ACCA F6 FA09 Study Text 2010

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Chapter 15: Capital gains tax reliefs

Gift relief

 Overview of gift relief

 Qualifying assets for gift relief

 The mechanics of gift relief

 Sales at under-valuation

 Restriction of relief for assets not used wholly for the purposes of the trade

3 Gift relief

3.1 Overview of gift relief

The lifetime gift of an asset is a chargeable disposal at full market value for capital

gains tax purposes. However, if defined conditions are satisfied, the gain arising on

the gift may be deferred if a gift relief claim is made.

Gift relief is available where:

 an individual makes a disposal of a qualifying business asset

 by way of an outright gift, or

 sale for less that its full market valuation.

Note that gift relief is available to individuals, but not to companies. (Rollover relief

is the only capital gains relief available to companies.)

The relief is an optional relief, and if required, it must be claimed. It is not given

automatically. A joint claim is required, and this must be signed by both the donor

(i.e. the person making the gift) and the donee (i.e. the recipient of the gift).

A joint claim must be made within four years of the end of tax year in which the

disposal takes place.

3.2 Qualifying assets for gift relief

Qualifying assets for gift relief purposes are as follows:

 assets used in a business carried on by the donor or by the donor’s personal

company

 unquoted trading company shares or securities

 quoted shares or securities, but only if they are shares or securities in the donor’s

personal company.

A personal company in this context means a company in which the individual has at

least 5% of the voting rights.

Paper F6 (UK): Taxation FA2009

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3.3 The mechanics of gift relief

Where there is an outright gift of a qualifying business asset and gift relief is

claimed:

 the whole gain arising on the gift is deferred (i.e. no gain arises and therefore no

tax is payable by the donor at the time of the gift)

 the gain is deferred by deduction from the deemed acquisition cost of the asset

acquired by the donee (see below)

 on the subsequent disposal of the asset by the donee, the deferred gain becomes

chargeable: the lower deemed acquisition cost is used in the computation rather

than the full market value of the asset at the date of the gift.

The deemed acquisition cost of the asset acquired by way of an outright gift is

calculated as follows:

Full market value of the asset at the date of the gift X

Minus Gift relief = gain deferred

(sometimes referred to as the gain held over) (X)

Deemed acquisition cost (also referred to as the base cost) X

Gift relief is an all or nothing relief. It is optional, but if claimed, the maximum

amount of gain allowed by the legislation must be deferred.

On the subsequent disposal of the asset by the donee, the gain is calculated using

the base cost of the asset as calculated above.

Example

On 4 October 2009 Francis gave a business asset to his daughter which was worth

£224,000. He bought the asset in July 1988 for £11,200. His daughter sold the asset in

April 2010 for £245,000. The asset qualifies as a business asset for gift relief.

Required

Calculate the chargeable gains arising on the disposals, with and without a gift relief

claim. State whether a gift relief claim is advisable.

Answer

No gift

relief claim

With a gift

relief claim

October 2009 - gift to daughter

£ £

Market value at date of gift 224,000 224,000

Minus: Cost (11,200) (11,200)

–

–––––

–

––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

Gain 212,800 212,800

Minus: Gift relief (Nil) (212,800)

–

–––––

–

––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

Gain after relief 212,800 Nil

–

–––––

–

––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

Chapter 15: Capital gains tax reliefs

Deemed acquisition cost for the daughter

Market value at date of gift

224,000

Minus: Gift relief

(212,800)

–––––––––––––––––––––––––––––––––

–

Base cost of the asset

11,200

–––––––––––––––––––––––––––––––––

–

April 2010 - sale of asset by the daughter

Sale proceeds 245,000 245,000

Minus: Market value at date of gift / Base cost (224,000) (11,200)

–

–––––

–

––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

Gain 21,000 233,800

–

–––––

–

––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

No gift

relief claim

With a gift

relief claim

Summary of chargeable gains

£ £

October 2009 212,800 Nil

April 2010 21,000 233,800

–

–––––

–

––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

Total chargeable gains 233,800 233,800

–

–––––

–

–––

–

––––––––––––––––––––––––

–––––––––––––––––––––––––––––––––

–

The total chargeable gains remain the same whether or not a gift relief claim is

made. However, the claim results in the payment of the tax being deferred until the

date the donee disposes of the asset. The claim is therefore advisable from a cash

flow point of view.

