capital gains tax – individuals – reliefs

Chapter 14

CAPITAL GAINS TAX – INDIVIDUALS – RELIEFS

1 Entrepreneurs’ relief

1.1 Introduction• Thisreliefisavailableforindividualsdisposingofabusinessorpartofabusiness.

• Thereliefcoversthefirst£10mofqualifyinggainsthatanindividualmakesduringtheir lifetime. Thisgainqualifyingistaxedatalowercapitalgainstaxrateof10%regardlessofapersonstaxableincome.

1.2 Conditions(a) Theassetsmusthavebeenownedforoneyearpriortothedateofdisposal

(b) Thereliefisavailableon:

x Adisposalofthewholeorpartofabusinessrunasanunincorporatedbusiness(soletraderorpartnership).Thereliefisnotthereforeavailableifatradersimplydisposesofanassetthatisusedinthetrade.Theassetsmustbeusedforthepurposeofthebusiness,sothereliefisnotavailableoninvestments.

x Individualbusinessassetsoftheindividuals’orpartnerships’tradingbusinessthathasnowceased.Notethedisposalofassetsmusttakeplacewithinthreeyearsofthecessationoftrade.

x Thedisposalofsharesinatradingcompanywheretheindividualhasatleasta5%shareholdinginthecompanyANDisalsoanemployee(parttimeorfulltime)ofthecompanyforthe12monthspriortodisposal.Thereisnorestrictionofthereliefifthecompanyownsinvestments.Thecompanyiseitheratradingcompanyoritisnot,thereisnoapportionmentofthegaineligibleforrelief.

1.3 Time limit for claimThereliefmustbeclaimedwithin12monthsofthe31Januaryfollowingtheendofthetaxyearinwhichthedisposalismadefor2014/15by31January2017

ExamplE 1Daisydisposedofthefollowingassetsin2014/15On30September2014DaisysoldabusinessthatsheranasasoletradersinceFebruary2008.Thesaleresultedinthefollowingcapitalgainsandcapitallosses

Goodwill 250,000Factory 320,000Warehouse (90,000)

InDecember2014Daisyalsosolda20%shareholdinginBedLtd,anunquotedcompany.DaisyhadbeenanemployeeofBedLtdfromthedatesheacquiredthesharesinJuly2009.Thegainarisingwas£370,000

Calculate Daisy’s Capital Gains Tax in 2014/15

89December 2015 Examinations Paper F6

http://opentuition.com/acca/f6/

1.4 Further points• Thegainsqualifyingforentrepreneurs’reliefmustbetakenintoaccountwhenestablishingwhichtaxrateappliestoother

capitalgainsinthetaxyear,inthattheyaredeemedtofirstlyuseanyamountofunusedbasicrateband.

• The annual exemption and any capital losses should however be deducted firstly from gains that do not qualify forentrepreneurs’reliefastheyaretaxedatahighercapitaltaxgainsrate(18%and/or28%)

• Theeasiestapproachindealingwithquestionsthatincludegainsqualifyingforentrepreneur’sreliefandgainsthatdonotqualifyistokeepthegainsseparate

ExamplE 2 AnnesoldhershareholdinginAnnielimitedfor£5,000,000in2014/15.Theshareshadcosther£500,000inJuly1991.Sheowned100%ofthesharesinAnnieLimitedandhadbeenafulltimedirectorsincethedateofacquisition.Shehasnotmadeanydisposalsqualifyingforentrepreneurs’reliefinthepast.Inadditionshesoldanantiquepaintingrealisingacapitalgainof£100,000.Annehadcapitallossesbroughtforwardof£25,000from2013/14andhertaxableincomefor2014/15was£18,000.

Calculate Anne’s capital gains tax for 2014/15 and state the due date for payment.

December 2015 Examinations Paper F6

Capital Gains tax – inDiviDuals – REliEfs Chapter1490

2 Replacement of business assets (Rollover Relief)

2.1 DefinitionAgainmaybe‘rolledover’ (deferred)where itarisesonthedisposalofabusinessassetwhosesaleproceedsarereinvestedinanotherqualifyingbusinessasset.

