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Chapter 14 CAPITAL GAINS TAX – INDIVIDUALS – RELIEFS 1 Entrepreneurs’ relief 1.1 Introduction This relief is available for individuals disposing of a business or part of a business. The relief covers the first £10m of qualifying gains that an individual makes during their lifetime. This gain qualifying is taxed at a lower capital gains tax rate of 10% regardless of a persons taxable income. 1.2 Conditions (a) The assets must have been owned for one year prior to the date of disposal (b) The relief is available on: x A disposal of the whole or part of a business run as an unincorporated business (sole trader or partnership). The relief is not therefore available if a trader simply disposes of an asset that is used in the trade. The assets must be used for the purpose of the business, so the relief is not available on investments. x Individual business assets of the individuals’or partnerships’trading business that has now ceased. Note the disposal of assets must take place within three years of the cessation of trade. x The disposal of shares 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 12 months prior to disposal. There is no restriction of the relief if the company owns investments. The company is either a trading company or it is not, there is no apportionment of the gain eligible for relief. 1.3 Time limit for claim The relief must be claimed within 12 months of the 31 January following the end of the tax year in which the disposal is made for 2014/15 by 31 January 2017 E XAMPLE 1 Daisy disposed of the following assets in 2014/15 On 30 September 2014 Daisy sold a business that she ran as a sole trader since February 2008. The sale resulted in the following capital gains and capital losses Goodwill 250,000 Factory 320,000 Warehouse (90,000) In December 2014 Daisy also sold a 20% shareholding in Bed Ltd, an unquoted company. Daisy had been an employee of Bed Ltd from the date she acquired the shares in July 2009. The gain arising was £370,000 Calculate Daisy’s Capital Gains Tax in 2014/15 89 December 2015 Examinations Paper F6

CAPITAL GAINS TAX – INDIVIDUALS – RELIEFS

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Chapter 14

CAPITAL GAINS TAX – INDIVIDUALS – RELIEFS

1 Entrepreneurs’ relief

1.1 Introduction• Thisreliefisavailableforindividualsdisposingofabusinessorpartofabusiness.

• Thereliefcoversthefirst£10mofqualifyinggainsthatanindividualmakesduringtheir lifetime. Thisgainqualifyingistaxedatalowercapitalgainstaxrateof10%regardlessofapersonstaxableincome.

1.2 Conditions(a) Theassetsmusthavebeenownedforoneyearpriortothedateofdisposal

(b) Thereliefisavailableon:

x Adisposalofthewholeorpartofabusinessrunasanunincorporatedbusiness(soletraderorpartnership).Thereliefisnotthereforeavailableifatradersimplydisposesofanassetthatisusedinthetrade.Theassetsmustbeusedforthepurposeofthebusiness,sothereliefisnotavailableoninvestments.

x Individualbusinessassetsoftheindividuals’orpartnerships’tradingbusinessthathasnowceased.Notethedisposalofassetsmusttakeplacewithinthreeyearsofthecessationoftrade.

x Thedisposalofsharesinatradingcompanywheretheindividualhasatleasta5%shareholdinginthecompanyANDisalsoanemployee(parttimeorfulltime)ofthecompanyforthe12monthspriortodisposal.Thereisnorestrictionofthereliefifthecompanyownsinvestments.Thecompanyiseitheratradingcompanyoritisnot,thereisnoapportionmentofthegaineligibleforrelief.

1.3 Time limit for claimThereliefmustbeclaimedwithin12monthsofthe31Januaryfollowingtheendofthetaxyearinwhichthedisposalismadefor2014/15by31January2017

ExamplE 1Daisydisposedofthefollowingassetsin2014/15On30September2014DaisysoldabusinessthatsheranasasoletradersinceFebruary2008.Thesaleresultedinthefollowingcapitalgainsandcapitallosses

Goodwill 250,000Factory 320,000Warehouse (90,000)

InDecember2014Daisyalsosolda20%shareholdinginBedLtd,anunquotedcompany.DaisyhadbeenanemployeeofBedLtdfromthedatesheacquiredthesharesinJuly2009.Thegainarisingwas£370,000

Calculate Daisy’s Capital Gains Tax in 2014/15

89December 2015 Examinations Paper F6

1.4 Further points• Thegainsqualifyingforentrepreneurs’reliefmustbetakenintoaccountwhenestablishingwhichtaxrateappliestoother

capitalgainsinthetaxyear,inthattheyaredeemedtofirstlyuseanyamountofunusedbasicrateband.