Before making a claim, however, it is also advisable to look at the full circumstances

surrounding the disposal. For example:

 Is entrepreneurs’ relief available to either the donor or the donee?

 Does either party have any capital losses available to offset against the gain?

 Is the annual exemption available to one party but not the other?

3.4 Sales at under-valuation

Where a qualifying business asset is sold for less than its full market value, the gain

must be calculated using the full market value of the asset. Gift relief is available,

but may be restricted, depending on the amount of sale proceeds received.

If the sale proceeds received

are:

Treatment:

Less than the original cost of

the asset

 Full gift relief is available, i.e. all the gain can

be deferred as if an outright gift.

More than the original cost of

the asset

 The excess sale proceeds received are treated

as the gain for the donor, arising at the time of

the disposal.

 The rest of the gain can be deferred with a gift

relief claim.

Paper F6 (UK): Taxation FA2009

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Example

Assume that the facts are the same as the previous example, except that Francis sold

the asset to his daughter for £50,000 and a gift relief claim was made.

Required

Calculate the chargeable gains arising on the disposals.

Answer

With a gift relief claim

October 2009 - sale at undervaluation to daughter

Gain (as in the previous example) 212,800

Note:

Ignore the actual sale proceeds received. Full market value

must be used as the consideration in the gain computation

Minus: Gift relief (see working) (174,000)

–––––––––––––––––––––––––––––––––

–

Gain after relief (see working) 38,800

–––––––––––––––––––––––––––––––––

–

Working:

Sale for less than full market value but more than the original cost

Gain at the time of the sale: £

Actual sale proceeds received 50,000

Original cost (11,200)

–––––––––––––––––––––––––––––––––

–

Gain at the time of the sale 38,800

–––––––––––––––––––––––––

–

–––––––

–

Gain 212,800

Gain at the time of the sale 38,800

–––––––––––––––––––––––––––––––––

–

Gift relief = 174,000

–––––––––––––––––––––––––––––––––

–

Deemed acquisition cost for the daughter £

Market value at date of gift 224,000

Minus: Gift relief (174,000)

–––––––––––––––––––––––––––––––––

–

Base cost of the asset 50,000

–––––––––––––––––––––––––––––––––

–

April 2010: Sale of asset by the daughter

Sale proceeds 245,000

Minus: Base cost (50,000)

––––––––––––––––––––––––––

–

––––––

–

Gain 195,000

–––––––––––––––––––––––––––––––––

–

3.5 Restriction of relief for assets not used wholly for the purposes of the

trade

The calculation of gift relief has been explained where there is an outright gift and

where there is a sale at undervaluation. However, the amount of relief available is

restricted if the asset has not been used wholly for the purposes of the trade.

Chapter 15: Capital gains tax reliefs

Where an individual qualifying

business asset:

(1) has been used partly for business

and partly for non-business use (e.g.

75% of a building used by the

business and 25% not)

 Only the business proportion of the

gain is eligible for gift relief.

(2) has been used wholly for business

use, but only for some of the period

of ownership (i.e. for 10 out of 12

years)

 The gain eligible for gift relief is time-

apportioned.

(3) is a shareholding in the donor’s

personal company (i.e. the donor

has more than a 5% interest in the

company) and the company has

investment assets

 The gain eligible for gift relief is the

business proportion of the chargeable

assets held by the personal company,

as calculated below.

The gain eligible for gift relief relating to shares in a personal trading company is

calculated as follows:

company in the (CAs) assets chargeable theof ueMarket val

company in the (CBAs) assets business chargeable theof ueMarket val

Gain ×

CAs are the capital assets owned by the company that are chargeable assets for

capital gains purposes (e.g. land and buildings, shares held in other companies,

investment properties, but not exempt assets such as goodwill, motor cars, stock,

debtors etc).

