ACCA F6 FA09 Study Text 2010
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Paper F6 (UK)
Taxation FA2009
CHAPTER
13
Capital gains tax
Contents
1 Overview of the taxation of chargeable gains of
an individual
2 The disposal of chargeable assets other than
shares and securities by an individual
3 Transfers between spouses
4 Part disposals
5 Wasting assets and chattels
6 Insurance and compensation
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Overview of the taxation of chargeable gains of an individual
The basic charging rules
The basis of assessment for capital gains tax
Calculating the capital gains tax liability of an individual
Proforma: capital gains tax computation
Calculating the capital gains tax liability
1 Overview of the taxation of chargeable gains of an
individual
1.1 The basic charging rules
Individuals are liable to:
income tax on their taxable income, and
capital gains tax (CGT) on their chargeable gains.
A chargeable gain arises if:
a chargeable person
makes a chargeable disposal
of a chargeable asset.
A chargeable person is someone who is resident or ordinarily resident in the UK in
the tax year in which the chargeable disposal is made. The meaning of residence
was covered in Chapter 2. The ordinary residence of an individual is the country in
which the individual normally lives. It is therefore possible for an individual to be
resident, but not ordinarily resident in the UK.
A chargeable disposal is the sale or gift of the whole or part of an asset.
CGT is only charged on the disposal of capital assets during lifetime. No CGT is
payable on the transfer of assets due to the death of an individual. Legacies on
death are therefore exempt disposals for the purpose of CGT.
Exempt assets
The following list shows the most common examples of exempt assets:
motor cars (including vintage cars and veteran cars)
goodwill
current assets (trade debtors, trading stock, cash).
If assets are exempt, they are ignored in the gain/loss computations:
Any gain on the disposal of an exempt asset is not taxable.
Any loss on the disposal of an exempt asset is not allowable.
Chapter 13: Capital gains tax
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1.2 The basis of assessment for capital gains tax
An individual is taxed on his taxable gains in respect of chargeable disposals made
in the tax year (i.e. 6 April to 5 April).
The date of disposal is the date on which the asset legally changes hands (i.e. when
the contract of sale is legally binding), which is not necessarily the same as the
payment date or delivery date.
1.3 Calculating the capital gains tax liability of an individual
The calculation of the capital gains tax liability of an individual is as follows:
Step 1: Calculate the gains or losses arising on the chargeable disposals. A
separate gain or loss calculation is needed for each chargeable asset that is
disposed of in the tax year.
Step 2: Calculate and deduct any specific reliefs, if applicable. Relief is
available to reduce or defer the tax on some gains if certain conditions are
satisfied.
Step 3: Aggregate the net chargeable gains arising in the tax year and deduct
allowable capital losses (if any).
Step 4: Deduct the annual exemption available to individuals. Every
individual can realise some gains tax-free each tax year. The 2009/10 annual
exemption is £10,100.
Step 5: Calculate the capital gains tax liability of the individual. Apply the rate
of 18% to calculate the liability to capital gains tax.
1.4 Proforma: capital gains tax computation
Where several assets are disposed of, steps (1) and (2) above are usually shown as
workings to an answer. These steps are explained in more detail later.
Steps (3) to (5) are shown in a summary capital gains tax liability computation as
follows:
Name of individual
Capital gains tax computation – 2009/10
£
Asset 1 - Gain after specific reliefs X
Asset 2 - Gain after specific reliefs X
Minus capital losses (X)
–––––––––––––––––––––––––––
Total net chargeable gains X
Minus annual exemption (note)
(10,100)
Taxable gains X
–––––––––––––––––––––––––––
Tax due at 18% X
Due date of payment under self assessment:
(31 January following the end of the tax year)
31 January 2011
Note
If the individual’s total net chargeable gains do not exceed £10,100, the unused
annual exemption is lost.
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1.5 Calculating the capital gains tax liability
Capital gains tax is levied on taxable gains at a flat rate of 18%, irrespective of the
level of the individual’s income.
Example
Terry realises taxable gains of £21,780.
Required
Calculate Terry’s capital gains tax.
Answer
Terry’s CGT liability is £3,920 (£21,780 at 18%).
Chapter 13: Capital gains tax
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The disposal of chargeable assets other than shares and securities
by an individual
Overview of the computation
Treatment of capital losses
Relief for trading losses against capital gains
2 The disposal of chargeable assets other than shares
and securities by an individual
2.1 Overview of the computation
The first step in calculating the capital gains tax liability of an individual is the
calculation of separate gains and allowable losses on every chargeable asset
disposed of in the tax year, after taking account of specific reliefs (e.g. rollover relief
and gift relief).
