Enhancement expenditure January 1991 of £20,000 Sold June 2007 for £280,000

11. Unindexed gain Consideration received 280,000 Less –acquisition cost(150,000) –enhancement (20,000) –total (170,000) Unindexed gain110,000

12. Indexation allowance 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

13. 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

14. See example p 33 - 34 (follows on from indexation example) 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

15. 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.

16. Annual exemption Eg £16,167.50 brought forward Apply annual exemption £9,200 (Each taxpayer receives tax free gains) Leaves £6,967.50

17. 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?

18. Finishing off Assume higher rate taxpayer (ie at 40%) So £6,967.50 x 40% = £2,787 Tax to be paid is £2,787

19. 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%)

20. Answer 1.Consideration received 320,000 Less initial cost100,000 220,000 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

21. 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

22. Business Reliefs Introduction to Tax ch 7 page 37

23. 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

24. Example 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)

25. 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

26. 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)

27. 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

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