CHARGEABLE GAINS
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　　This article looks at chargeable gains in either a personal or corporate context. This article is relevant to candidates sitting Paper F6 （UK） in 2013
　　This two-part article is relevant to candidates sitting Paper F6 （UK） in either the June or December 2013 sittings, and is based on tax legislation as it applies to the tax year 201213 （Finance Act 2012）。
　　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.
　　Example 1 On 19 May 1998 Jorge purchased an acre of land for 20,200. He died on 20 June 2012, 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 Jorgeˇs 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.
　　Example 2 Explain when a person will be treated as resident or ordinarily resident in the UK for a particular tax year and state how a personˇs residence status establishes whether or not they are liable to CGT.
　　A person will be resident in the UK during a tax year if they are present in the UK for 183 days or more.
　　A person will also be treated as resident if they make substantial visits to the UK, with visits averaging 91 days or more over four consecutive tax years.
　　Ordinary residence is not precisely defined, but a person will normally be ordinarily resident in the UK if this is where they habitually reside.
　　A person is liable to CGT on the disposal of assets during any tax year in which they are either resident or ordinarily resident in the UK.
　　Basic computation For individuals the basic CGT computation is quite straightforward.
　　Example 3 Andy sold a factory on 15 February 2013 for 320,000. The factory was purchased on 24 January 1994 for 164,000, and was extended at a cost of 37,000 during March 2004. During May 2006 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 5,800 in connection with the disposal.
　　Andyˇs taxable gain for 201213 is as follows: 
　?、G Disposal proceeds 320,000
　　Cost
　　164,000
　　Enhancement expenditure 37,000
　　Incidental costs （3,600 + 5,800）
　　9,400
　　_______ （210,400）
　　________ Chargeable gain 109,600
　　Annual exempt amount
　　（10,600） _______
　　Taxation gain
　　99,000 _______
　　The factory extension is enhancement expenditure as it has added to the value of the factory.
　　The replacement of the roof is not enhancement expenditure, being in the nature of a repair.
　　Note that the standardised term ˉchargeable gainˇ refers to the gain before deducting the annual exempt amount, while the term ˉtaxable gainˇ refers to the gain after deducting the annual exempt amount.
　　Capital losses Capital losses are set off against any chargeable gains arising in the same tax year, even if this results in the annual exempt amount being wasted. Any unrelieved capital losses are carried forward, but in future years they are only set off to the extent that the annual exempt amount is not wasted.
　　Example 4 For the tax year 201213 Nim has chargeable gains of 17,600. He has unused capital losses of 16,700 brought forward from the tax year 201112.
　?、G Chargeable gains 17,600
　　Capital losses brought forward
　?。?,000） _______
　　Chargeable gains
　　10,600 Annual exempt amount （10,600）
　　_______ Taxable gains Nil
　　_______
　　The set off of the brought forward capital losses is restricted to 7,000 （17,600  10,600） so that chargeable gains are reduced to the amount of the annual exempt amount.
　　Nim therefore has capital losses carried forward of 9,700 （16,700  7,000）。
　　Rates of CGT The rate of CGT is linked to the level of a personˇs taxable income. Taxable gains are taxed at a lower rate of 18% where they fall within the basic rate tax band of 34,370, and at a higher rate of 28% where they exceed this threshold. Remember that the basic rate band is extended if a person pays personal pension contributions or makes a gift aid donation.
　　CGT is collected as part of the self-assessment system, and is due in one amount on 31 January following the tax year. Therefore, a CGT liability for the tax year 201213 will be payable on 31 January 2014. Payments on account are not required in respect of CGT.
　　Example 5 For the tax year 201213 Adam has a salary of 40,105, and during the year he made net personal pension contributions of 4,400. On 15 August 2012 Adam sold an antique table and this resulted in a chargeable gain of 17,400.
　　For the tax year 201213 Bee has a trading profit of 58,105. On 20 August 2012 she sold an antique vase and this resulted in a chargeable gain of 18,600.
　　For the tax year 201213 Chester has a salary of 36,105. On 25 August 2012 he sold an antique clock and this resulted in a chargeable gain of 23,800.
　　Adam Adamˇs taxable income is 32,000 （40,105 less the personal allowance of 8,105）。 His basic rate tax band is extended to 39,870 （34,370 + 5,500 （4,400 x 100/80））， of which 7,870 （39,870  32,000） is unused.
　　Adamˇs taxable gain of 6,800 （17,400 less the annual exempt amount of 10,600） is fully within the unused basic rate tax band, so his CGT liability for 201213 is therefore 1,224 （6,800 at 18%）。
　　Bee Beeˇs taxable income is 50,000 （58,105  8,105）， so all of her basic rate tax band has been used. The CGT liability for 201213 on her taxable gain of 8,000 （18,600  10,600） is therefore 2,240 （8,000 at 28%）。
　　Chester Chesterˇs taxable income is 28,000 （36,105  8,105）， so 6,370 （34,370  28,000） of his basic rate tax band is unused. The CGT liability for 201213 on Chesterˇs taxable gain of 13,200 （23,800  10,600） is therefore calculated as follows:
　　 6,370 at 18% 1,147
　　6,830 at 28%
　　1,912 _______
　　3,059 _______
　　In each case, the CGT liability will be due on 31 January 2014.