• The annual exemption and any capital losses should however be deducted firstly from gains that do not qualify forentrepreneurs’reliefastheyaretaxedatahighercapitaltaxgainsrate(18%and/or28%)

• Theeasiestapproachindealingwithquestionsthatincludegainsqualifyingforentrepreneur’sreliefandgainsthatdonotqualifyistokeepthegainsseparate

ExamplE 2 AnnesoldhershareholdinginAnnielimitedfor£5,000,000in2014/15.Theshareshadcosther£500,000inJuly1991.Sheowned100%ofthesharesinAnnieLimitedandhadbeenafulltimedirectorsincethedateofacquisition.Shehasnotmadeanydisposalsqualifyingforentrepreneurs’reliefinthepast.Inadditionshesoldanantiquepaintingrealisingacapitalgainof£100,000.Annehadcapitallossesbroughtforwardof£25,000from2013/14andhertaxableincomefor2014/15was£18,000.

Calculate Anne’s capital gains tax for 2014/15 and state the due date for payment.

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2 Replacement of business assets (Rollover Relief)

2.1 DefinitionAgainmaybe‘rolledover’ (deferred)where itarisesonthedisposalofabusinessassetwhosesaleproceedsarereinvestedinanotherqualifyingbusinessasset.

2.2 Qualifying assetsBoththeoldandnewassetsmustfallintooneofthefollowingcategories:

(a) Landandbuildings

(b) Fixedplantandmachinery

Boththeoldandnewassetsmustbeusedinthebusiness.

2.3 The relief(a) Thegain isnottaxedimmediatelybut ispostponeduntil thetradermakesadisposalofthereplacementassetwithout

furtherreplacement.

(b) Thepostponementisachievedbydeductingthegainmadeontheoldassetfromthecostofthenewone.

(c) Wherethedisposalproceedsoftheoldassetarenotfullyreinvested,thesurplusretainedreducestheamountofcapitalgainthatcanberolledover.

(d) Thereplacementassetmustbeboughtintheperiod12monthsbeforeto36monthsafterthedisposaloftheoldasset.

(e) Rolloverreliefisavailableonthesaleofanindividualassetsoentrepreneurs’reliefwouldnotnormallybeavailable.

However, ifthewholebusinessissoldandrolloverrelief isclaimedonpartofthegains-anyremaininggainscouldbeeligibleforentrepreneurs’relief.

(f) Aclaimmustbemadewithin4yearsfromtheendofthetaxyearinwhichthedisposaloccurred.Fordisposalsin2014/15by5April2019.

ExamplE 3 JonespurchasedapropertyforuseinhisbusinessinMarch1990for£250,000.InAugust2014hesoldthepropertyfor£300,000andspent£320,000inJuly2014onanewbusinessproperty.

Calculate the gain to be deferred and the base cost of new asset.

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ExamplE 4 JeromeboughtafactoryinJune1991for£680,000.InAugust2014wishingtomovetoamoreconvenientlocation,hesoldthefactoryfor£800,000.HemovedintoarentedfactoryuntilJanuary2015whenhepurchasedandmovedtoanewfactory.

Calculate the base cost of the new factory if it was purchased for

(a) £750,000

(b) £600,000

2.4 Non-business use(a) Fullrolloverreliefisonlyavailablewheretheassetbeingreplaced(theoldasset)wasusedentirelyforbusinesspurposes

throughoutthetrader’speriodofownership

(b) Wherethisconditionisnotmetrolloverreliefislimitedinproportiontothebusinessuse.

(c) Theassetistreatedastwoseparateassets,onethatqualifiesforrelief(thepartwhollyusedinthetrade)andanotherthatdoesnot.

ExamplE 5 JakepurchasedfactoryinMay1991for£540,000.Heletout15%ofthefactory.InJuly2014hesoldthefactoryfor£600,000andboughtanotherfactoryinAugust2014for£650,000claimingrolloverrelief.

(a) what is the chargeable gain arising on the disposal in July 2014?

(b) what is the base cost of a new factory?

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2.5 Reinvestment in depreciating asset

2.6 Definition(a) Anassetwithanexpectedlifeofamaximum60yearsor

(b) Fixedplantandmachinery

Note:Youwillonlybeexaminedonfixedplantandmachineryandleaseholdpropertywithalifeof60yearsorless.

2.7 EffectIfthenewassetisadepreciatingasset.

(a) Thegaindeferredisnotdeductedfromthecostofthenewasset

(b) Insteaditispostponeduntiltheearliestof:(i) disposalofthenewasset(ii) thedatethenewassetceasestobeusedinthetrade(iii) 10yearsafterthenewassetwasacquired.

