This two part article is relevant to candidates sitting Paper F6 (UK) in either the June or December 2014 sittings, and is based on tax legislation as it applies to the tax year 2013-14 (Finance Act 2013).
Question 3 of Paper F6 (UK) focuses on chargeable gains in either a personal or a corporate context, and will be for 15 marks. A small element of chargeable gains may also be included in any of the other questions.
PERSONAL CHARGEABLE GAINS
Scope of capital gains tax (CGT)
CGT is charged when there is a chargeable disposal of a chargeable asset by a chargeable person.
A chargeable disposal includes part disposals and the gift of assets. However, the transfer of an asset upon death is an exempt disposal. A person who inherits an asset takes it over at its value at the time of death.
On 19 May 1999 Jorge purchased an acre of land for £20,200. He died on 20 June 2013, and the land was inherited by his son, William. On that date the land was valued at £71,600.
- The transfer of the land on Jorge’s death is an exempt disposal.
- William will take over the land with a base cost of £71,600.
All forms of property are chargeable assets unless exempted. The most important exempt assets as far as Paper F6 (UK) is concerned are:
- Certain chattels (see later)
- Motor cars
- UK Government securities (Gilts)
In determining whether or not an individual is chargeable to CGT it is necessary to consider their residence status.
Explain when a person will be treated as resident in the UK for a particular tax year, and state how a person’s residence status establishes whether or not they are liable to CGT.
Subject to not meeting any of the automatic non–resident tests, the following people will be treated as resident:
- A person who is in the UK for 183 days or more during a tax year.
- A person whose only home is in the UK.
- A person who carries out full time work in the UK.
A person can also be treated as resident if they have more UK ties than is permitted according to the number of days they are in the UK during a tax year.
A person is liable to CGT on the disposal of assets during any tax year in which they are resident in the UK.
For individuals the basic CGT computation is quite straightforward.
Andy sold a factory on 15 February 2014 for £320,000. The factory was purchased on 24 January 1995 for £164,000, and was extended at a cost of £37,000 during March 2005. During May 2007 the roof of the factory was replaced at a cost of £24,000 following a fire.
Andy incurred legal fees of £3,600 in connection with the purchase of the factory, and legal fees of £5,500 in connection with the disposal.
Andy’s taxable gain for 2013-14 is as follows: