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For IHT purposes the transfer will be a PET and computed as the difference in value between a 60% shareholding and a 30% shareholding. If the transferor dies within 7 years of this transfer it will become chargeable, but if the transferor lives for at least 3 years then any IHT chargeable will be reduced by the available taper relief
What are the CGT implications of a taxpayer making a gift in lifetime to his daughter of half of his 60% shareholding in the unquoted trading company in which he has worked for several years.
There will be an immediate CGT implication as the gift represents a chargeable disposal of a chargeable asset by a chargeable person and a gain must be computed based on the open market value of the 30% of shares being gifted.
The gift will then be eligible for a gift relief claim, but if gift relief is not claimed or does not cover the full gain, any gain remaining chargeable may be eligible for business asset disposal relief
What other exemptions are available to fully exempt a lifetime transfer
In addition to the spouse / civil partner exemption available against both lifetime transfers and transfers on death, the following specific exemptions will apply against lifetime transfers:
• Small gifts
• Gifts for family maintenance
• Normal expenditure out of income
What exemptions may be deducted from a lifetime transfer of value in computing the chargeable transfer figure
Annual exemptions and Marriage exemptions
What rate of tax above the nil rate band is chargeable on a transfer of value made in lifetime into a discretionary trust and who pays the tax where no election has made by the trustees
If no election has been made by the trustees to pay any IHT chargeable out of the trust, then the donor will be liable to pay the IHT and the IHT will be computed at a rate of 25% on the excess of the chargeable transfer above the available nil rate band.
In what circumstances can an IHT charge of 40% made on a lifetime transfer made within 7 years of the death of the taxpayer be reduced
If a lifetime transfer chargeable on death is more than 3 years before the date of death of the taxpayer, any tax charge will be reduced by taper relief.
What rates of IHT may be chargeable on the death estate
If the lifetime transfers made in the 7 years before the date of death do not exceed the nil rate band, then the remaining amount of the nil rate band will be available and may have been increased by any unused nil rate band transferred to the individual following the earlier death of a spouse or civil partner.
The residence nil rate band is also available where a “main” residence is held within the death estate and is inherited by direct descendants (children / grandchildren).
The remainder of the estate will be chargeable at a rate of 40%.
How do you compute a transfer of value
A transfer of value is a gift made by an individual and is calculated as the loss to the estate of the donor – the difference in the value of the estate before the transfer and after the transfer.
In what circumstances will IHT become chargeable
IHT will become chargeable in lifetime if an individual makes a chargeable lifetime transfer ie a transfer of value into a trust, and on death when lifetime transfers made within 7 years of the date of death become chargeable along with the chargeable estate.
When an individual sells his / her private residence, what periods of non-occupation of the property will be treated as deemed occupation for purposes of private residence relief
The following periods of absence are deemed to be full occupation:
(a) Last 9 months – if the property was the individuals main residence at some point in time
(b) Any periods during which the individual was required by his employment to live abroad
(c) Any period up to four years during which the individual is required to live elsewhere in the UK due to employment or self employment
(d) Up to three years for any reason.
What assets qualify for gift relief when an individual makes a gift of that asset
Gift relief may be claimed on the gift of the following assets:
Business assets used in the trade of:
- the donor
- the donor’s personal company (owns at least 5%)
- Shares and securities of trading companies provided that one of the following conditions apply:
- the shares or securities are not quoted on a recognised stock exchange, or
- the shares or securities gifted are those of the individual’s personal company
What would happen if the replacement asset was fixed plant and machinery to be used in the trade
The new asset is a depreciating asset. The gain deferred is not deducted from the cost of the new asset but is instead postponed until the earliest of:
•disposal of the new asset
•the date the new asset ceases to be used in the trade
• 10 years after the new asset was acquired.
How is the gain deferred on a claim for rollover relief
The gain is deferred by deducting it from the cost of the newly acquired replacement asset which results in a larger gain then arising on the eventual sale of the replacement asset.
When land and buildings are sold at a gain by a business what conditions must be satisfied for the gain to be fully deferred by a claim for rollover relief
The land and buildings sold must have been used in the business and the full sale proceeds must be reinvested in another qualifying business asset. The replacement asset must be bought in the period 12 months before to 36 months after the disposal of the old asset.
When an individual sells shares in a company what conditions need to be satisfied for the sale to qualify for investors’ relief
Qualifying shares must have been subscribed for by the individual on or after 17 March 2016 in an unquoted trading company and held for a minimum period of 3 years since 6 April 2016.
When an individual sells shares in a company what conditions need to be satisfied for the sale to qualify for business asset disposal relief
The disposal of shares must be in a trading company where the individual has at least a 5% shareholding in the company and is also an employee (part time or full time) of the company for the 24 months prior to disposal.
When an individual disposes of shares in a company what is the order in which the shares sold are matched with acquisitions.