2.2 Qualifying assetsBoththeoldandnewassetsmustfallintooneofthefollowingcategories:

(a) Landandbuildings

(b) Fixedplantandmachinery

Boththeoldandnewassetsmustbeusedinthebusiness.

2.3 The relief(a) Thegain isnottaxedimmediatelybut ispostponeduntil thetradermakesadisposalofthereplacementassetwithout

furtherreplacement.

(b) Thepostponementisachievedbydeductingthegainmadeontheoldassetfromthecostofthenewone.

(c) Wherethedisposalproceedsoftheoldassetarenotfullyreinvested,thesurplusretainedreducestheamountofcapitalgainthatcanberolledover.

(d) Thereplacementassetmustbeboughtintheperiod12monthsbeforeto36monthsafterthedisposaloftheoldasset.

(e) Rolloverreliefisavailableonthesaleofanindividualassetsoentrepreneurs’reliefwouldnotnormallybeavailable.

However, ifthewholebusinessissoldandrolloverrelief isclaimedonpartofthegains-anyremaininggainscouldbeeligibleforentrepreneurs’relief.

(f) Aclaimmustbemadewithin4yearsfromtheendofthetaxyearinwhichthedisposaloccurred.Fordisposalsin2014/15by5April2019.

ExamplE 3 JonespurchasedapropertyforuseinhisbusinessinMarch1990for£250,000.InAugust2014hesoldthepropertyfor£300,000andspent£320,000inJuly2014onanewbusinessproperty.

Calculate the gain to be deferred and the base cost of new asset.



ExamplE 4 JeromeboughtafactoryinJune1991for£680,000.InAugust2014wishingtomovetoamoreconvenientlocation,hesoldthefactoryfor£800,000.HemovedintoarentedfactoryuntilJanuary2015whenhepurchasedandmovedtoanewfactory.

Calculate the base cost of the new factory if it was purchased for

(a) £750,000

(b) £600,000

2.4 Non-business use(a) Fullrolloverreliefisonlyavailablewheretheassetbeingreplaced(theoldasset)wasusedentirelyforbusinesspurposes

throughoutthetrader’speriodofownership

(b) Wherethisconditionisnotmetrolloverreliefislimitedinproportiontothebusinessuse.

(c) Theassetistreatedastwoseparateassets,onethatqualifiesforrelief(thepartwhollyusedinthetrade)andanotherthatdoesnot.

ExamplE 5 JakepurchasedfactoryinMay1991for£540,000.Heletout15%ofthefactory.InJuly2014hesoldthefactoryfor£600,000andboughtanotherfactoryinAugust2014for£650,000claimingrolloverrelief.

(a) what is the chargeable gain arising on the disposal in July 2014?

(b) what is the base cost of a new factory?



2.5 Reinvestment in depreciating asset

2.6 Definition(a) Anassetwithanexpectedlifeofamaximum60yearsor

(b) Fixedplantandmachinery

Note:Youwillonlybeexaminedonfixedplantandmachineryandleaseholdpropertywithalifeof60yearsorless.

2.7 EffectIfthenewassetisadepreciatingasset.

(a) Thegaindeferredisnotdeductedfromthecostofthenewasset

(b) Insteaditispostponeduntiltheearliestof:(i) disposalofthenewasset(ii) thedatethenewassetceasestobeusedinthetrade(iii) 10yearsafterthenewassetwasacquired.

(c) Entrepreneurs’ relief is only available if any remaininggains after the relief are in relation to thedisposal of thewholebusiness.

ExamplE 6 CharlespurchasedafreeholdfactoryinMay1991for£300,000.InJune2013hesolditfor£500,000andinJuly2013boughta55yearleaseholdfactorybuildingfor£600,000.InFebruary2015Charlessoldtheleaseholdfactoryfor£640,000andmovedintorentedpremises.

Calculate the chargeable gains arising in 2014/15 assuming Charles claims to defer gains where possible.



2.8 Acquisition of a new non-depreciating asset(a) Ifanewnon-depreciatingassetisacquiredbeforethedeferredgainbecomestaxable,rolloverreliefcanbeclaimedinstead.