CBAs are those CAs that are used for the purposes of the trade (e.g. land and

buildings, but not investment assets such as shares held in other companies and

investment properties).

The restriction is calculated using the market values of these assets at the date of the

gift of the shares by the donor.

Paper F6 (UK): Taxation FA2009

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Tax consequences of incorporation

 Overview of the consequences of incorporation

 Summary of the main CGT consequences of incorporation

 Incorporation relief for capital gains

4 Tax consequences of incorporation

4.1 Overview of the consequences of incorporation

When an unincorporated business (sole trader or partnership) incorporates its

business into a limited company, there are many taxation consequences to consider.

These consequences are the same whether the business is sold to an existing

company or a new company is established for the purpose of incorporation.

The key factor in an incorporation scenario is that the individual owner of the

unincorporated business retains his interest in the business, but in a different form.

He becomes a director/shareholder in a separate legal entity, the company, with an

interest in the shares of the company. (If the individual did not remain involved in

the business, there would be a disposal of the business, and the tax rules for

incorporation would not apply.)

4.2 Summary of the main CGT consequences of incorporation

Chargeable gains arise on each chargeable asset disposed of to the company:

 using the rules applicable to individuals, and

 taking as the disposal consideration the full market value of the assets at the date

of incorporation.

Incorporation relief is available to defer the gains on the disposal of the

unincorporated business until the individual disposes of the shares he acquires in

the company.

4.3 Incorporation relief for capital gains

On incorporation, an individual is usually transferring his unincorporated business

to a company in return for shares and other consideration (such as cash or

debentures) which have the same total value as the value of the unincorporated

business. Capital gains/losses will arise on the disposal of each chargeable asset to

the company.

Incorporation relief is an automatic relief which defers the net gains arising on

incorporation where the following conditions are satisfied:

 The transfer must be of a business as a going concern.

Chapter 15: Capital gains tax reliefs

 All the assets in the business must be transferred. (The only exception is that the

owner is allowed to retain the cash in the unincorporated business.)

 The consideration received from the company must be wholly or partly in the

form of shares.

The mechanics of incorporation relief

If the consideration for the business is received wholly in the form of shares:

 all the gains are deferred against the base cost of the shares acquired

 no chargeable gains arise at the time of incorporation

 the gain crystallises when the individual disposes of the shares in the future.

If the consideration for the business is received only partly in the form of shares, the

gains to be deferred are calculated as follows:

ionconsiderat totalof ueMarket val

acquired shares of ueMarket val

Gains = deferred be toGains ×

ionconsiderattotalofvalueMarket

ionconsideratshare‐nonofvalueMarket

Gains=ionincorporatontaxedbetoGains ×

Any deferred gain is deducted from the base cost of the shares as follows:

Market value of the shares issued on incorporation X

Minus: Gains deferred (X)

Base cost of shares X

Incorporation relief is automatic if the conditions are satisfied, therefore no claim is

required. However, the relief can be dis-applied if the taxpayer prefers (for example

if he wishes to claim entrepreneurs’ relief, has capital losses or wishes to use his

annual exemption).

A claim to dis-apply the relief must be made within two years of the 31 January

following the end of tax year in which the disposal takes place (i.e. the 31 January

immediately prior to the third anniversary of the end of the tax year).

Example

On 23 March 2010 Poppy sold her business to TY Ltd for £140,000, realising total

gains of £45,000. She became a director/shareholder of TY Ltd.

Required

Calculate the chargeable gains arising in 2009/10 and the base cost of the shares

acquired in TY Ltd assuming the following alternative amounts of consideration

were received:

(a) 80,000 £1 ordinary shares

(b) Cash of £40,000 and 50,000 £1 ordinary shares in TY Ltd

Paper F6 (UK): Taxation FA2009

Answer

(a) Consideration received wholly in the form of shares

No chargeable gain arises in 2009/10.

