ACCA TX Flashcards – The Capital Taxes (CGT & IHT)

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% holding 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 will be eligible for business asset disposal relief

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.

Annual exemptions and the Marriage exemption.

If the trustees have not agreed 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% (20/80) on the excess of the chargeable transfer above the available nil rate band.

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.

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) and again may have been increased by any unused residence nil rate band transferred to the individual following the earlier death of a spouse or civil partner. Any amount covered by the nil rate bands is taxed at 0% and the remainder of the estate will be taxed at 40%.

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 the value after the transfer.

IHT will potentially become payable in lifetime if an individual makes a chargeable lifetime transfer i.e. 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 death estate.

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.

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 trading 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 trading company.

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.

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.

The land and buildings sold must have been used in a trade of the vendor and the full sale proceeds must be reinvested in another qualifying business asset which will be used in a trade. The replacement asset must be bought in the period 12 months before to 36 months after the disposal of the old asset.

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 and the individual cannot be an employee of the company.

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 shares in a company are disposed of by an individual, 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

A painting is a non-wasting chattel and as 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.

The allowable cost will be calculated 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 a no gain / no loss basis which means that the transferee (recipient) takes over the transferor’s (donor’s) cost.

For CGT purposes the asset is transferred at its open market value of £100,000.

Based on the taxpayers’ taxable income from their Income Tax Computation a CGT rate of 18% 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 24% is then applied on those gains in excess of the remaining basic rate band (or extended basic rate band).

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 brought forward from previous tax years

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.

A payment on account, along with a return to HMRC, must be made within 60 days of the disposal (‘completion’) of a residential property.

CGT is due in one amount on 31 January following the end of the tax year (for 2025/26 by 31 January 2027)

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 other assets (taxed at 18% and 24%), and then

(2) Gains on assets qualifying for business asset disposal relief or investors’ relief (taxed at 14%).

Assets qualifying for business asset disposal relief will be taxed at 14% up to a maximum lifetime limit of £1m. Shares qualifying for investors’ relief will also be taxed at 14% up to a maximum lifetime limit of £1m Gains on any other assets will be taxed at either 18% or 24%.

The gains and losses of the current tax year must be netted off to arrive at net gains for the tax year, then the AEA will be deducted, followed by the deduction of the capital losses brought forward.

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 qualifies for gift relief.

A chargeable disposal arises on the disposal of a chargeable asset, which includes sales or gifts of the whole or part of the chargeable asset, or the destruction or loss of the chargeable asset.

A chargeable gain must be computed when a chargeable person makes a chargeable disposal of a chargeable asset.