Capital gains tax - Payment methods and deadlines

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Overview

Capital Gains Tax (CGT) is a key aspect of UK tax law, particularly for those preparing for the SQE1 FLK1 exam. This tax applies to profits from disposing of chargeable assets, and a solid comprehension is essential for effective tax management and client representation. This guide covers CGT payment methods, deadlines, calculations, and related concepts, preparing you for exam success and a future in legal practice.

Capital Gains Tax Formula

CGT is charged on the profit from selling or disposing of a chargeable asset. Identifying who and what qualifies as chargeable are fundamental steps in calculating liabilities.

Chargeable Persons and Assets

Chargeable persons include:

  1. Individuals
  2. Trustees
  3. Personal representatives of deceased persons
  4. Companies (in certain cases)

Chargeable assets include:

  • Residential property (excluding the main home)
  • Investments such as shares and bonds
  • Business assets
  • Valuable items like artwork and antiques
  • Contractual rights

Some assets are exempt from CGT, such as:

  • Motor vehicles
  • UK government gilts and qualifying corporate bonds
  • Personal effects sold for £6,000 or less

Calculating Chargeable Gains

The basic formula for calculating chargeable gains is:

ChargeableGain=DisposalProceeds−(AcquisitionCost+AllowableExpenditure)Chargeable Gain = Disposal Proceeds - (Acquisition Cost + Allowable Expenditure)

Allowable expenditure includes:

  1. Costs of acquisition
  2. Improvements to the asset
  3. Incidental acquisition and disposal costs (e.g., legal fees, valuation costs)

Example: Complex Gain Calculation

Sarah bought a commercial property in 2010 for £500,000, with legal fees of £5,000 and stamp duty of £25,000. She spent £100,000 on renovations in 2015. By 2023, she sold it for £900,000, incurring estate agent fees of £18,000 and legal fees of £7,000.

Calculation:

  1. Disposal proceeds: £900,000
  2. Less:
    • Acquisition cost: £500,000
    • Legal fees on purchase: £5,000
    • Stamp duty: £25,000
    • Renovation costs: £100,000
    • Estate agent fees: £18,000
    • Legal fees on sale: £7,000
  3. Total deductions: £655,000

Chargeable gain: £900,000 - £655,000 = £245,000

Key Reliefs and Their Effect

Understanding CGT reliefs is essential for minimizing tax liability. Two key reliefs relevant for the SQE1 FLK1 exam are:

1. Business Asset Disposal Relief (BADR)

Formerly Entrepreneurs' Relief, BADR cuts the CGT rate to 10% on qualifying disposals, with a lifetime limit of £1 million in gains.

Eligibility criteria include:

  • Being an officer or employee of the company
  • Holding at least 5% of the ordinary share capital and voting rights
  • The business must be a trading company or a holding company of a trading group

2. Private Residence Relief (PRR)

PRR exempts gains on selling an individual's main home. Key points include:

  • Applies to the property and grounds up to 0.5 hectares
  • The last 9 months of ownership are always covered
  • Lettings relief may apply for periods when part of the property was rented out

Reporting and Payment Deadlines

Timely reporting of CGT is vital to avoid penalties, and requirements vary by disposal type.

Self-Assessment

For most disposals, CGT is reported via the Self-Assessment tax return:

  • Paper returns by 31 October following the tax year of disposal
  • Online returns by 31 January following the tax year of disposal

CGT payments are due by 31 January following the tax year of disposal.

UK Property Reporting Service

Since April 2020, UK residents selling UK residential property must:

  • Report the sale within 60 days (changed from 30 days in October 2021)
  • Pay any CGT due within the same period

This applies even if no CGT is owed or gains are relieved.

Non-UK Residents

Non-UK residents must report UK property sales (residential or otherwise) within 60 days, regardless of CGT liability.

Payment Methods and Strategies

Understanding payment methods and strategic planning is key to managing CGT effectively.

Payment Methods

  1. Online banking
  2. CHAPS
  3. Debit card
  4. Direct Debit
  5. Cheque (in exceptional cases)

Strategic Planning

  1. Annual Exemption: Use the annual exempt amount of £12,300 for 2023/24 by spacing out disposals across tax years.

  2. Loss Relief: Offset losses against gains in the current year or carry forward.

  3. Spouse Transfers: Transfer assets to a spouse or civil partner to use their exemption or lower tax rate.

  4. Deferral Reliefs: Consider options like Enterprise Investment Scheme (EIS) to defer liabilities.

Example: Strategic Disposal

Emma has unrealized gains on shares worth £30,000. She plans to sell in the 2023/24 tax year when her income places her in the higher rate band.

Strategy:

  1. Sell shares realizing £12,300 gain in 2023/24 (covered by annual exemption)
  2. Sell remaining shares in 2024/25, using next year's exemption

This approach could save Emma up to £3,540 in CGT (20% of £17,700).

Interaction with Other Taxes

CGT does not exist in isolation, and its relationship with other taxes is a key area of study for SQE1 FLK1 candidates.

Income Tax

  • CGT rates depend on the individual's Income Tax band
  • Basic rate taxpayers pay 10% CGT on most assets (18% on residential property)
  • Higher rate taxpayers pay 20% CGT on most assets (28% on residential property)

Inheritance Tax (IHT)

  • Assets transferred on death are exempt from CGT but may face IHT
  • The recipient's base cost for CGT generally resets to the market value at death

Corporation Tax

  • Companies pay Corporation Tax on chargeable gains, not CGT
  • The current rate is 19%, rising to 25% for profits over £250,000 from April 2023

Conclusion

A thorough understanding of Capital Gains Tax is vital for success in the SQE1 FLK1 exam and future legal practice. This guide has covered the key aspects of CGT, including chargeable persons and assets, calculation methods, key reliefs, reporting and payment deadlines, and strategic planning. By understanding these elements and how they apply in practice, aspiring solicitors can handle complex CGT scenarios, provide informed client advice, and ensure compliance with HMRC regulations. Keep updated on legislative changes to maintain proficiency in this area of tax law.

Key points to remember:

  1. Identify chargeable persons and assets accurately
  2. Master chargeable gain calculations, including allowable expenses
  3. Apply key reliefs like BADR and PRR effectively
  4. Meet all reporting and payment deadlines, especially for property sales
  5. Use strategic planning to minimize CGT liability
  6. Be aware of CGT's interaction with other taxes, like Income Tax and IHT
  7. Follow legislative updates and changes in tax regulations