The proforma computation is as follows:
£
Gross sale proceeds X
Minus Incidental costs of sale (X)
Net sale proceeds X
Minus Allowable costs
Acquisition cost (including incidental costs) (X)
Enhancement expenditure (X)
Gain/(loss) before specific reliefs X/(X)
Minus Reliefs (if applicable) (X)
Gain after specific reliefs/(allowable loss) X/(X)
Gross sale proceeds or full market value
The gross sale proceeds are used as the starting point of the computation where the
asset is sold in a commercial arm’s length transaction.
However, the gross sale proceeds are replaced with the full market value of the
asset at the date of disposal if the asset is:
gifted, or
sold to anyone for less than its full market value, or
sold to a connected person.
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An individual is connected to the following persons:
spouse or civil partner (i.e. same-sex partner recognised by a civil ceremony
under the Civil Partnership Act)
direct relatives and their spouses (brothers, sisters, ancestors and lineal
descendants)
spouse’s direct relatives and their spouses
business partners and their spouses and direct relatives.
The net sale proceeds from the disposal of a chargeable asset is the amount of the
consideration received on the sale of the asset, after deducting any incidental selling
costs.
Allowable costs consist of:
the original purchase cost of the asset
any incidental acquisition costs (see below)
any enhancement expenditure (costs incurred in improving or enhancing the
value of the capital asset).
Incidental selling costs and incidental acquisition costs both include estate agent
fees, legal fees, commissions, auctioneer’s fees, valuation fees, advertising costs, and
stamp duty.
Enhancement expenditure is only allowable if it:
is capital expenditure (and not revenue expenditure, such as repairs)
improves the value of the asset (for example, extensions and additions), and
is reflected in the state of the asset sold.
(For example, if an extension to a property is built but later demolished, the cost
of the extension is not allowable when the property is disposed of, because the
proceeds from the sale relate to the property without the extension).
2.2 Treatment of capital losses
The treatment of capital losses depends on the type of loss. A summary of the rules
for capital losses are as follows:
Type of capital loss: Explanation:
Current year losses
Must be set off against current year gains first.
An individual cannot restrict the set off to preserve the
annual CGT exemption.
If current year losses reduce the chargeable gains
below the annual exemption, the unused annual
exemption is lost.
If current year losses exceed current year gains, the net
losses are carried forward and set off against future
gains.
Chapter 13: Capital gains tax
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Type of capital loss: Explanation:
Losses brought
forward
These are set off after the deduction of current year
losses.
Must be set off against the first available gains. (It is
not possible for an individual to skip a year.)
If deducting brought forward losses would reduce the
total net gains below the annual exemption, the set off
of these brought forward losses is restricted to the
amount that brings the total net gains of the individual
down to the annual exemption.
Losses on disposals to
connected persons
These can only be set against gains from disposals in
the current or future years to the same connected
person.
Relief of trading
losses against capital
gains under s261B
TCGA 1992
s261B trading losses are treated as if they are current
year capital losses.
s261B relief is explained later.
Example
Victoria has made a chargeable gain of £15,700 in respect of the disposal of an asset
in 2009/10.
Required
Calculate Victoria’s taxable gains for 2009/10 assuming the following alternative
losses arise:
(a) current year loss of £14,500
(b) current year loss of £4,500 and brought forward losses of £10,000
Answer
Situation(a):Victoria
Capitalgainstaxcomputation–2009/10
Gain 15,700
Minuscapitalloss (14,500)
–––––––––––––––––––––––––––––––––––
Netchargeablegain 1,200
MinusAnnualexemption(seenote) (1,200)
–––––––––––––––––––––––––––––––––––
Taxablegains Nil
–––––––––––––––––––––––––––––––––––
Note
Current year losses must be off set even if they result in the wastage of the annual
exemption.
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Situation(b):Victoria
Capitalgainstaxcomputation–2009/10
Gain 15,700
Minuscurrentyearcapitalloss (4,500)
–––––––––––––––––––––––––––––––––––
11,200
Minusbroughtforwardcapitalloss(restricted) (1,100)
–––––––––––––––––––––––––––––––––––
10,100
MinusAnnualexemption (10,100)
–––––––––––––––––––––––––––––––––––
Taxablegains Nil
–––––––––––––––––––––––––––––––––––
Note
Brought forward capital losses must be set off against the first available gains, but
not if they reduce the total net gains below £10,100.