(c) Entrepreneurs’ relief is only available if any remaininggains after the relief are in relation to thedisposal of thewholebusiness.

ExamplE 6 CharlespurchasedafreeholdfactoryinMay1991for£300,000.InJune2013hesolditfor£500,000andinJuly2013boughta55yearleaseholdfactorybuildingfor£600,000.InFebruary2015Charlessoldtheleaseholdfactoryfor£640,000andmovedintorentedpremises.

Calculate the chargeable gains arising in 2014/15 assuming Charles claims to defer gains where possible.

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2.8 Acquisition of a new non-depreciating asset(a) Ifanewnon-depreciatingassetisacquiredbeforethedeferredgainbecomestaxable,rolloverreliefcanbeclaimedinstead.

(b) Thecapitalgainontheoriginalassetisthenrolledoverintothenewnon-depreciatingassetandthedepreciatingassetis,effectively,ignored.

3 Relief for the gift of business assets

3.1 Nature of relief(a) Agiftissubjecttocapitalgainstax

(b) Thedonor(thepersonmakingthegift)istreatedasmakingadisposaloftheassetatmarketvalue.

Thedonee(thepersonreceivingthegift)istreatedasifhehadacquiredtheassetatmarketvalue.

(c) Whengiftreliefisclaimed,thedonor’sgainisdeferred.Thegainisdeductedfromthedonee’scost(marketvalue)

Thiscanbeillustratedasfollows:

gift

donor donee

proceeds MV cost MV

less:cost (x) less:gaindeferred (x)

gain x x

giftreliefclaimed

ExamplE 7 Davidboughtanassetfor£60,000inJune2012.InSeptember2014hegiftedittoTommy,whenitsmarketvaluewas£100,000.Theassetqualifiedforgiftrelief.

Assuming David and Tommy make a claim for gift relief calculate Tommy’s base cost of the asset.

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3.2 Interaction with entrepreneurs’ relief(a) Whenaclaimforgiftreliefismade,thedonormayloseentitlementtoentrepreneurs’relief

(b) Iftheassetqualifies,giftreliefifclaimedisappliedbeforeentrepreneurs’relief.

3.3 Availability of the relief(a) Thereliefisonlyavailabletoindividualsnotcompanies

(b) Theclaimmustbemadebyboththedonoranddoneeandmustbemade4yearsfromtheendofthetaxyearinwhichthedisposaloccurred.Foragiftmadein2014/15theclaimmustbemadeby5April2019.

3.4 Qualifying assetsGiftreliefmaybeclaimedonthegiftofthefollowingassets:

(a) Assetsusedinthetradeof:

x thedonor(i.e.whereheisasoletrader)

x thedonor’spersonalcompany(thisextendstherelieftoassetsownedbytheindividualbutnotusedbyhimdirectlyfortradingpurposes).

(b) Sharesandsecuritiesoftradingcompaniesprovidedthatoneofthefollowingconditionsapply:

x thesharesorsecuritiesarenotquotedonarecognisedstockexchangeor

x thesharesorsecuritiesgiftedarethoseoftheindividual’spersonalcompany

Acompanyqualifiesasanindividual’spersonalcompanyifatleast5%ofthevotingrightsareownedbytheindividual

3.5 Sale at undervalue (a) Giftreliefisalsoavailableforsalesmadebelowmarketvalue,wherethereisanelementofgift.

(b) AnyproceedsreceivedinexcessoftheoriginalcostarechargeabletoCGTimmediately.

(c) Thegaindeferred,thegiftrelief,isreducedbythisamount

ExamplE 8Richardacquireda25%holdinginanunquotedtradingcompanyinMarch1991for£60,000.Heimmediatelybecameanemployeeofthecompany.InMarch2015hesoldthesharestohissonfor£85,000whentheirvaluewas£200,000.Richardandhissonclaimedreliefforagiftofabusinessasset.

(a) What is the chargeable gain, if any, incurred by Richard?

(b) What is the base cost of the shares for Richard’s son?

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3.6 Assets not wholly used for trading purposes(a) Whereonlypartofanassetisusedfortradingpurposes,orwhereanassethasbeenusedforonlypartofthedonor’speriod

ofownership,thengiftreliefisrestricted.

