CAPITAL GAINS TAX

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CAPITAL GAINS TAX
Theory and practice of taxation BModule code
C33TB2 Lecture 13

• INTRODUCTION

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CAPITAL GAINS TAXCGT

• Introduced in 1965
• Governed by Taxation of Chargeable Gains Act
  1992. - amended by subsequent Finance Acts
• Taxable persons Individuals, partners, trustees
  
• Exempt from CGT charities registered friendly
  societies local authorities approved
  superannuation funds unit trusts investment
  trusts approved scientific research
  associations.
• Companies pay Corporation Tax on chargeable gains.

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CAPITAL GAINS TAX 2

• All assets are chargeable assets except those
  that are specifically exempted by legislation .
  (see Melville p 248) Examples
• Taxpayers private residence
• Motor cars
• Gilt edged securities and qualifying corporate
  bonds
• Gambling winnings
• Personal Equity Plans/Investments held in ISAs
• Foreign currency for private use
• National Savings Certificates and Premium Bonds

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CAPITAL GAINS TAX 3

• CHARGEABLE DISPOSALS
• Sale, but not sale in the course of trade
• Gift
• Destruction
• Receipts of capital sums following the surrender
  of rights to assets
• Appropriation of assets as trading stock
• ARISES AT date that ownership changes hands.
• NON CHARGEABLE DISPOSALS
• Gift to charity
• Transfer on death of a taxpayer
• Disposal between husband and wife
• Transfer of assets as security for a
  loan/mortgage

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CAPITAL GAINS TAX 4

• CHARGEABLE DISPOSALS (2)
• Appropriation of assets as trading stock
• Where taxpayer acquires an asset an asset - other
  than as (trading) stock - then uses it as stock
• Normally gives rise to immediate chargeable
  gain/loss Based on assets market value at date
  of appropriation
• Market value becomes Trading Income cost
• Trader can elect for no gain/no loss
• Trading Income cost is reduced by gain/increased
  by loss
• When trading (stock) asset is used for other
  purposes Trader is treated as having sold it for
  market value (for Trading Income ) and having
  bought it for same value.

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CAPITAL GAINS TAX 5 BASIS OF ASSESSMENT

• Gains made on disposals made in the tax year 6
  April to 5 April
• Each disposal is looked at separately.
• Then gains and losses are aggregated to give a
  "net gain" or "net loss" for the year. FROM NET
  GAINS
• Deduct (1) Annual Exemption (A level of gains
  for the year bearing a Nil rate of tax 2006-07
  8,800 )
• (2) Capital losses brought forward
  from earlier years
• Remaining gain is subject to Capital Gains Tax
• Husband and wife are assessed independently to
  CGT. Each have their own annual exemption.

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CAPITAL GAINS TAX 6RATE OF CGT PAYABLE

• The amount of income tax that would be payable if
  the assessable gain (net gain after deduction of
  annual exemption and losses brought forward) were
  treated as extra taxable income.
• BUT
• unused personal allowances and charges on income
  cannot reduce assessable gains
• Nor can unused tax reducers be used to reduce CGT
  payable.

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CAPITAL GAINS TAX 7CALCULATION OF CGT PAYABLE

• An individual has one set of tax bands Lower
  rate 10(2,150) and Basic rate (31,150) for use
  for BOTH Income and Capital Gains Taxes.
• Net Capital gains are treated as an extra slice
  of savings (NOT dividend) income
• Thus any gains may be taxed at 10 20 or 40
• The rate bands are used first for income then for
  gains
• If a Gift Aid payment is made the basic rate band
  may be extended (as for Income Tax)

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CAPITAL GAINS TAX 8 CALCULATION OF CGT PAYABLE
Example

• "Y" is single and has individual chargeable
  gains of 21,250,
• 7,630 and 5,400, and a capital loss of 5,580
  in the tax
• year 2006-07.
• Compute Net Chargeable Gains
• 1st 21,250
• 2nd 7,630
• 3rd 5,400
• 34,280
• Loss (5,580)
• Net gains 28,700
• Annual exemption (8,800)
• CGT Assessment 19,900

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CAPITAL GAINS TAX 9 CALCULATION OF CGT PAYABLE
Example Continued

• Income from part time employment 8,000
• Gross interest from N S Bank Investment Account
  15,000Taxable income
• Total Non-savings Savings
• Employment Income 8,000 8,000
• Savings Income 15,000 15,000 23,00
  0 8,000 15,000
• Personal allowance 5,035 5,035
  . 17,965 2,965 15,000

