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F6 exam: what a relief!
Tax planning is an important aspect of the F6 Taxation (UK) paper. Here Caron Betts explains which Capital Gains Tax reliefs can be used to mitigate tax liability
The aim of this relief is to defer the point at which Capital Gains Tax is paid. It’s available when the disposal proceeds of an asset are reinvested in a new asset. The amount of the gain rolled over is deducted from the base cost of the replacement asset.
There are conditions for the relief to apply:
• Both the old and new asset must be a ‘qualifying’ asset such as land, buildings, fixed plant and machinery, and goodwill. Tip: they don’t have to be in the same class.
• The reinvestment must be within 12 months before, or 36 months after, the date of disposal.
Watch out for partial reinvestment! This is where the seller does not reinvest the entire disposal proceeds and receives some cash; expect HMRC to want a portion of that, in tax, immediately.
It’s easier to remember this relief when thinking of its alternative name – ‘Gift relief’. If a gift is made of a qualifying business asset then the gain is deferred against the base cost that the donee will use when the asset is eventually sold. Tip: this is a really useful relief for families who want to pass a business down to future generations.
The assets that qualify are:
• Assets used for trading purposes by a sole trader.
• Shares in a personal trading company, if the individual holds at least 5% of the shares.
• Shares in unquoted trading companies.
Watch out for sales at less than market value, as the reduced price means there is a ‘gift’ element. Like rollover relief, when the seller (donor) receives some cash, HMRC will be looking to receive some tax. Any excess of the sale proceeds over the original cost of the asset, is chargeable.
The name is a little confusing as it’s not a relief at all, but a lower rate of tax. A reduced rate of 10% will apply if a disposal qualifies for entrepreneur’s relief.
It’s available to individuals who dispose of all or part of a business as follows:
• For sole traders, relief is only available in respect of gains arising from the disposal of assets used for the purpose of the business.
Tip: remember to exclude any investments.
• For shareholders, it is available for the disposal of shares in a trading company if the individual has at least a 5% shareholding and is an officer or employee.
Tip: if it is a trading company, there is no restriction to the relief for investments.
Watch out for any prior disposals that might have qualified for entrepreneur’s relief. The relief covers the first £10m of qualifying gains that a person makes during their lifetime. Once that limit is reached, the gain is taxed at the normal 18% or 28% rates.
• Caron Betts is AVADO’s F6 tutor
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