(b) Thecapitalgainontheoriginalassetisthenrolledoverintothenewnon-depreciatingassetandthedepreciatingassetis,effectively,ignored.

3 Relief for the gift of business assets

3.1 Nature of relief(a) Agiftissubjecttocapitalgainstax

(b) Thedonor(thepersonmakingthegift)istreatedasmakingadisposaloftheassetatmarketvalue.

Thedonee(thepersonreceivingthegift)istreatedasifhehadacquiredtheassetatmarketvalue.

(c) Whengiftreliefisclaimed,thedonor’sgainisdeferred.Thegainisdeductedfromthedonee’scost(marketvalue)

Thiscanbeillustratedasfollows:

gift

donor donee

proceeds MV cost MV

less:cost (x) less:gaindeferred (x)

gain x x

giftreliefclaimed

ExamplE 7 Davidboughtanassetfor£60,000inJune2012.InSeptember2014hegiftedittoTommy,whenitsmarketvaluewas£100,000.Theassetqualifiedforgiftrelief.

Assuming David and Tommy make a claim for gift relief calculate Tommy’s base cost of the asset.



3.2 Interaction with entrepreneurs’ relief(a) Whenaclaimforgiftreliefismade,thedonormayloseentitlementtoentrepreneurs’relief

(b) Iftheassetqualifies,giftreliefifclaimedisappliedbeforeentrepreneurs’relief.

3.3 Availability of the relief(a) Thereliefisonlyavailabletoindividualsnotcompanies

(b) Theclaimmustbemadebyboththedonoranddoneeandmustbemade4yearsfromtheendofthetaxyearinwhichthedisposaloccurred.Foragiftmadein2014/15theclaimmustbemadeby5April2019.

3.4 Qualifying assetsGiftreliefmaybeclaimedonthegiftofthefollowingassets:

(a) Assetsusedinthetradeof:

x thedonor(i.e.whereheisasoletrader)

x thedonor’spersonalcompany(thisextendstherelieftoassetsownedbytheindividualbutnotusedbyhimdirectlyfortradingpurposes).

(b) Sharesandsecuritiesoftradingcompaniesprovidedthatoneofthefollowingconditionsapply:

x thesharesorsecuritiesarenotquotedonarecognisedstockexchangeor

x thesharesorsecuritiesgiftedarethoseoftheindividual’spersonalcompany

Acompanyqualifiesasanindividual’spersonalcompanyifatleast5%ofthevotingrightsareownedbytheindividual

3.5 Sale at undervalue (a) Giftreliefisalsoavailableforsalesmadebelowmarketvalue,wherethereisanelementofgift.

(b) AnyproceedsreceivedinexcessoftheoriginalcostarechargeabletoCGTimmediately.

(c) Thegaindeferred,thegiftrelief,isreducedbythisamount

ExamplE 8Richardacquireda25%holdinginanunquotedtradingcompanyinMarch1991for£60,000.Heimmediatelybecameanemployeeofthecompany.InMarch2015hesoldthesharestohissonfor£85,000whentheirvaluewas£200,000.Richardandhissonclaimedreliefforagiftofabusinessasset.

(a) What is the chargeable gain, if any, incurred by Richard?

(b) What is the base cost of the shares for Richard’s son?



3.6 Assets not wholly used for trading purposes(a) Whereonlypartofanassetisusedfortradingpurposes,orwhereanassethasbeenusedforonlypartofthedonor’speriod

ofownership,thengiftreliefisrestricted.

(b) Wherethegiftissharesandtheindividualownsatleast5%ofthevotingrights,thenthecapitalgainontheshareseligibleforreliefisrestrictedbythefollowingfraction:

Marketvalueofcompany’schargeablebusinessassets(CBA)Marketvalueofcompany’schargeableassetsCA)

Note that this treatment is completely different to that which applies for entrepreneurs’ relief. Remember that forentrepreneurs’reliefpurposesthereisnoquestionofapportionment.Acompanyiseitheratradingcompany(andthereforequalifiesfortheentrepreneurs’relief )oritisnot.