Base cost of the 80,000 £1 ordinary shares received:

Market value of the shares issued on incorporation 140,000

Minus gains deferred (45,000)

–––––––––––––––––––––––––––––––––

–

Base cost of shares 95,000

–––––––––––––––––––––––––––––––––

–

(b) Consideration partly in the form of shares and partly cash

Total consideration = market value of business 140,000

Minus Cash received (40,000)

–––––––––––––––––––––––––––––––––

–

Value of shares 100,000

–––––––––––––––––––––––––––––––––

–

£32,143 =

£140,000

£100,000

£45,000 = deferred be toGains ×

£12,857 =

£140,000

£40,000

£45,000 =ion incorporaton taxedbe Gain to ×

Base cost of the 50,000 £1 ordinary shares received:

Market value of the shares issued on incorporation 100,000

Minus: Gains deferred (32,143)

–––––––––––––––––––––––––––––––––

–

Base cost of shares 67,857

–––––––––––––––––––––––––––––––––

–

Chapter 15: Capital gains tax reliefs

Principal private residence and letting relief

 An overview of principal private residence relief

 Choice of principal private residence

 Actual and deemed occupation rules

 The mechanics of principal private residence relief

 Letting relief

 Restriction of relief for business use

5 Principal private residence and letting relief

5.1 An overview of principal private residence relief

Where an individual disposes of his only or main residence and grounds of up to

half a hectare, the gain is completely exempt from CGT provided the individual:

 occupied the property as his ‘principal private residence’ (PPR) (i.e. main home)

throughout the whole period of ownership, or

 was prevented from living in the house because he was required to live in ‘job-

related accommodation’ (as defined for employment income purposes).

If these conditions are not met, a chargeable gain may arise on the disposal of the

property. However, part of the gain may be exempt under the PPR relief rules.

In addition to PPR relief, letting relief is available if:

 the property has been the individual’s PPR, and

 after PPR relief there is a gain remaining in charge to tax, and

 during the period of ownership part or all of the house was let to tenants.

5.2 Choice of principal private residence

Where an individual owns and lives in more than one residence, it is necessary to

determine which property is to be treated as his PPR for CGT purposes. This is

because an individual may only have one PPR at any one time. Note also that a

married couple (or civil partners) can similarly only have one PPR between them at

any one time.

The PPR of an individual is usually the property he lives in the most. However, as

long as the individual lives in the property at some time, he may choose the

property he wishes to be treated as his PPR. It therefore is advantageous to choose

the property likely to have the highest chargeable gain arising on its disposal, so

that the highest gain is exempted.

The election to choose the PPR must be:

 made within two years of the acquisition of the second property, and

 signed by all parties, if the property is jointly owned.

Paper F6 (UK): Taxation FA2009

If an election is not made, HMRC will choose the property to be treated as the PPR

based on the facts of actual occupation (i.e. the property most used as the main

residence).

5.3 Actual and deemed occupation rules

PPR relief is given for periods of actual and deemed occupation and is calculated as

follows:

1982March31sinceownershipofPeriod

1982March31sinceoccupationdeemedandactualofPeriod

Gain ×

Calculations are made to the nearest month in the examination.

Deemed occupation

In addition to periods of actual occupation, HMRC will exempt the following

periods of deemed occupation:

Provided the property has been the

individual’s PPR at some time

Provided additional conditions are

satisfied (see below)

The last 36 months of ownership Any period(s) of absence while working

overseas

Maximum total of four years absence

while working elsewhere in the UK

Maximum total of three years for any

other reason

The two additional conditions, both of which must be satisfied, are as follows:

 During the period of absence this property must be elected as the individual’s

PPR at that time, and

 at some time both before and after the period of absence there is a period of

actual occupation by the owner.

However, there is an extra-statutory concession which will allow the periods of

absence while working overseas or in the UK to be exempt even if the property is

not reoccupied by the owner after the period of absence.

This concession applies only to the ‘work-related’ absences and only if the reason

the individual does not reoccupy the house is because the terms of his employment

prevent him from being able to reoccupy it.

5.4 The mechanics of principal private residence relief

If the property has not been occupied as an individual’s PPR throughout the period

of ownership and the individual was not required to live in ‘job-related

accommodation’, a chargeable gain arises as follows:

 The gain on the disposal of the property is calculated in the normal way.