Fiscal Year (FY) 2022/2023

(6 April 2022 ------------------------------------- 5 April 2023)

Sources of income for an individual person

1 Property income xxx

2 Employment income xxx

3 Trading Income xxx

4 Interest income xxx

5 Dividend income xxx

6 Pension xxx

Total income xxx

Less: Personal allowance (PA) (xxx)

Taxable income xxx

Income Tax Rates

Basic Rate - £1 ---------------- £37,700 20%

High Rate - £37,701 ---------------- £150,000 40%
Additional Rate - £150,000 ---------------- above 45%

Few examples that how to find taxable income, applying tax rates and calculating income tax liability:

Example 1:

Total income £30,000

Required: Taxable income and Income tax Liability?

Total income =

L: PA =

Taxable income =

1
Example 2:

Total income £80,000

Required: Taxable income and Income tax Liability?

Total income =

L: PA =

Taxable income =

Example 3:

Taxable income £195,000

Required: Income tax liability?

Total income =

L: PA =

Taxable income =

2
 Capital Gains Tax (CGT) ––> Individuals

For capital gains tax implications, there must be:

Chargeable Person Chargeable Asset Chargeable Transfer

- UK Resident Person All assets are chargeable, except of Means,

- Inventory - Sale of asset (at MV or < than MV)

- Receivables
- UK Resident Company - Gift of asset
And
- Exchange of asset
- The assets stated on the below
- UK Trusts table are exempt from CGT. - Damage / Destroyed / Stolen
assets and the insurance company

Exempt assets:
The following are exempt assets for capital gains tax;

- Motor vehicles
- National Savings and Investments certificates and premium bonds
- Shares of Venture Capital Trust (VCT)
- Gilt-edged securities (treasury stock)
- Qualifying corporate bonds (QCBs)
- Certain chattels
- Investments held in Individual Savings Accounts
- Wasting chattels (an asset with an estimated remaining useful life of 50 years or less used
forprivate purpose, for eg. Plant and Machinery)

If an asset is an exempt asset any gain is not chargeable and any loss is not allowable.

Annual Exemption £12,300

Rate of Tax Normal Rate Residential Property

– Lower Rate 10% 18%

– High Rate 20% 28%

3
 Individual Person – Capital Gains Tax Calculations
Disposal proceeds xxx

L: Cost of disposal (xx) Cost of Disposal

- Carriage outwards
Net disposal proceeds xxx - Selling commission
- Advertisement
Purchased cost xxx
- legal charges etc…
A: Improvements xxx

Total allowable cost (xx)

Capital gain / capital loss x/(x)

Asset 1 disposal – Gain xxx Annual Exemption 12,300

Asset 2 disposal – Loss (xx) - Cannot create –ve figure of
Asset 3 disposal – Gain xxx
taxable gains
Total gains xxx
L: Annual Exemption (xx)
Taxable gains xxx

Rate of Tax Normal Rate Residential Property

– Lower Rate 10% 18%

– High Rate 20% 28%

 If complete or part of capital gains fall in Basic rate band

CGT @ 10% or 18%

 If complete or part of capital gains fall in High / Additional rate band

CGT @ 20% or 28%

Band limit covered by;

1st. Taxable income
nd
2 . Taxable gains

4
Example 1:

Taxable income £18,000

Taxable Gains £10,000

Calculate CGT liability?

Example 2:

Taxable income £87,700

Taxable Gains £10,000

Calculate CGT liability?

Example 3:

Taxable income £30,000

Taxable Gains £10,000

Calculate CGT liability?

Example 4:

Taxable income £33,200

Taxable Gains £10,000

Calculate CGT liability?

5
 Part Disposal
- This concept is applicable when a person sold a part of an asset

- Cost of part sold is calculated as = M.V of part sold * original cost

M.V of whole asset

Example 1:

10 Acres of Land purchased for £100,000 10 Acres

After few years, 4 Acres sold for £500,000

Remaining 6 Acres M.V at that time is 1 Million

6 Acres

At disposal time, MV is £1,000,000

4 Acres

4 Acres sold for £500,000

1. Cost of part sold:

2. Capital Gains:

3. Cost of un-sold part:

6
Example 2:(Part Disposal)

Ali had purchased a building (comprising of ground floor and first floor) for £120,000 in August 2004. He
sold the first floor for £104,000 in February 2023. Market value of ground floor was £156,000 on that
date.

Required:

1. Cost of part sold:

2. Capital Gains:

3. Cost of un-sold part:

7
 Assets

Chattel Non- Chattel

- Tangible - Intangible

- Moveable - Immoveable

Wasting Non-Wasting Wasting Non-Wasting

Chattel Chattel Non- Chattel Non- Chattel

- Useful life
- Useful life - Useful life - Useful life more than 50
less than 50 more than 50 less than 50 years
years years years

- Exempt from - There could - E.g. Patents, - Normal

CGT be 4 situations copyrights calculations
etc…

DP xxx
Cost (xx)
Gain xxx

Non-Wasting Chattel Original Cost * Remaining life

Total Life
S. # D.P Cost Treatment

1. < 6,000 < 6,000 Exempt

2. > 6,000 > 6,000 Normal

Calculations - Normal calculations

3. < 6,000 > 6,000 Ignore actual DP Or

&
Deemed DP 6,000 - 5/3 Rule

4. > 6,000 < 6,000 Lower of 5/3 (DP – 6,000

8
Example 3:(Painting  Antique Life normally more than 50 years Non-Wasting Chattel)

Babar sold a painting in October 2022 for a sum of £8,400. He had bought the painting in 2001 at a cost
of £4,100. Calculate capital gains for 22/23.

Example 4:(Vases  Antique Life normally more than 50 years  Non-Wasting Chattel)

Asma bought a pair of vases for £3,000 in November 2005. She sold one vase in April 2020 for £5,400,
when market value of the other vase was £6,600.

She sold the second vase in June 2022 for £8,700. Calculate capital gains on both transactions.

9
Example 5: (Copyrights Life normally less than 50 years  Wasting Non-Chattel)

Harry bought a copyright on 1 July 2016 for £20,000. The copyright is due to expire in July 2036. He sold
it on 1 July 2022 for £22,000. Calculate his gains for 22/23.

Shares  Market Value?

* Un-quoted company share’s price  given in exam

* Quoted company share’s price can be calculated as follows:

- Average of ask and bid price or

- Half-up of bid price

Example:

Buying (Bid) Price 80.4

Selling (Ask) Price 80.6

Average of ask and bid price or

Half-up of bid price

10
 Shares  Cost?
- It is very important to calculate the cost of shares at time of shares disposal, because;

- A person purchased different number of shares at different dates and disposing the
shareholding at once from the acquired shares

- Then the cost of shares would be calculated by means of “Matching Principle”

- Matching Principle:

1. Same day purchases (disposal date)

2. Next 30 days purchases (disposal date to next 30 days)

3. Shares in the pool (on weighted average basis)

Shares pool to be created by keeping in mind the following:

Right Issue Bonus Issue

Issued to existing shareholders Issued to existing shareholders

Total No. of shares Increase, Total cost Increases Total No. of shares Increase, No impact on cost

Issued against some consideration Issued free of cost

11
 Transfer of Assets between Spouses or Civil Partners in Capital Gains
- Transfer of any asset between spouses or civil partners will be exempt from capital gains

- Irrespective of the consideration involved

Husband Transferred a house (Cost £100,000) to his wife

Husband Wife

Case A Case B

Sold @ Gifted
(No consideration
£175,000 received)

12
 Capital Loss
Step 1:

Current year CL on disposal of an asset  Adjust against  Capital gain in current year from disposal of
other assets

Step 2:

After the adjustment in step 1 above, if there is still capital loss remaining  adjust against  future
capital gains (first available income and maximum possible extent), however, loss should be restricted to
preserver “Annual Exemption (AE) of £12,300”.

Example:
Show the treatment of CL:

(Without planning AE) 21/22 22/23 23/24

Capital gain (10,000) 15,000 20,000

Adjustment of loss

AE (not preserving)

Taxable gains

(With planning AE) 21/22 22/23 23/24

Capital gain (10,000) 15,000 20,000

Adjustment of loss

AE (preserving)

Taxable gains

13
Question 1 (Exam style Question - Extract)

Required:What amount of unused capital losses do Hali and Goma have brought forward to the tax year
2022/23?

Hali had capital losses of £39,300 for the tax year 2020/21. He had chargeable gains of £15,700 for the
tax year 2021/22.

Goma had capital losses of £9,100 and chargeable gains of £6,900 for the tax year 2021/22. She did not
have any capital losses for the tax year 2020/21.

14
 Sale / Transfer / Gift of Assets to Connected Person and Available Reliefs
- Spouses are not covered in connected persons (transfer between spouses is exempt from CGT)

- Connected persons  Parents, Siblings, Children, In-laws etc….

- If a person Sale / Transfer / Gift of Assets to Connected Person, it would always be considered at
M.V

- DP = MV

- When asset gifted  Relief available Gift Relief (Gift holdover relief)

- When asset sold at less than MV Relief available Holdover Relief (Gift holdover relief)

- Conditions: For claiming any of the above relief(s),

- Assets should be the “Business Asset” (ie, must be used in business)

- Both persons should agree to claim the relief

- Crystallization of deferred gains  when asset sold to an unconnected person / Cease to be UK

resident (within 6 years from end of tax year of gift)

Example: Asset gift and gift relief:

Mr. A purchased a shop at a cost of £125,000 in 2003 and gifted to his son in September 2022 when it
had a market value of £190,000.

His son sold the shop for £210,000 in January 2023. Calculate the capital gains for both persons under;

a) Not claiming the Gift holdover relief

Mr. A (not claiming the Gift holdover relief) Son (not claiming the Gift holdover relief)
D.P (MV) D.P (MV)
L: Cost L: Cost
Gains Gains
Chargeable gains Chargeable gains

b) Claiming the Gift holdover relief

Mr. A (claiming the Gift holdover relief) Son (claiming the Gift holdover relief)
D.P (MV) D.P (MV)
L: Cost L: Cost
Gains Gift Relief
Gift Relief Base cost
Chargeable gains Chargeable gains

15
Example: Asset Sold at Less Than MV and Hold OverRelief:

Mr. A purchased a shop at a cost of £125,000 in 2002 and sold to his son in September 2022 for
£180,000 when it had a market value of £190,000.