　　Entrepreneursˇ relief A reduced CGT rate of 10% applies if a disposal qualifies for entrepreneursˇ relief. This rate applies regardless of the level of a personˇs taxable income. Entrepreneursˇ relief can be claimed when an individual disposes of a business or a part of a business as follows:
　　A disposal of the whole or part of a business run as a sole trader. Relief is only available in respect of chargeable gains arising from the disposal of assets in use for the purpose of the business. This will exclude chargeable gains arising from investments.
　　The disposal of shares in a trading company where an individual has at least a 5% shareholding in the company and is also an officer or an employee of the company. Provided the limited company is a trading company, there is no restriction to the amount of relief if it holds non-trading assets such as investments.
　　The relief covers the first 10m of qualifying gains that a person makes during their lifetime. Gains in excess of the 10m limit are taxed as normal at the 18% or 28% rates.
　　Assets must have been owned for one year prior to the date of disposal in order to qualify, and the qualifying conditions must have been met for a similar period.
　　Example 6 On 15 October 2012 the four shareholders of Alphabet Ltd, an unquoted trading company, all sold their shares in the company. Alphabet Ltd has a share capital of 100,000 1 ordinary shares.
　　Aloi had been the managing director of Alphabet Ltd since the companyˇs incorporation on 1 January 2002. She had held 60,000 shares since 1 January 2002.
　　Bon had been the sales director of Alphabet Ltd since 1 February 2012, having not previously been an employee of the company. She had held 25,000 shares since 1 February 2012.
　　Cherry had never been an employee or a director of Alphabet Ltd. She had held 12,000 shares since 27 July 2005.
　　Dee had been an employee of Alphabet Ltd since 1 May 2003. She had held 3,000 shares since 20 June 2004.
　　刪 Aloiˇs disposal qualified for entrepreneursˇ relief because she was a director of Alphabet Ltd, had a shareholding of 60% （60,000/100,000 x 100）， and these qualifying conditions were met for one year prior to the date of disposal.
　　刪 Bonˇs disposal did not qualify for entrepreneursˇ relief because she only acquired her shareholding and became a director on 1 February 2012. The qualifying conditions were therefore not met for one year prior to the date of disposal.
　　刪 Cherryˇs disposal did not qualify for entrepreneursˇ relief because she was not an officer or an employee of Alphabet Ltd.
　　刪 Deeˇs disposal did not qualify for entrepreneursˇ relief because her shareholding of 3% （3,000/100,000 x 100） was less than the minimum required holding of 5%.
　　Example 7 On 25 January 2013 Michael sold a 30% shareholding in Green Ltd, an unquoted trading company. The disposal resulted in a chargeable gain of 800,000. Michael had owned the shares since 1 March 2006, and was an employee of the company from that date until the date of disposal.
　　He has taxable income of 8,000 for the tax year 201213.
　　Michaelˇs CGT liability for 201213 is as follows:
　?、G Chargeable gain 800,000
　　Annual exempt amount
　?。?0,600） _______
　　789,400 _______
　　Capital gains tax: 789,400 at 10%
　　78,940 _______
　　Although chargeable gains that qualify for entrepreneursˇ relief are always taxed at a rate of 10%, they must be taken into account when establishing which rate applies to other chargeable gains. Chargeable gains qualifying for entrepreneursˇ relief therefore reduce the amount of any unused basic rate tax band.
　　The annual exempt amount and any capital losses should be initially deducted from those chargeable gains that do not qualify for entrepreneursˇ relief. This approach will save CGT at either 18% or 28%, compared to just 10% if used against chargeable gains that do qualify for relief.
　　There are several ways of presenting computations involving such a mix of gains, but the simplest approach is to keep gains qualifying for entrepreneursˇ relief and other gains separate.
　　Example 8 On 30 September 2012 Mika sold a business that she had run as a sole trader since 1 January 2006. The disposal resulted in the following chargeable gains:
　?、G Goodwill 260,000
　　Freehold office building
　　370,000 Freehold warehouse 170,000
　　_______ 800,000
　　_______
　　The assets were all owned for more than one year prior to the date of disposal. The warehouse had never been used by Mika for business purposes.
　　Mika has taxable income of 4,000 for the tax year 201213. She has unused capital losses of 28,000 brought forward from the tax year 201112.
　　Mikaˇs CGT liability for 201213 is as follows:
　　 Gains qualifying for entrepreneursˇ relief 260,000
　　Goodwill
　　370,000 Freehold office building _______
　　630,000 _______
　　Other gains
　　Freehold warehouse 170,000
　　Capital losses brought forward
　?。?8,000） _______
　　142,000
　?、G Annual exempt amount （10,600）
　　_______ 131,400
　　_______ Capital gains tax: 630,000 at 10% 63,000
　　131,400 at 28%
　　36,792 _______
　　Tax liability
　　99,792 _______
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