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Chargeable Gains

Learning tasks:
Capital Gains Tax (CGT): Scope CGT: Overseas Aspects Exempt Assets Exempt Transfers for CGT Part Disposal Loss or Destruction of an Asset CGT: Proforma CGT: Computation Reading:
Recommended Text: ACCA Paper F6, Taxation BPP Learning Media Study Text Chapter 13 Melville 16th Ed. Ch 16, 17, 21

Capital Gains Tax (CGT): Scope


Scope
A chargeable gain arises when there is a chargeable disposal of a chargeable asset by a chargeable person

Chargeable person
Capital gains are chargeable on individuals and companies (note: companies do not pay CGT - they pay corporation tax on chargeable gains)

Chargeable disposals include:


Sale of assets or part thereof Gifts of assets or part thereof Loss or destruction of assets

Chargeable assets
All assets, including those held overseas, are chargeable assets unless they are specifically exempt.

CGT rate
Individuals pay CGT on gains arising in a tax year at the rate of 18%

Annual exemption
Individuals have an annual exemption of 10,100 (2009-10) thus do not pay CGT on the first 10,100 of chargeable gains

CGT: Overseas Aspects


Residency
Individuals are liable to CGT if they are resident or ordinarily resident in the UK for any part of the tax year in which a disposal occurs

Upon becoming resident in the UK, CGT is charged only on gains which arise after arrival provided the person has not been resident or ordinary resident in the UK for four out of the previous seven years.

Resident and ordinarily resident for CGT are defined as for income tax

Exempt Assets
Specified exempt assets:
Motor vehicles suitable for private use NSI certificates and Premium Bonds Foreign currency for private use Bravery awards (ie not purchased) Damages for injury Gilt-edged securities (ie treasury stock) Qualifying corporate bonds Certain chattels Debts ISA holdings Principal private residence

Exempt Transfers for CGT


Transfers between spouses and civil partners does not give rise to chargeable gains or losses. Spouses and civil partners are taxed separately as individuals thus the losses of one party cannot be set-off against the gains of the other party

Other exempt persons


Registered charities and friendly societies, community amateur sports clubs. Local authorities and LA associations, registered pension schemes, unit trusts, investment trusts, approved scientific research associations.

CGT: Part Disposal


Upon part disposal of an asset the cost must be apportioned between the part disposed of and the part retained.

Where part of an asset is disposed of, the chargeable gain must be computed by deducting a fraction of the original cost of the whole asset from the disposal value.

The fraction is:

Cost * A / A+B
Where : A = value of the part diaposed of B = Market value of the remainder

CGT: Loss or Destruction of an Asset


Destruction
Any compensation or insurance monies relating to the destruction of an asset will ordinarily be brought into the CGT computation as proceeds from disposal However, if the proceeds are used to replace the asset within 12 months then any gain may be deducted from the cost of the replacement asset.

Damage
Any compensation or insurance monies relating to the damage of an asset will ordinarily be brought into the CGT computation as proceeds from a part disposal However, if the proceeds are used to restore the asset then the taxpayer may elect to set aside the part disposal and the proceeds may be deducted from the cost of the asset.

CGT: Proforma
Computation of CGT

Disposal value Less: Incidental costs of disposal Less Allowable expenditure: Acquisition cost of asset Incidental costs of acquisition Enhancement expenditure 1 Costs of defending owners title Valuation fees2 Chargeable gain/allowable loss Notes 1. mere repairs or maintenance are disallowed 2. for the necessary purpose of determining CGT XXX XXX XXX XXX XXX XXX XXX

XXX XXX XXX

CGT: Computation
Disposal value
Market value is normally taken to be proceeds of sale. However, the disposal value is taken to be market value where the disposal is: 1. not a bargain at 'arms length' ie between 'connected' people - eg relatives, business partners etc. 2. made for consideration which is hard to value 3. a gift

Incidental costs of disposal


Incidental costs of disposal include:- legal fees, valuation fees, estate agents fees, auctioneers fees, advertising costs etc. Note: These are the same as the incidental costs of acquisition.