His son sold the shop for £210,000 in January 2023. Calculate the capital gains for both persons under;

a) Not claiming the Gift holdover relief

Mr. A (not claiming the Gift holdover relief) Son (not claiming the Gift holdover relief)

D.P (MV) D.P (MV)

L: Cost L: Cost

Gains Gains

Chargeable gains Chargeable gains

b) Claiming the Gift holdover relief

Mr. A (claiming the Gift holdover relief) Son (claiming the Gift holdover relief)

D.P (MV) D.P (MV)

L: Cost L: Cost

Gains Holdover Relief

Holdover Relief Base cost

Chargeable gains Chargeable gains

Conditions for claiming Gift holdover relief:

- All conditions are same as Gift Relief (Gift holdover relief)

- Crystallization of Deferred gains is also same like Gift Relief (Gift holdover relief)

16
Question 2
Paul Opus disposed of the following assets during the tax year 2022/23. (Assume business asset disposal
relief (entrepreneur relief) is not claimed in any of the disposals).

Paul had a capital loss of £8,500 bought forward as at06 April 2022. Assuming Paul’s employment
income for the tax year 2022/23is £80,000.Calculate his capital gains tax for 2022/23.

1. On 10 April 2022 Paul sold 5,000 £1 ordinary shares in Symphony Ltd, an unquoted trading
company, for £23,600. He had originally purchased 40,000 shares in the company on 23 June
2016 for £120,000, and purchased a further 10,000 shares on 18 September 2019 for £44,000

2. On 15 May 2022 Paul made a gift of 10,000 £1 ordinary shares in Concerto plc to his daughter.
On that date the shares were quoted on the Stock Exchange at £5.10–£5.18, with recorded
bargains of £5.00, £5.15 and £5.22. Paul had purchased 10,000 shares on 29 April 2015 for
£14,000 and received a one for two bonus issue on 31 January 2016. The shareholding is less
than 1% of Concerto plc’s issued share capital, and Paul has never been employed by Concerto
plc.

3. On 9 June 2022 Paul sold a vintage Aston Martin motor car for £76,400. The motor car had been
purchased on 21 January 2010 for £34,800.

4. On 4 July 2022 Paul sold an antique vase for £9,350. The antique vase is one out of a pair of two
vases purchased earlier on 19 January 2017 for £6,200. Market value of the other remaining
vase on the day of sale is £7,650.

17
5. On 16 August 2022 Paul sold three hectares of freehold land for £285,000. He had originally
purchased four hectares of land on 17 July 2016 for £220,000. The market value of the unsold
hectare of land on the day of disposal was £90,000.

6. On 21 September 2022, Paul sold his quarter share in a racing horse for £36,000, which was
purchased two years ago for £19,000.

7. Paul sold a copyright for £75,000 on 5 October 2022, which he had purchased on 01 October
2012 for £35,000. The copyright is due to expire on 30 September 2047.

8. On 18 October 2022, Paul sold one chair for £8,400, from a set of three antique chairs. The set
of chairs was purchased 12 years ago for £9,000, and Paul had earlier sold one chair from the set
for £5,500 in 2018. Market values of other chairs were £15,500 in 2018 and Market value of
remaining chair in 2022 is £9,600.

18
9. Paul had purchased a 25 years lease on land for £18,000 in October 2012. He disposed of this
piece of land for the sum of £54,000 on 30 October 2022.
(Lease depreciation % 45 yrs = 98.059, 35 yrs = 91.981, 25 yrs = 81.100, 15 yrs = 61.617, 5 ys =
26.722)

10. On 5 March 2023 Paul sold a freehold holiday cottage for £125,000. The cottage had originally
been purchased on 28 July 2007 for £101,600 by Paul’s wife. She transferred the cottage to Paul
on 16 November 2017 when it was valued at £114,800.

11. 2,000 shares in APC Ltd were sold for £3,500 on 31 March 2023. Paul's purchases of APC Ltd
shares have been:
14 September 2014: 1,000 shares for £500
16 November 2016: 500 shares for £550
19 October 2018: 500 shares for £775
31 March 2023: 200 shares for £300

19
Asset 1

Asset 2

Asset 3

Asset 4
Asset 5

Asset 6

Asset 7
Asset 8
Asset 9

Asset 10

Asset 11
Total Gains
L: Annual Exemption
L: Capital Loss b/f

Taxable Gains
CGT Liability @

If Cottage is Residential Property:

Normal Assets Gains Residential Property

Total Gains
L: Annual Exemption

L: Capital Loss b/f

Taxable Gains
CGT @

CGT Liability

Total CGT

20
 Reliefs (2 Types)
Tax Deferral Reliefs Tax Savers (Reducers) Reliefs
- Gift Relief (Gift holdover relief) - Business Asset Disposal Relief

- Holdover Relief (Gift holdover relief) - PPR Exemption

- Rollover Relief - Letting Relief

- Holdover Relief - Investors’ Relief

- Insurance Relief - SEIS Reinvestment Relief

- Paper For Paper Exchange

- Incorporation Relief

- EIS deferral relief

PrincipalPrivateResidence
1. The09monthsdirectlyprecedingthedisposalofproperty
2. Anyperiodorperiodswhichtogetherdonotlastmorethan threeyears
3. Anunlimitedperiodthroughoutwhich theindividualwasemployedabroad
4. Anyperiodsorperiodnotlastingmorethanfouryears,
throughoutwhichtheindividualwaspreventedfromresidinginthepropertybecause
a. Hisplaceofworkwastoofarfromhisproperty
b. Hisemployerrequiredhimtoresidesomewhereelse

21
Question 3 (Principal PrivateResidence)

On 30 September 2022 Hue sold a house for £381,900. The house had been purchased on 1 October
2002 for £141,900.