3.7 Chargeable assets (CA) and chargeable business assets (CBA)(a) Anassetcannotbeachargeableassetwhereanygainthatmightariseonitsdisposalwouldnotbeachargeablegain.This

provisionrulesoutexemptassetssuchasmotorcars,butnotthosethatcouldproduceagainondisposalbutcurrentlystandatalossThiswillincludeallchargeableassetsheldbythecompany,boththoseusedinthebusinessandthoseheldasinvestments.

(b) Chargeablebusinessassetsarethoseusedforthepurposesofacompany’strade(includinggoodwillpurchasedbefore1/4/02,butexcludingshares,securitiesandotherassetsheldasinvestments).

ExamplE 9Johnowns100%ofthesharesinJohnLtdofwhichheisthemanagingdirector.On1December2014hemadeagiftofthesharestohisson,whenthemarketvalueoftheshareswas£800,000.Thesharescost£200,000inFebruary2001.AtthetimeofthegiftJohnLtdownedthefollowingassets.

£Freeholdtradingpremises 500,000Goodwill 200,000Investments 100,000Stockandworkinprogress 150,000Debtors 80,000Cash 170,000

1,200,000

Calculate John’s Capital Gains Tax on disposal of the shares in John Ltd and base cost of the shares for his son.



4 principal private Residence Relief

4.1 The sale of an individuals only or main private residence is covered by Principal Private Residence Relief (PPR). The relief also covers grounds up to half a hectare.Thereliefisavailableinfullifthetaxpayeroccupiedthepropertythroughouttheentireperiodofownership.Whereoccupationhasbeenforonlypartoftheperiod,aproportionofthegainiscoveredbytherelief

Gain×PeriodofoccupationPeriodofownership

4.2 There are however periods of absence which are deemed to be full occupation(a) Last18months-ifthepropertywastheindividualsmainresidenceatsomepointintime

(b) Anyperiodsduringwhichtheindividualwasrequiredbyhisemploymenttoliveabroad

(c) AnyperioduptofouryearsduringwhichtheindividualisrequiredtoliveelsewhereintheUKduetoemployment

(d) Uptothreeyearsforanyreason.

Points(b–d)mustbeprecededandfollowedbyperiodsofactualoccupation,butforpoints(b–c)iftheindividualcouldnotreoccupyduetothetermsofemploymentrequiringthemtoworkelsewhere,byconcession,theconditionofactualoccupationfollowingtheperiodofabsenceisnotapplied.

ExamplE 10Davidboughtahouseon1April1986for£10,000.helivedinituntil30June1986.Heworkedabroadfor2yearsandthenmovedbackintothehouseonhisreturnon1July1988.Helivedinthehouseuntil31December2002beforeleavingtoliveandworkelsewhereinUK.Daviddidnotreturntothehouseandthehousewassoldon31December2014for£150,000.

Calculate the chargeable gain arising.



4.3 Business use Wherepartofaresidenceisusedexclusivelyforbusinesspurposesthroughouttheperiodofownership,thegaininrelationtothatpartisnotcoveredbyrelief.

Thelast18monthsruledoesnotapplytothatpartunlessthebusinesspartwasatsometimeusedaspartoftheonlyormainresidence.

4.4 Letting reliefLettingreliefisavailabletocoveranygainnotcoveredbyPPRif:

(a) ownerisabsent(notcoveredbydeemedoccupationrules)andthepropertyisrentedout.

(b) partofthepropertyisrentedout,theremainingpartbeingoccupiedbythetaxpayer

Lettingreliefisthelowerof:

x PPRreliefgiven

x £40,000

x gainattributabletoletting

ExamplE 11Kenboughtahouseon1April1986for£30,000andoccupiedasfollows:1/4/1986–31/3/1988 livedinit1/4/1988–30/9/1993 travelstheworldandletsthehouse1/10/1993–31/3/2003 livedinit1/4/2003–31/3/2015 Movedoutofthehousetolivewithhisgirlfriendandthepropertywasempty.

Kensoldthehouseon31March2015for£250,000.

Calculate the chargeable gain arising.



You should now review the following part of the Finance Act 2014 technical article written by the F6 examining team: Capital Gains Tax section

You may now attempt Practice Questions 34 to 37




Chapter14100

capital gains tax – individuals – reliefs

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