(b) Wherethegiftissharesandtheindividualownsatleast5%ofthevotingrights,thenthecapitalgainontheshareseligibleforreliefisrestrictedbythefollowingfraction:

Marketvalueofcompany’schargeablebusinessassets(CBA)Marketvalueofcompany’schargeableassetsCA)

Note that this treatment is completely different to that which applies for entrepreneurs’ relief. Remember that forentrepreneurs’reliefpurposesthereisnoquestionofapportionment.Acompanyiseitheratradingcompany(andthereforequalifiesfortheentrepreneurs’relief )oritisnot.

3.7 Chargeable assets (CA) and chargeable business assets (CBA)(a) Anassetcannotbeachargeableassetwhereanygainthatmightariseonitsdisposalwouldnotbeachargeablegain.This

provisionrulesoutexemptassetssuchasmotorcars,butnotthosethatcouldproduceagainondisposalbutcurrentlystandatalossThiswillincludeallchargeableassetsheldbythecompany,boththoseusedinthebusinessandthoseheldasinvestments.

(b) Chargeablebusinessassetsarethoseusedforthepurposesofacompany’strade(includinggoodwillpurchasedbefore1/4/02,butexcludingshares,securitiesandotherassetsheldasinvestments).

ExamplE 9Johnowns100%ofthesharesinJohnLtdofwhichheisthemanagingdirector.On1December2014hemadeagiftofthesharestohisson,whenthemarketvalueoftheshareswas£800,000.Thesharescost£200,000inFebruary2001.AtthetimeofthegiftJohnLtdownedthefollowingassets.

£Freeholdtradingpremises 500,000Goodwill 200,000Investments 100,000Stockandworkinprogress 150,000Debtors 80,000Cash 170,000

1,200,000

Calculate John’s Capital Gains Tax on disposal of the shares in John Ltd and base cost of the shares for his son.

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4 principal private Residence Relief

4.1 The sale of an individuals only or main private residence is covered by Principal Private Residence Relief (PPR). The relief also covers grounds up to half a hectare.Thereliefisavailableinfullifthetaxpayeroccupiedthepropertythroughouttheentireperiodofownership.Whereoccupationhasbeenforonlypartoftheperiod,aproportionofthegainiscoveredbytherelief

Gain×PeriodofoccupationPeriodofownership

4.2 There are however periods of absence which are deemed to be full occupation(a) Last18months-ifthepropertywastheindividualsmainresidenceatsomepointintime

(b) Anyperiodsduringwhichtheindividualwasrequiredbyhisemploymenttoliveabroad

(c) AnyperioduptofouryearsduringwhichtheindividualisrequiredtoliveelsewhereintheUKduetoemployment

(d) Uptothreeyearsforanyreason.

Points(b–d)mustbeprecededandfollowedbyperiodsofactualoccupation,butforpoints(b–c)iftheindividualcouldnotreoccupyduetothetermsofemploymentrequiringthemtoworkelsewhere,byconcession,theconditionofactualoccupationfollowingtheperiodofabsenceisnotapplied.

ExamplE 10Davidboughtahouseon1April1986for£10,000.helivedinituntil30June1986.Heworkedabroadfor2yearsandthenmovedbackintothehouseonhisreturnon1July1988.Helivedinthehouseuntil31December2002beforeleavingtoliveandworkelsewhereinUK.Daviddidnotreturntothehouseandthehousewassoldon31December2014for£150,000.

Calculate the chargeable gain arising.

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4.3 Business use Wherepartofaresidenceisusedexclusivelyforbusinesspurposesthroughouttheperiodofownership,thegaininrelationtothatpartisnotcoveredbyrelief.

Thelast18monthsruledoesnotapplytothatpartunlessthebusinesspartwasatsometimeusedaspartoftheonlyormainresidence.

4.4 Letting reliefLettingreliefisavailabletocoveranygainnotcoveredbyPPRif:

(a) ownerisabsent(notcoveredbydeemedoccupationrules)andthepropertyisrentedout.

(b) partofthepropertyisrentedout,theremainingpartbeingoccupiedbythetaxpayer

Lettingreliefisthelowerof:

x PPRreliefgiven

x £40,000

x gainattributabletoletting

ExamplE 11Kenboughtahouseon1April1986for£30,000andoccupiedasfollows:1/4/1986–31/3/1988 livedinit1/4/1988–30/9/1993 travelstheworldandletsthehouse1/10/1993–31/3/2003 livedinit1/4/2003–31/3/2015 Movedoutofthehousetolivewithhisgirlfriendandthepropertywasempty.

Kensoldthehouseon31March2015for£250,000.

Calculate the chargeable gain arising.

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You should now review the following part of the Finance Act 2014 technical article written by the F6 examining team: Capital Gains Tax section

You may now attempt Practice Questions 34 to 37

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Chapter14100