Hue occupied the house as her main residence from the date of purchase until 31 March 2006. The
house was then unoccupiedbetween 1 April 2006 and 31 December 2009 due to Hue being required by
her employer to work elsewhere in the UK.

From 1 January 2010 until 31 December 2016 Hue, again occupied the house as her main residence.
The house was thenunoccupied until it was sold on 30 September 2022.

Calculate the chargeable gain on the house.

DP =

Cost =

Gains =

PPR =

Chargeable Gain =

Exempt Months Chargeable Months

1 October 2002 to 31 March 2006 (occupied)
1 April 2006 to 31 December 2009 (working in UK)
1 January 2010 to 31 December 2016 (occupied)
1 January 2017 to 31 December 2021 (unoccupied)
1 January 2022 to 30 September 2022 (final 9 months)

- The total period of ownership of the house is 240 months (180 + 60), of which 180 months
qualify for exemption:

- No part of the unoccupied period from 1 January 2017 to 31 December 2021 qualifies as a
period of deemed occupation because it was not followed by a period of actual occupation.

- Private residence relief is therefore £__________ (240,000 x ___/___).

22
Question 4 (Business use of PPR)

Mr. Small purchased a property for £35,000 on 31 May 2008and began operating a dental practice from
that date in one quarter of the house. He closed the dental practice on 31 December 2022, selling the
house on that date for £130,000.

Compute the gain.

23
 Business Asset Disposal Relief (BADR)
This relief is available for individuals, when individual

- Disposing of complete business or part of business

- Share of partnership is sold
- Individual asset are being sold at time of business cessation (with in 3 yrs of cessation)
- Disposing shares of - Company, in which person is

- Employee (part-time or full-time), and

- owns at least 5% of the ordinary shares (voting rights)

The assets must be owned for two years prior to date of disposal and must be business asset (not
available on investments)

This relief covers the first £1 Million of qualifying gains that an individual makes during their lifetime.
This gain is taxed at a lower CGT rate of 10% regardless of taxable income

Question 5(Business Asset Disposal Relief)

On 30 November 2022, Mae sold a business that she had run as a sole trader since 1 December 2002.
The sale resulted in the following capital gains:

Goodwill £250,000
Freehold office building £320,000
Warehouse (£90,000)

In November 2022 Mae also sold 20% shareholding in X plc where she has been employed from the date
when she acquired the shares in July 2018. The gain rising was £370,000. Mae claimed BADR relief in
respect of this.

Calculate her CGT liability.

24
Question 6(Business Asset Disposal Relief)

30 September 2021, Mika sold a business that she had run as a sole trader since 1 January 2017. The
assets were all owned for more than twoyear prior to the date of disposal.The sale resulted in the
following capital gains:

Goodwill £260,000
Office building £370,000
Warehouse £170,000 (Never been used for business purposes)
£800,000

Mika has taxable income of £8,000 for the tax year 22/23. She has unused capital losses of £28,000
brought forward from the tax year 21/22.

Mika’s capital gains tax liability will be?

Tax Band is covered by:

1st. Taxable Income
2nd. Taxable Gains

2A. Business asset disposal relief & Investor Relief

2B. Non-Business asset disposal relief & Non-Investor Relief
2Bi. Residential property relief
2Bii. Normal gain

Annual exemption & Loss b/f allocation (Tax Planning Aspect)

1. Residential property gains

2. Normal gains
3. Entrepreneur Relief (BADR) and/or Investor Relief

25
Question 7

On 25 January 2023 Michael sold a 30% shareholding in Green Ltd, an unquoted trading company. The
disposal resulted in a chargeable gain of £180,000. Michael had owned the shares since 1 March 2016
and was an employee of the company from that date until the date of disposal. Michael has already
used entrepreneur limit of £930,000 in previous years. He has taxable income of £8,000 for the tax year
2022/23.

Michael CGT liability would be?

26
 Investors’ Relief
- This relief is available for individuals disposing of shares of trading unquoted companies.

- This relief covers the first £10 Million of qualifying gains that an individual makes during their
lifetime (separate limit from Entrepreneur Relief Limit). This gain is taxed at a lower CGT rate
of 10% regardless of taxable income

To qualify for investors’ relief, shares must be:

- Newly issued shares acquired by subscription

- Owned for at least three years after 6 April 2016
- The investor must not be an employee or a director (can be unremunerated director)

Question 8(Investors’ relief)

On 20 June 2019, Winnie subscribed for 150,000 £1 ordinary shares (a 2% shareholding) in Unquote Ltd,
an unquoted trading company, at their par value.

She has never been an employee or director of the company. Winnie sold the 150,000 shares in
Unquote Ltd for £760,000 on 15 December 2022.

