CGT

29 Winston (TX 06/12) (amended)

(a) On 19 May 2014 Winston disposed of a painting, and this

resulted in a chargeable gain of £46,260. For the tax year
2014/15 Winston has taxable income of £19,265 after the
deduction of the personal allowance.
Winston is considering the sale of a business that he has run
as a sole trader since 1 July 2007. The business will be sold
for £260,000, and this figure, along with the respective cost
of each asset, is made up as follows:
29 Winston (TX 06/12) (amended)
Sale proceeds Cost
£ £
Freehold shop 140,000 80,000
Freehold warehouse 88,000 102,000
Net current assets 32,000 32,000
260,000

The freehold warehouse has never been used by Winston for business
purposes.
29 Winston (TX 06/12) (amended)
Required

(i) Assuming that Winston does not sell his sole trader business,
calculate his capital gains tax liability for the tax year
2014/15. (3 marks)

(ii) Calculate Winston’s capital gains tax liability for the tax year
2014/15 if he sold his sole trader business on 25 March 2015.
(4 marks)
 29 Winston (TX 06/12) (amended)
(b) On 3 December 2014 Renaldo sold two acres of land at auction
for gross proceeds of £92,000. The auctioneers’ commission was
5% of the sale price.

Renaldo’s wife’s father had originally purchased three acres of

land on 4 August 2001 for £19,500. He died on 17 June 2008,
and the land was inherited by Renaldo’s wife. On that date the
three acres of land were valued at £28,600.

Renaldo’s wife transferred the land to Renaldo on 14 November

2011. On that date the three acres of land were valued at £39,000.
The market value of the unsold acre of land as at 3 December
2014 was £38,000.
29 Winston (TX 06/12) (amended)

Required

Compute Renaldo’s chargeable gain in respect of the disposal on

3 December 2014. (3 marks)
 Answer
(a)
(i) Winston – CGT liability 2014/15
£
Chargeable gain on painting 46,260
Less annual exempt amount (11,000)
Taxable gain 35,260
CGT liability: £(31,865 – 19,265) = 12,600 @ 18% 2,268
£(35,260 – 12,600) = 22,660 @ 28% 6,345
8,613
 Answer
(ii) Winston – Revised CGT liability 2014/15
£
Gain qualifying for entrepreneurs’ relief
Gain on freehold shop £(140,000 – 80,000) 60,000
Gain not qualifying for entrepreneurs’ relief
Painting 46,260
Less allowable loss on warehouse £(102,000 – 88,000) (14,000)
Net gain 32,260
Less annual exempt amount (11,000)
Taxable gain 21,260
£
CGT liability: £60,000 @ 10% 6,000
£21,260 @ 28% 5,953
11,953
 Answer
Tutorial notes

1 The capital loss on the sale of the freehold warehouse and the
annual exempt amount are set against the chargeable gain from the
sale of the painting as this saves CGT at the higher rate of 28%.
Although the warehouse is being sold with the business, it was
never actually used in the business, and so this aspect of the sale
does not qualify for entrepreneurs’ relief. If it had been used in the
business, the loss of £14,000 would have been deducted from the
gain on the shop to give a net gain on sale of the business of
£46,000. CGT would then be charged on £46,000 at 10%.

2 The unused basic rate tax band of £12,600 is set against the gain
qualifying for entrepreneurs’ relief of £60,000 even though this has
no effect on the 10% tax rate.
 Answer
(b) Renaldo – Chargeable gain 3 December 2014
£
Gross proceeds 92,000
Less: auctioneers’ commission (cost of disposal) £92,000 × 5% (4,600)
Net proceeds 87,400
Less: cost £28,600 × 92,000/(92,000 + 38,000) (20,240)
Chargeable gain 67,160

Tutorial notes
1 The cost of the land is £28,600 which is the value when Renaldo’s
father-in-law died. Renaldo would have taken over this cost when
his wife transferred the land to him.
2 The gross proceeds of sale are used in the part disposal fraction.
 30 Jorge (TX 12/11) (amended)
Jorge disposed of the following assets during the tax year 2014/15:

(1) On 30 June 2014 Jorge sold a house for £308,000. The house
had been purchased on 1 January 1997 for £93,000. On 10
June 2004, Jorge had incurred legal fees of £5,000 in relation
to a boundary dispute with his neighbor.

Throughout the 210 months of ownership the house had been

occupied by Jorge as follows:
 30 Jorge (TX 12/11) (amended)
Months
34 Occupied
18 Unoccupied – Travelling overseas
24 Unoccupied – Required to work overseas by his employer
11 Occupied
30 Unoccupied – Required to work elsewhere in the United Kingdom by his employer
22 Unoccupied – Travelling overseas
26 Unoccupied – Required to work elsewhere in the United Kingdom by his employer
17 Occupied
12 Unoccupied – Required to work overseas by his employer
13 Unoccupied – Travelling overseas
3 Unoccupied – Lived with sister
210
 30 Jorge (TX 12/11) (amended)

Jorge let the house out during all of the periods when he did
not occupy it personally. Throughout the period 1 January
1997 to 30 June 2014 Jorge did not have any other main
residence.
 30 Jorge (TX 12/11) (amended)

(2) On 30 September 2014 Jorge sold a copyright for £80,200. The copyright
had been purchased on 1 October 2012 for £70,000 when it had an
unexpired life of 10 years.
(3) On 6 October 2014 Jorge sold a painting for £5,400. The painting had been
purchased on 18 May 2010 for £2,200.
(4) On 29 October 2014 Jorge sold a motor car for £10,700. The motor car had
been purchased on 21 December 2012 for £14,600.

Required
Calculate Jorge’s taxable gains for the tax year 2014/15. (10 marks)
 Answer
Jorge – Taxable gains computation 2014/15
£
House (W1) 0
Copyright (W4) 24,200
Painting (W5) – exempt as proceeds and cost £6,000 or less 0
Motor car (W6) – exempt asset so loss not allowable 0
Chargeable gains 24,200
Less: annual exempt amount (11,000)
Taxable gains 13,200
 Answer
Workings
1 House
£
Proceeds 308,000
Less: cost (93,000)
Less: enhancement expenditure (defending title to property) (5,000)
Gain 210,000
Less: principal private residence exemption (W2) (188,000)
letting exemption (W3) (22,000)
Gain after exemptions 0
 Answer
2 Principal private residence exemption
Exempt Chargeable Total
months months months
Actual occupation 34 34
Deemed occupation – up to 3 years any reason 18 18
Deemed occupation – any time employed overseas 24 24
Actual occupation 11 11
Deemed occupation – up to 4 years working 30 30
elsewhere in UK
Deemed occupation – up to 3 years any reason
balance (36 – 18) = 18, (22 – 18) = 4 chargeable 18 4 22
 Answer
Deemed occupation – up to 4 years working
elsewhere in UK balance (48 – 30) = 18, (26 – 18) =
8 chargeable 18 8 26
Actual occupation 17 17
Working overseas (12 – [18 – 3 – 13] = 10 10 10
chargeable
Last 18 months – always treated as period of
Occupation 18 18
Totals 188 22 210

Principal private residence exemption £210,000 × 188/210 £188,000

 Answer
Tutorial note
In calculating the principal private residence exemption, any
periods of absence while working overseas, a maximum of four
years absence while working elsewhere in the UK, and a
maximum of three years absence for any reason are treated as
deemed occupation, usually provided that they are preceded
and followed by a period of actual occupation. The second
period working overseas is therefore not a period of deemed
occupation as it was not followed by a period of actual
occupation.
 Answer
Alternative approach
An alternative approach to calculate the chargeable months as follows:
Total period of ownership 210
Less: Actual occupation (34 + 11 + 17) (62)
Deemed occupation - any reason up to 3 years (36)
- employed overseas without limit (24)
- working in UK up to 4 years (48)
Last 18 months - always treated as period of occupation (18)
Chargeable months 22
 Answer
3 Letting exemption
Lowest of:
(i) Gain in letting period £210,000 × 22/210 £22,000
(ii) Gain exempt under PPR (W2) £188,000
(iii) Maximum exemption £40,000

Therefore letting exemption is £22,000

 Answer
4 Copyright
£
Proceeds 80,200
Less cost: £70,000 × 8/10 (N) (56,000)
Gain 24,200

Tutorial note
The copyright is a wasting asset. The cost of £70,000 must therefore
be depreciated based on an unexpired life of ten years at the date of
acquisition and an unexpired life of eight years at the date of disposal.
 Answer
5 Painting
Non-wasting chattel. Gain is exempt as gross sale proceeds are
£6,000 or less.

6 Motor car
Exempt asset for capital gains tax so loss of £(14,600 – 10,700) =
£3,900 is not allowable.
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