When shares in a company are disposed of, they are matched against acquisitions of shares in that company in the following order:
• Shares acquired on the same day (as the sale)
• Shares acquired within the 30 days following the sale
• Shares from the share pool
How would you compute a chargeable gain arising on a disposal of a painting for sale proceeds of £7,500
A painting is a chattel and if the cost of the painting was less than £6,000, then in addition to the normal gains computation a maximum gain figure would also be computed using the following calculation:
(sale proceeds – £6,000) x 5/3
If a taxpayer disposes of 25% of a plot of land originally purchased at a total cost of £120,000, how do you calculate the allowable cost to be used in the calculation of any chargeable gain arising
The allowable cost will be computed by taking the following proportion of the original total allowable cost of the plot of land:
Sale Proceeds / Sale Proceeds + Value of remaining part of land
On what basis are chargeable assets transferred between spouses or civil partners
On a no gain / no loss basis which means at the transferor’s cost.
If an individual sells a chargeable asset to his daughter for half of its market value of £100,000, what disposal consideration if any should be used to compute any chargeable gain arising
For CGT purposes the asset is transferred at its open market value of £100,000.
Assuming a taxpayer made no disposals of residential property or assets qualifying for either business asset disposal relief or investors’ relief, how is the CGT liability calculated on the taxable gains
Based on the taxpayers’ taxable income from their Income Tax Computation a CGT rate of 10% is applied on those taxable gains that fall into any remaining basic rate band (or extended basic rate band if the person makes gift aid donations or pays personal pension contributions).
After considering a persons’ taxable income, a CGT rate of 20% is then applied on those gains in excess of the remaining basic rate band (or extended basic rate band).
How is the payment on account calculated
In computing the payment on account the following deductions should be made from the gain:
• Any current tax year capital losses incurred prior to the property disposal
• The AEA of the tax year
• Any capital losses b/f at the start of the tax year
It will also require an estimate of how much, if any, of the taxpayer’s basic rate band will be available for the tax year – this information will be provided in the exam.
When must a payment on account be made on the disposal of a residential property
A payment on account, along with a return to HMRC, must be made within 30 days of the disposal of a residential property
By what date must the CGT liability for the 2021/22 tax year be paid assuming no disposals of residential property
CGT is due in one amount on 31 January following the end of the tax year (for 2021/22 by 31 January 2023)
Capital losses and AEA are deducted from the gains made by a taxpayer in the tax year.
In what order will these deductions be applied to ensure their optimal use.
Deductions are made firstly against those gains taxable at the highest tax rates
They will therefore be deducted from gains in the following order:
(1) Gains on residential property (taxed at 18% and 28%)
(2) Gains on other assets (taxed at 10% and 20%), and finally
(3) Gains on assets qualifying for business asset disposal relief or investors’ relief taxed at 10%
What tax rates may apply to an individuals’ taxable gains
Assets qualifying for business asset disposal relief will always be taxed at 10% up to a maximum lifetime limit of £1m.
Shares qualifying for investors’ relief will also be taxed at 10% but up to a maximum lifetime limit of £10m
Residential property gains will be taxed at either 18% or 28%
Gains on any other assets will be taxed at either 10% or 20%
If an individual has a mix of both gains and losses arising in a tax year and also has unused capital losses brought forward from the previous tax year, show how the taxable gains for the current tax year would be computed.
The gains and losses of the current tax year must be netted off, from which net gains the AEA will then firstly be deducted, followed by the deduction of the capital losses brought forward.
Explain how to deal with the CGT implications of a gift made by an individual of a chargeable asset
A gain must be computed based on the open market value of the asset at the date of disposal. The gain arising may then be deferred from immediate chargeability by a claim for gift relief if the asset / gift qualifies for gift relief.
In what circumstances does a chargeable disposal arise for an individual
A chargeable disposal arises on the sale of, the gift of, or the destruction or loss of a chargeable asset.
In what circumstances must a chargeable gain be computed
A chargeable gain arises when a chargeable person makes a chargeable disposal of a chargeable asset.
Please is there any condition for adding the “3 years not occupying residence for any reason” in computation for total number of occupation period? I did a question on the ACCA practice website and added it but on checking the answer, I found out that it wasn’t added. Here is the question;
On 31 March 2022, Angus sold a house, which he had bought on 31 March 2008.
Angus occupied the house as his main residence until 31 March 2013, when he left for employment abroad.
Angus returned to the UK on 1 April 2015 and lived in the house until 31 March 2016, when he bought a flat in a neighbouring town which became his main residence.
What is Angus’ total number of qualifying months of occupation for private residence relief on the sale of the house?
ACCA Answer:
168 – (72 – 9) = 105 months.
Or:
Actual occupation 72 (60 + 12)
Employed abroad (any length with reoccupation) 24
Last 9 months ownership 9
72 + 24 + 9 = 105