Explain why entrepreneur relief limit is not available to Winnie? Explain why investor relief would be
available to Winne and what will be her CGT liability if investor relief applies?

27
 Transfers on Death
- Any asset transferred at time of death, is exempt from CGT. However, IHT is applicable.

- The asset is to be accounted for @ M.V / Probate value of asset being transferred at death time.

Death  Land Transferred to Son (Cost £120,000) (MV £260,000)

Mrs. A Son

Question 9

Ahmed sold the following assets during 2022/23 and he is high-rate taxpayer. Calculate the net cash
Ahmed will receive after paying all taxes, assuming all applicable relief’s are claimed during these
transactions. Ignore business asset disposal relief and investor relief.

a. A freehold warehouse for £205,000 on 31 May 2022. The warehouse was originally purchased
by his father in 2002 for £90,000 and has been used in business since then. Ahmed acquired the
warehouse on his father’s death when the probate value was £165,000.

b. A painting for £9,500 on 15 July 2022. The painting was given to Ahmed by his Uncle as a
birthday gift two years ago, when it had a value of £7,500. His uncle had purchased the painting
for £3,400 in 2014.

c. An office building for £220,000 in December 2022. The office building was given to Ahmed by his
father as a gift in January 2018 when it had a market value of £185,000. His father had
purchased the office for £130,000 in 2016. It is to be considered as a business asset.

28
d. 20,000 shares of ABC plc, an unquoted company, for £6 each. The shares were transferred to
him by his wife in January 2023. His wife had received the shares as gift from her father in
August last year, when they were valued at £4.5 each. They were originally purchased in
September 2016 for £3.2 each.

a.

b.
c.
d.

Total Gains
L: Annual Exemption
L: Capital Loss b/f

Taxable Gains

CGT Liability@

Proceeds from a.

Proceeds from b.

Proceeds from c.
Proceeds from d.

L: Tax Paid

Net of Tax, Cash Proceeds

29
 Business Asset Sold&Business AssetPurchased  Rollover Relief

- When a business asset is sold and a new business asset is acquired, then the Rollover Relief can
be claimed

- There could be two scenarios as follows:

Scenario A Scenario B

Business asset sold and re-invested the whole amount Business asset sold and re-invested the partial amount
in acquiring the other business asset in acquiring the other business asset

Rollover relief can be claimed in partial

Rollover relief can be claimed in full
(un-invested amount is taxed immediately)

- Crystallization of gains under ROR  when the purchased asset is sold and proceeds not re-
invested

Question 10(Rolloverrelief)

Babar sold a factory building on 15 Jun 22 for £525,000 which hepurchasedin 1997 at acost of£225,000.
Hepurchasedanotherfactorybuildingforasumof£475,000on1 Jan 23.

BothbuildingsareusedinbusinessandBabarclaimsallreliefsavailabletohim.Calculatehiscapitalgainsfor2
2/23.

Factory Sold Factory Purchased (partial amount re-invested)

D.P

L: Cost Cost

Gains Rollover Relief

Rollover Relief Base cost

Chargeable gains

30
Question 11

Ahmedsoldafactorybuildingfor£325,000on12 Feb 23.Hehadpurchased thebuildingon15

Jan15atacostof£120,000,aftersellingawarehouseon7 Mar 14for 145,000.Thegainsarising
onsaleofwarehousewas£70,000. Bothbuildingsareusedinbusiness&Ahmedclaimsallreliefsavailabletohim

Calculatehiscapitalgainsfor22/23.

Warehouse Factory Purchased

D.P D.P

L: Cost Cost

Gains Rollover Relief

Rollover Relief Base cost

Chargeable gains Gain

Question 12 (Non-Business Use of Business Asset)

John bought a factory for £150,000 on 11 January 2013, for use in his business. From 11 January 2014,
he let the factory out for a period of two years. He then used the factory for his own business again,
until he sold it on 10 July 2022 for £225,000. On 13 January 2023, he purchased another factory for use
in his business. This second factory cost £300,000.

Calculate chargeable gain on the sale of first factory and the base cost of the second factory.

31
 Non-Depreciating
Rollover Relief
Re-invest asset
available
Business Asset
Sold &
Re-invest Holdover Relief
Depreciating asset
available

Depreciating assets:
Asset becomes wasting in 10 years. Asset with a life of 60 years or less is Depreciating. Plant and
machinery is always treated as depreciating.

Crystallization of Deferred Gain:

- The deferred gain (under HOR) is not deducted from the cost of new asset (like ROR)
- The deferred gain simply “Freeze” and become taxable at the earliest of;

(a) The disposal of the replacement asset and proceeds are not re-invested
(b) The date the replacement asset ceases to be used in the business
(c) Ten years after the acquisition of the replacement asset (maximum)

Question 13 (Gain deferred into depreciating asset)

Norma bought a freehold shop for use in her business in June 2014 for £125,000. She sold it for
£140,000 on 1 August 2022. On 10 July 2022, Norma bought some fixed plant and machinery to use in
her business, costing £150,000. She then sells the plant and machinery for £167,000 on 19 November
2023. Show Norma's gains in relation to these transactions.

What would be changed to answer if Norma disposed of plant and machinery on 19 Nov 2033?