Only £1,100 of the loss brought forward is set off, to leave total net gains of £10,100.
Victoria still has £8,900 of capital loss remaining to carry forward to the following
tax year.
2.3 Relief for trading losses against capital gains
The relief for trading losses of an unincorporated business against income is the
subject of an earlier chapter. Several options for relief are available, and the choices
depend on whether the business is in its opening, closing or ongoing years.
However, regardless of whether an individual is in the opening, closing or ongoing
years of an unincorporated business, he can always set trading losses against his
total income in the tax year of the loss and/or the preceding year with a s64 claim.
In addition, after a s64 claim has been made in a particular tax year, an individual
can make a claim to extend the relief and to set off some of the trading loss against
gains under s261B TCGA 1992.
The rules for s261B
An individual can make a claim to set off trading losses against his gains:
in the tax year of the loss, and/or
in the preceding tax year,
but only if a s64 claim against total income has been made in the same year first.
When setting off the trading loss under s261B in the current or preceding tax year,
the following rules apply:
Rule: Explanation:
Set off against gains
Treat the trading loss as if it is a current year
capital loss: i.e. s261B losses must be set off
against current year gains.
Chapter 13: Capital gains tax
© EWP Go to www.emilewoolfpublishing.com for Q/As, Notes & Study Guides 233
Must set off as much as
possible in the tax year
It is an all or nothing relief.
The claim is optional. However, if the claim is
made, the maximum amount must be deducted
from the current year’s gains.
An individual cannot restrict the set off to
preserve the annual exemption.
Loss relief may reduce the chargeable gains so that
the relief for the annual exemption is lost.
The maximum amount of a s261B claim is calculated as follows:
£
Lower of (1) The unrelieved trading loss after the s64 claim has
been made
X
(2) Total gains for the year X
Minus: Total capital losses for the year (X)
All capital losses brought forward
(X)
Maximum amount X
In this calculation, ignore the annual exemption, and deduct all capital losses in full.
A claim must be made for s261B relief within the same timescale as a s64 claim. This
is within one year of the 31 January following the end of the tax year of the loss (i.e.
the 31 January immediately prior to the second anniversary of the end of the tax
year of the loss).
If an individual claims under s64 and s261B, any trading losses left unrelieved are
automatically carried forward and set off under the rules of s83.
Example
William prepares accounts to 31 August each year. In the year ended 31 August
2009 he incurred a trading loss of £32,000. He has provided the following
information relating to 2009/10:
£
UK rental income
17,150
Gains 22,800
William also has capital losses of £13,200 brought forward.
Required
Calculate William’s taxable gains assuming that current year s64 and s261B claims
are made. State the amount of any losses remaining unrelieved, if any.
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Answer
The amount of s261B claim is the lower of:
£
(1) The unrelieved trading loss after the s64 claim has been made
(£32,000 - £17,150) 14,850
–––––––––––––––––––––––––––––––––
–
–
(2) Total gains for the year 22,800
All capital losses (current year and brought forward) (13,200)
–––––––––––––––––––––––––––––––––
–
–
Maximum amount 9,600
–––––––––––––––––––––––––––––––––
–
–
William
Capitalgainstaxcomputation
–
2009/10
£
Totalnetchargeablegains 22,800
Minuss261Bclaim (9,600)
–––––––––––––––––––––––––––––––––
–
–
13,200
Minuscapitallossbroughtforward(restricted) (3,100)
–––––––––––––––––––––––––––––––––
–
–
10,100
Minus:Annualexemption (10,100)
–––––––––––––––––––––––––––––––––
–
–
Taxablegains Nil
–––––––––––––––––––––––––––––––––
–
–
Notes
(1) The s261B claim is an all or nothing claim; therefore the maximum amount
must be deducted from the current year’s gains.
(2) Brought forward capital losses are then set off, but not to the extent that they
reduce the total net gains below £10,100.
Losses remaining unrelieved
Trading losses
£
Trading loss in tax year 32,000
s64 current year claim (17,150)
s261B current year claim (9,600)
–––––––––––––––––––––––––––––––––
–
–
Trading loss c/f under s83 5,250
–––––––––––––––––––––––––––––––––
–
–
Capital losses
£
Capital loss brought forward 13,200
Current year set off (3,100)
–––––––––––––––––––––––––––––––––
–
–
Capital loss c/f 10,100
–––––––––––––––––––––––––––––––––
–
–