Capital gains tax - Chargeable persons and entities

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Overview

Capital Gains Tax (CGT) plays a vital role in the UK tax landscape, affecting individuals and entities profiting from asset sales. For those preparing for the SQE1 FLK1 exam, a deep comprehension of CGT is key. This guide examines the main elements of CGT, covering chargeable persons and entities, asset classification, calculation methods, reliefs, and complex scenarios. By understanding these concepts, candidates will gain the skills needed to handle CGT issues and offer sound legal advice in practice.

Chargeable Persons and Entities

The Taxation of Chargeable Gains Act 1992 (TCGA 1992) provides the structure for CGT liability. Knowing who is chargeable is essential for accurate tax assessment and adherence.

Individual Taxpayers

Individuals, including sole traders, are primarily subject to CGT, incurring liability on gains from personal and business asset sales. Key factors include:

  • Residence status (s.2 TCGA 1992)
  • Domicile effects on non-UK assets
  • Interaction with Income Tax for certain transactions (e.g., share deals)

Partnerships and Limited Liability Partnerships (LLPs)

Partnerships offer specific CGT challenges:

  • Each partner is personally liable for their share of partnership gains
  • LLPs are considered partnerships for CGT purposes, despite their corporate form
  • Special rules cover changes in profit-sharing ratios (s.59A TCGA 1992)

Trustees and Personal Representatives

Trustees and personal representatives have distinct CGT responsibilities:

  • Trustees manage gains on trust assets (s.69 TCGA 1992)
  • Personal representatives oversee CGT on deceased estates during administration
  • Special rates and reliefs may apply (e.g., trusts for vulnerable beneficiaries)

Corporate Entities

While companies face Corporation Tax on chargeable gains, understanding the distinction is crucial:

  • Gains are part of a company's taxable profits
  • Different rates and reliefs apply compared to CGT
  • Group relief can greatly affect tax liability

Chargeable Assets

Identifying chargeable assets is vital to applying CGT. The TCGA 1992 broadly defines chargeable property.

Real Estate

Property transactions constitute a large part of CGT cases:

  • Principal Private Residence Relief (s.222-226 TCGA 1992) can exempt or reduce CGT on main residences
  • Buy-to-let and commercial properties are fully chargeable
  • Special rules apply to properties with mixed or partial business use

Shares and Securities

Share and security disposals carry CGT, with important distinctions:

  • Listed vs. unlisted shares may be treated differently
  • Employee share schemes have specific rules (e.g., Enterprise Management Incentives)
  • Substantial shareholding exemption may apply to companies

Intangible Assets

Intangible assets, particularly goodwill, pose complex valuation and CGT questions:

  • Goodwill sold with a business may qualify for Business Asset Disposal Relief
  • Intellectual property rights (patents, trademarks) are chargeable
  • Interaction with the Intangible Fixed Assets regime for companies

High-Value Items

Personal possessions over £6,000 in value may be subject to CGT:

  • Includes antiques, artworks, and collectibles
  • Exemption applies for "wasting assets" with predictable life under 50 years
  • Special rules for sets of items (s.262 TCGA 1992)

Calculating Capital Gains

Accurate capital gains calculation is crucial for CGT compliance and optimization, involving several steps.

Basic Calculation Methodology

  1. Determine disposal proceeds
  2. Deduct acquisition cost (or March 1982 value for pre-1982 assets)
  3. Subtract allowable expenses (improvement and disposal costs)
  4. Apply available reliefs or exemptions

Use of Market Value

In certain cases, market value must replace actual proceeds:

  • Gifts or non-arm's length disposals (s.17 TCGA 1992)
  • Assets held since March 31, 1982 (use rebasing provisions)
  • Transactions with connected persons (s.18 TCGA 1992)

Allowable Expenses

Recognizing and calculating allowable expenses helps minimize CGT:

  • Acquisition costs (legal fees, stamp duty)
  • Enhancement expenditure reflected in the asset at disposal
  • Incidental disposal costs (agent's fees, advertising)

Reliefs and Exemptions Application

Various reliefs and exemptions can significantly lower CGT:

  • Annual exempt amount (£12,300 for 2023/24)
  • Business Asset Disposal Relief (formerly Entrepreneurs' Relief)
  • Rollover Relief for business assets
  • Hold-over Relief for gifts of business assets

Reliefs and Exemptions

Strategic use of CGT reliefs and exemptions is key for tax planning.

Business Asset Disposal Relief (BADR)

BADR offers a reduced 10% CGT rate on qualifying sales:

  • Applies to entire or partial business disposals
  • Available for shares in a personal company
  • Lifetime limit of £1 million on qualifying gains
  • Strict ownership and involvement conditions

Rollover Relief

Rollover Relief allows deferment of CGT when proceeds are reinvested:

  • Applies to disposals of trade assets
  • Reinvestment must occur within a set timeframe (1 year before to 3 years after disposal)
  • Partial relief available for partial reinvestment
  • Interaction with other reliefs requires careful planning

Hold-Over Relief

Hold-Over Relief defers CGT on gifts of business assets:

  • Applies to business asset or certain shareholding gifts
  • Transfers CGT liability to the recipient
  • Useful in family business succession planning
  • Can be combined with other reliefs when appropriate

Principal Private Residence Relief (PPR)

PPR offers full or partial CGT exemption on the main residence sale:

  • Covers occupation period plus the last 9 months of ownership
  • Special rules for periods of absence (e.g., work-related)
  • Interaction with lettings relief for rental periods
  • Complexities arise with multiple residences or partial business use

Complex Scenarios and Legislative Context

Advanced CGT cases often involve detailed legislative considerations and the intersection of multiple tax regimes.

Interconnected Transactions

The TCGA 1992 addresses series of transactions potentially structured to avoid CGT:

  • Section 29: Transactions between connected persons
  • Section 30: Value-shifting
  • Section 31: Artificial securities transactions

International Aspects

CGT becomes more intricate in international contexts:

  • Double taxation agreements and CGT effects
  • Temporary non-residence rules (s.10A TCGA 1992)
  • Interaction with Inheritance Tax for non-domiciled individuals
  • Offshore trusts and CGT consequences

Corporate Restructuring

Corporate changes present unique CGT considerations:

  • Share-for-share exchanges (s.135 TCGA 1992)
  • Company reconstructions (s.136 TCGA 1992)
  • Demergers and related CGT impacts
  • Interaction with Stamp Duty and Stamp Duty Reserve Tax

Conclusion

Comprehension of Capital Gains Tax principles is essential for success in the SQE1 FLK1 exam and legal practice. Key takeaways include:

  1. Identifying chargeable persons and entities, such as individuals, partnerships, trustees, and corporations.
  2. Understanding the various chargeable assets, from real estate to intangible property.
  3. Calculating capital gains accurately, considering market value rules and allowable expenses.
  4. Strategically applying reliefs and exemptions to lower CGT liability.
  5. Handling complex scenarios like international transactions and corporate restructuring.
  6. Appreciating the legislative context, especially the Taxation of Chargeable Gains Act 1992.

By thoroughly understanding these areas, aspiring solicitors will be prepared to offer insightful advice on CGT matters and manage the intricacies of this critical area of tax law.