32
 Asset Destroyed / Stolen

If Insured If Not-Insured

- Person will get proceeds - Person will not get proceeds

from insurance co. from insurance co.

- Insurance proceeds considered - the DP = NIL

As Disposal Proceeds (D.P)
D.P (Insurance Proceeds)
Cost
There will be loss, as there must
Some cost of that asset.
xxx
On such loss, we can have option to
claim Negligible Value Claim (NVC)
(xx) (see later)

Gain / (Loss) xxx

- Insurance proceeds used to purchase another asset  then  you may claim  Insurance
Relief

- If insurance proceeds not used to purchase another asset  then  Normal calculations

Proceeds Re-Invested

If complete re-investment If partial re-investment

All gains would exempt Partial gains would exempt

Question 14(Assets lost /destroyed)

Marrypurchasedadiamondnecklacecosting £8,400on12 Jun 03.Thenecklacewasstolenon15 Jan

22,andinsurancecompanypaidcompensationof£12,000on31 Jul
22.Marrypurchasedanothernecklaceusingthecompensation forasumof£15,800on1 Aug 22.

Calculatehercapitalgainsfor22/23.

33
Question 15(Assetslost– restrictionofgains)

Asmapurchasedagoldbraceletcosting£6,500on31 Jan 97.Thebraceletwasstolenon21 Jan

22,andtheinsurancecompanypaidacompensationof£12,000on30 Jun
22.Asmapurchasedanotherbraceletusingthecompensationforasumof£11,500on1 Sep 23.

Calculatehercapitalgainsfor22/23.

Asset Damaged

If insured If Not-Insured

Person will not get proceeds from

Person will get proceeds from insurance co.
insurance co.

Proceeds used in restoration of Proceeds not used in restoration

asset of asset
An election can be made to
deduct proceeds from cost of
asset

Revised Cost of Asset

- Normal CGT calculations No disposal recorded and no CGT

implications
- DP = Insurance Proceeds
Original cost XX
- Cost = Part Sold Cost
A: Restoration exp XX
L: Insurance proceeds (XX)
Revised cost of asset XXX

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 Re-organization / Takeover / Acquisition and Shares for Shares Exchange
- Re-organization / Takeover means, a company is acquiring another company and at that time
- Existing shareholders get additional number of shares for free of cost
- When the shareholder dispose the shareholding in future, then the determination of cost of
shares is very important as he got the shares for free
- Lets take an example

Acquired 10,000 shares @ 10 each = £100,000 Company Y

Mr. Happy

Acquired
Company Z

Offered the following to the existing

shareholders of Company Y

2 ordinary share (M.V 12 each) 1preference share (M.V 6 each)

Total # of ord. shares: Total # of pref. shares:

M.V: M.V:

Worth of ord. shares: Worth of pref. shares:

Cost of ord. shares = worth of ord. shares * Original cost Cost of pref. shares = worth of Pref. shares * Original cost
Total worth Total worth

Cost / ord. Share: Cost / pref. Share:

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Assume, Mr. Happy sold 12,000 ordinary shares at £20 each.
Disposal proceeds (12,000 X 20) = £240,000
Cost (12,000 X __) =
Capital gains =

After some time, Mr. Happy sold 1,000 preference shares for £50,000.
Disposal proceeds (1,000) = £5,000
Cost (1,000 X __) =
Capital gains =

Re-organization / Takeover / Acquisition and Shares for Shares and Cash Exchange

- As discussed earlier, Re-organization / Takeover means, a company is acquiring another

company and at that time
- Existing shareholders get additional number of shares for free of cost and
- Cash against the shares already held by them, and it cash received will be taxed immediately
- When the shareholder dispose the shareholding in future, then the determination of cost of
shares is very important as he got the shares for free
- Lets take an example

Acquired 10,000 shares @ 10 each = £100,000

Mr. Happy Company Y

Acquired

Company Z

Offered the following to the existing

shareholders of Company Y

2 ordinary share (M.V 12 each) 1preference share (M.V 6 each)

Cash £2/share

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37
 Re-organization / Takeover / Acquisition and Shares for Shares and Loan Notes

- As discussed earlier, Re-organization / Takeover means, a company is acquiring another

company and at that time
- Existing shareholders might get additional number of new shares, cash and
- loan notes against the shares already held by them and any future disposal of loan notes would
be exempt from CGT (as the loan notes are Qualifying Corporate Bonds)
- Lets take an example

Acquired 10,000 shares @ 10 each = £100,000

Mr. Happy Company Y

Acquired
Company Z

Offered the following to the existing

shareholders of Company Y

1 ordinary share (M.V 8 each) 1preference share (M.V 4 each)

1 £100 loan note for 50

shares
MV = £110/loan note

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39
 Incorporation Relief (IR)
Availability:
Incorporation relief is available in 02 situation, when;

- Sole trader business get incorporate its business (Started operating as a company) or

- Un-incorporated business (whether sole trader or partnership) transferred their business to

incorporated entity  and get consideration in form of shares

Conditions:

- All assets (except of cash) must be transferred

- The business must be a going concern

Formula to calculate IR:

M.V of shares received X Gains

M.V of whole assets

How it works:

40
 Question 16(Incorporation)

(a) Calculate the chargeable gains, if any, arising on the incorporation of Sarah’s business and state
Sarah’s base cost in the shares in Sarah Ltd assuming:

Sarah incorporated her sole trader business on 1 June 2022. The assets transferred to the new company,
Sarah Ltd, are set out below:
Assets transferred Market value at 1.6.22 Original cost
£ £
Freehold premises – acquired May 2005 150,000 70,000
Furniture and fittings 5,000 10,000
Plant and machinery 5,500 15,000
Stock 25,500 25,000
Goodwill 54,000 –
––––––– –––––––
240,000 120,000
––––––– –––––––
Sarah continued to run the business as the sole director and shareholder of the company. Sarah is an
additional rate taxpayer.

