This document is useful for anyone sitting the LPC Wills and Administration exam as a key topic is inheritance tax.
I achieved a high distinction in the exam due to the detail in these notes. They contain a step by step structure for tax calculations.
CAPITAL GAINS TAX
Capital gains tax (CGT) is a tax which is charged on the difference between the value of an asset
when the taxpayer acquired it and the value of that asset when the taxpayer disposes of it later.
Capital gains tax is a gain on chargeable disposals made by chargeable persons in the absence of any
relief which is available and is subject to a variety of different rates of tax, depending on the
circumstances
REMEMBER: Income tax is applied to income profits and CGT is concerned with capital profits and
losses.
Calculating Capital Gains Tax
STEP 1: Identify the chargeable disposal = what is it that has happened which may give rise to a tax
charge?
E.G Has somebody sold something for example?
STEP 2: Calculate the gain or loss
STEP 3: Consider reliefs = there are a number or reliefs which can act to reduce or wipe out the
charge to tax completely.
STEP 4: Aggregate gains and deduct annual exemption
STEP 5: Apply correct rate of tax
STEP 1: Identify the chargeable disposal
You need:
A chargeable person
Who makes a chargeable disposal
Of a chargeable asset
So a chargeable person is going to be almost all individuals including such people as trustees who are
charged on the gains made by the trust they administer. It also includes personal representatives.
They are charged on the gains realised when the deal with the deceased person’s estate.
Chargeable disposals normally involve making a sale of something. but sometimes there will not be a
sale because a chargeable disposal could be a gift. If a chargeable person gives away an asset then
they are deemed to have made a gain and that gain is calculated in the same way as if they had sold
the asset at market value.
So the personal representatives of a deceased person will acquire the assets at the value they had
when the person died. So they will only be liable to capital gains tax if they sell the property
somewhat later, somewhat after the death of the deceased person, and in the meantime that
property has gone up in value. If it has not or if they sell it pretty swiftly after the death of the
deceased person, then there will be no capital gains tax, there will only be inheritance tax.
Note: An asset can still be chargeable even though the taxpayer has created it rather than buying it
or receiving it as a gift.
Types of asset which are specifically excluded from the definition of chargeable:
Private motor vehicles = cars, motorbikes
National savings certificates
Recognised currencies
, STEP 2: Calculate the gain or loss IN ORDER:
1. Proceeds of sale = how much did you sell the property for? (E.G. £250,000 - that would be the
proceeds of disposal - the gross proceeds
DEDUCT
2. Any incidental costs related to the disposal = any costs on estate agent charging advertising
fee (1/1.5%) or deduct the conveyancing costs involved in the sale.
DEDUCT
3. Initial price paid on property + incidental costs = (E.G. bought property for £200,000) you can
deduct
paid conveyancing costs to the solicitor when you bought it from the gross profits that you have
made so far. You can also deduct any expenditure that you have done to improve the place (DOES
NOT include maintenance like repainting ), BUT an extra room built on the property or garden
extension or garage build would be expenditure that has affected the capital value of the property,
so can be deducted.
=
GAIN OR LOSS
NOTE: need to do this in relation to each asset which has been disposed of and it is better to do it
separately.
IMPORTANT NOTE: if an asset has been given to you then the price the initial expenditure
equivalent is the market value at the time that it was given to you. so the market value at the date
you received it will substitute for the initial expenditure if you received something that is a gift.
STEP 3: Consider reliefs
2 types of relief:
Non-Business Asset
Main dwelling house
Business Asset
Business asset disposal relief (previously known as entrepreneurs' relief)
Hold over relief = relief which is available for people who are given/gifted business assets
rather than buying them. Allows the parent who is giving the business to the child to pass on
any gain made in a way that allows the recipient to defer the taxation until the recipient
themselves comes to dispose of the business (AKA , if a business is kept within a family and is
simply transferred by gift from one generation to the next, capital gains tax will never be paid,
it will continue to be deferred until such point as the family give up owning the business and
sell it to a third party).
Roll over relief on incorporation = relief that you can claim if you have a business which is
unincorporated, maybe it is a partnership for example or a sole proprietorship, and you decide
to turn it in to a limited company by selling the business to the company in exchange for assets
in the company. It is considered to be not really a disposal in that situation because the person
who owned the business before ends up owning it through the medium of a limited company
and so therefore it is not appropriate to tax them at that point and so therefore the gain is
rolled over until the situation in which they sell the shares in the business.
Roll over relief on replacement of a qualifying business asset = allows a company to sell an
asset like a factory, an office building for example, and use the money to buy a new one. If
they were taxed on the gain of selling the old one, they might not have enough money to buy
the new one and that might hinder the expansion of the business . So just as they allow you to
avoid paying tax when you sell your main residence, you are allowed to avoid paying the tax
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