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CAPITAL GAINS TAX 10Example continued - Tax
payable

• Income tax payable on income at the following
  rates Lower rate on 2,150 Basic rate on
  15,815 Total 17,965Capital
  Gains Tax payable (19,900)
• Basic rate remaining 33,300 - 17,965 15,335
  _at_ basic rate for saving 20
  3,067 Remainder
  19,900 - 15,335 4,565 at higher rate
  for saving 40 1,826
  Total capital gains tax
  4,893
  

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CAPITAL GAINS TAX 9 CALCULATION OF CGT PAYABLE
Example Continued WITH GIFT AID

• Income from part time employment 8,000
• Gross interest from N S Bank Investment Account
  15,000
• Payment to a charity paid under gift aid (Gross)
  400Taxable income
• Total Non-savings Savings
• Employment Income 8,000 8,000
• Savings Income 15,000 15,000 23,00
  0 8,000 15,000
• Personal allowance 5,035 5,035
  . 17,965 2,965 15,000

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CAPITAL GAINS TAX 10Example continued - Tax
payable

• Income tax payable on income at the following
  rates Lower rate on 2,150 Basic rate on
  15,815 Total 17,965Capital
  Gains Tax payable (19,900)
• Basic rate remaining 33,300 400 (extension
  of basic rate band) - 17,965
  15,735 _at_ basic rate for saving 20
  3,147 Remainder
  19,900 - 15,735 4,165 at higher rate
  for saving 40 1,666
  Total capital gains tax
  4,813
  

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RELIEF FOR CAPITAL LOSSES

• If chargeable losses exceed chargeable gains in a
  tax year the assessment to CGT is NIL.
• The amount of Net Losses are carried forward.
• Losses carried forward are only set off against a
  future years gains
• Brought forward losses are only deducted from
  current gains to the extent that these gains
  exceed the CGT annual exemption
• Net losses in year of death cannot be carried
  forward! These losses can be carried back 3
  years. (most recent year first)

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RELIEF FOR CAPITAL LOSSES

• Brought forward losses are only deducted from
  current gains to the extent that these gains
  exceed the CGT annual exemption. This will
  preserve the annual exemption
• Example
• Net gains 9,300. Losses b/fwd 4,000
• Chargeable gains
  9,300
• less losses b/fwd Not 4,000
  But (9300 - 8800) 500
• 
  8,800less annual exemption
  8,800Chargeable
  
  nil
• losses4000 - 500 3500 to carry forward

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RELIEF FOR TRADING LOSSES.

• Trading losses in a tax year can also be set off
  against chargeable gains (S 72 claim). If
• i) a S 380 claim has been made for the year
  and
• ii) the taxpayers total income has been reduce
  to Nil and
• iii) there are still unrelieved losses.
• If a S 72 claim is made it is given in priority
  to losses brought forward
• The S 72 claim is the lower of
• (i) the trading loss available and
• (ii) the CGT assessment (before deducting the
  annual exemption) that would be raised if a S
  72 claim were not made

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RELIEF FOR TRADING LOSSES. EXAMPLE

• "M" has net chargeable gains of 10,500 for
  the year . He has capital losses brought forward
  of 1,200. He has made a S380 loss claim for the
  year and has unrelieved trading losses of
  12,500.
• CGT assessment on "M" if no S 72 claim in made.
  
• ie he only claims the normal set off of capital
  losses brought forward.
• Net gain 10,500
• Less Capital loss claim 1,200
• 9,300
• Less Annual exemption 8,800
• CGT assessment 500

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RELIEF FOR TRADING LOSSES. EXAMPLE - continued

• From this calculation any S 72 claim is
  restricted to the
• lower of
• 12,500 ( trading losses available) and
• 9,300 (The assessment before the annual
  exemption)
• CGT assessment with S 72 claim being made
• Net gain 10,500
• Less S 72 claim 9,300
• 1,200
• Less Annual exemption (restricted) 1,200
• CGT assessment Nil

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RELIEF FOR TRADING LOSSES. EXAMPLE - continued

• As a result
  Trading losses 12,500
  Less S 72 9,300
• C/fwd S 393(1)
  3,200Capital losses b/fwd
  1,200No relief therefor c/fwdAnnual exemption
  8,800used
  1,200 Balance lost
  7,600