(ai) Sarah received 100,000 £1 ordinary shares in (aii) Sarah received £30,000 cash and 100,000 £1
exchange for the business. ordinary shares in exchange for the business.

Sole Trader Company Sole Trader Company

41
Let’s assume:

Capital loss b/f 24,700

Annual Exemption of 22/23 Un-used

Cash consideration how much? NO CGT LIABILITY

42
(b) Calculate the CGT payable by Sarah in 2023/24 assuming she received only shares on incorporation
(scenario part (a)(i) above), and she sold all of the shares on 1 May 2023 for £300,000. She makes no
other disposals in the tax year.

Assume that the rates and allowances for 2022/23 continue in the future.

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Question 16 Again (ai & b)  Incorporation relief disapply

44
 Interaction of BADR with other Reliefs

- BADR vs Gift Relief / Holdover Relief

- BADR vs Paper For Paper Exchange Relief
- BADR vs Rollover Relief / Holdover Relief

 Go with deferral relief  Pay more but later

 No go with deferral relief  Pay less but now

Tax Planning Aspect:

If future disposal does not qualify for BADR (whereas, currently you will get it), from tax saving angle,
should not go for deferral relief.

Example: (BADRvsGift Relief / Holdover Relief)

On 10 January 2023, Delroy made a gift of 25,000 £1 ordinary shares in Dub Ltd, an unquoted trading
company, to his son, Grant. The market value of the shares on that date was £240,000. Delroy had
subscribed for the 25,000 shares in Dub Ltd at par on 1 July 2006. Delroy and Grant have elected to hold
over the gain as a gift of a business asset.

Grant sold the 25,000 shares in Dub Ltd on 18 March 2023 for £240,000. Dub Ltd has a share capital of
100,000 £1 ordinary shares. Delroy was the sales director of the company from its incorporation on 1
July 2006 until 10 January 2023. Grant has never been an employee or a director of Dub Ltd.

For the tax year 2022/23, Delroy and Grant are both higher rate taxpayers. They have each made
other disposals of assets during the tax year 2022/23, and therefore they have both already utilized
their annual exempt amount for this year.

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Example: (BADR vs Paper For Paper Exchange Relief)

Acquired 10,000 shares @ 10 each = £100,000 Company Y

A

Acquired
Company Z

Offered the following to the existing shareholders of

Company Y

1 ordinary share (M.V 8 each) 2preferenceshare (M.V 4 each)

Total # of ord. shares: X M.V Total # of pref. shares: X M.V

Worth of ord. shares: Worth of pref. shares:
Total Worth:

Cost of ord. shares Cost of pref. shares

Cost / ord. Share: Cost / pref. Share:

After some time if Mr. Adisposeentire 20,000 pref. shares @15 each.

Disposal proceeds (20,000X15) = £75,000

Cost (20,000X __) =
Capital gains =

If Paper for Paper Exchange Relief is Disapplied at time of Exchange, then

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 Jointly Owned Assets
- From the income generating assets  any income / capital gains  always distributed equally
- Unless; there is an election for the proportion of the ownership of the asset.

Joint Bank Account  Interest Income

- Income from joint bank account  always distributed equally
- There is no concept of proportion of ownership

Joint shareholding
- From legal aspect, there is no concept of joint shareholding
- Dividend is always based on actual shareholding

Negligible Value Claim (NVC)

- When any of the asset becomes “NIL” or “Approximately NIL” value (&Asset is not insured)

- Then NVC can be made in the following 2 situations:

1. Asset  Destroyed / Stolen

2. Asset  Shares of a company (e.g. when a company is about to bankrupt)

How NVC works:

- A person can make an election, under which it is assumed that asset is sold today @ its M.V
(which is = NIL) & realizes a capital loss (not necessary – asset sold actually)

- It is further assumed that the asset is re-acquired @ its today’s M.V

Assumption 1 Assumption 2

Deemed DP NIL

Cost NIL

Benefit of VNC:

- For NVC  It is possible to carry the loss back upto 2 years, provided the asset
would be of Negligible Value that time.

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 Terminal Capital Loss (TCL)
- Capital loss arose in the fiscal year in which a person dies, would be treated as TCL
- For example, a person died in the FY 22/23 and he has capital loss in the same FY
- TCL would be adjusted by carrying back it against capital gains, upto 03 tax years on LIFO basis
(maximum possible extent)

19/20 20/21 21/22 22/23 (Death Year)

- However, loss should be restricted to preserve Annual Exemption (like capital loss b/f)
- The refund from adjusting the TCL from previous year’s gains would be Taxable Receipt for IHT
purposes

Small Part Disposal of Land & Building

Disposing a small part of land& building at time of disposal there would be a gain amount,

unless an election is made; to make the gains exempt at disposal time of that small part

The effects / consequences of making election is:

- There will be no part disposal @ that time

- The gain would be deferred until the disposal of remainder part
- No need to pay immediate tax on part disposal

How the relief works:

- The gain would be deferred be deducting the proceeds receive on part disposal from original
cost of asset

- The “base cost” of part retained is reduced & future gain on disposal would be higher.

What is the definition of small part land & building?

a) Disposal less than 20% of the total current value (before disposal) AND
b) Total disposal of land in the year is less than £20,000

(both conditions should be met)

Example:

4 hectares of Land purchased for £40,000. After some time, 0.5 hectare sold for £12,000 when the MV
of whole land was £100,000.

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 Sale of Rights– NIL Paid
- Let say, I have 10,000 shares of a company, and today company announced a 1 for 4 Right Issue.

- Then, I am eligible to be entitled to receive 2500 shares (10000X1/4) at a less than MV.

- Assume, I am going to sale of rights of right issue, then if;

1. Selling price is less than 5% of total value of shares OR

less than £3,000,
 no chargeable disposal @ time of “Sale of Rights – NIL paid”.

&

S.P (Consideration Received) would be deducted from cost of share (base cost would be
reducedand future gain on disposal would be higher)

2. Selling price is more than 5% of the total value of sharesAND

more than £3,000,
 deemed part disposal of original shares held (Due to TERP), “Normal part disposal
calculation”.

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CGT Liability Payment Date  at once pay @ 31 January after FY

FY 22/23 (6.Apr.22 ------- 5. Apr. 23) 

Land/Building/Controlling Shares of a Company &Installment Option

If a person has gifted any of the above stated assets and if Gift Relief is Not Available on such gifts,
Then,
- Person can pay CGT liability in 10 Equal Annual Installments, starting on normal due date, then
annually thereafter.
- If the asset is disposed off by the giftee/transferee within 10 years, then all remaining
installments become immediately payable.
- If installment is late, then interest would charge @ 3.25% on all remaining installments.

Disposal of Residential Property &Payments on Account

A payment on account (POA) must now be made within 30 days where capital gains tax is payable in
respect ofa disposal of residentialproperty. A return must be submitted to HMRC at the same time.

Example:Mr. Zee, a High-Rate Taxpayer, disposed the following assets during the FY 22/23:

- 24 April 2022, £5,000 capital loss on disposal of X shares

- 11 June 2022, £9,000 capital gain on disposal of Y shares
- 31 July 2022, £50,000 capital gain on disposal of Residential Property
- 09 Sept 2022, £1,000 capital loss of disposal of Z shares

When to make POA on the disposal of R.P? _______________

What should be the amount of POA on the disposal of R.P? _______________

Payment on Account:
Residential Property Gain xxx
Capital loss on disposals – Prior to the disposal of R.P in same FY (xx)
b/f Capital Loss (xx)
Annual exempt amount (xx)
Net Residential Property Gains xxx
CGT @ 18% or 28% XXX
The calculation of the payment on account takes into account the annual exempt amount, any capital
losses incurred in the same taxyear prior to the disposal of the residential property, plus any brought
forward capital losses. Any other chargeable gains and capitallosses incurred subsequent to the disposal
of the residential property are ignored.

It is necessary to make an estimate as to how much of the taxpayer’s basic rate tax band will be
available for the tax year.

50
A payment on account of capital gains tax has nothing to do with the normal self-assessment payments
on account due on 31January in the tax year, and 31 July following the tax year.

The residential property gain is still included in the taxpayer’s self-assessment capital gains tax
computation following the end of thetax year, with the payment on account being deducted from the
total capital gains tax liability. Any additional tax is payable on 31January following the tax year. If a
repayment is due, then this will be claimed when the self-assessment tax return for the tax year
issubmitted.

The additional capital gains tax payable on 31 January 2024 is:

£
Residential Property Gain xxx

Total Capital losses xxx

b/f Capital Loss (xx)

Annual exempt amount (xx)

Net Residential Property Gains xxx CGT@ 28% =

Other gain xxx CGT@ 20% =

Total CGT =

Less: Payment on Account =

Payable on 31 January 2024 =

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Example:
Zack, a higher rate taxpayer, had the following chargeable gains and capital losses during the tax year
2022-23:

10 April 2022 Capital loss of £4,600 from the disposal of shares

31 May 2022 Chargeable gain of £28,200 from the disposal of shares
31 August 2022 Chargeable gain of £82,000 from the disposal of residential property
10 March 2023 Capital loss of £14,000 from the disposal of shares

A payment on account of capital gains tax will have been made on _______________ in respect of the
residential property disposalon 31 August 2022, calculated as:

£
Residential property gain
Capital loss – 10 April 2022
Annual exempt amount
_______

_______

Payment on account: _______ at 28%

The additional capital gains tax payable on 31 January 2024 is:

£
Residential property gain
Capital losses
Annual exempt amount
_______

_______

Other gain _______

Capital gains tax:

______ at 28%

______ at 20%
_______

Payment on account
_______
Payable on 31 January 2024
_______

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