Chargeable gains: reliefs

Introduction
In the previous chapters, we have seen how to calculate chargeable gains. We
now look at various reliefs relating to gains.
Entrepreneurs’ relief is a very important relief. It applies on the disposal of a
business and on the disposal of certain trading company shares. It reduces the
rate of tax payable from 18% or 28% to 10% on all or part of the chargeable
gains arising on such disposals.
In certain circumstances, it may be possible to defer a gain – that is to remove
it from an immediate charge to CGT. However, it is important to realise the gain
has not been exempted and it may become charged in the future.
Deferral reliefs operate in two ways. First, the gain may be deducted from the
base cost of an asset (for example, rollover relief for replacement with nondepreciating business assets, incorporation relief, gift relief). Second, the gain
may be ‘frozen’ until a certain event occurs (deferral relief for replacement with
depreciating business assets, EIS deferral relief).
SEIS reinvestment relief operates in a different way as it exempts part of a gain
made in a tax year if the individual subscribes for SEIS shares in the same tax
year.
Finally, we consider the CGT implications of varying a will.
In the next chapter, we will look some further rules for gains and losses.

Study guide
Intellectual level
2 Chargeable gains and capital gains tax liabilities in situations involving further overseas aspects and in relation to closely related persons and trusts together with the application of additional exemptions and reliefs
(a) The contents of the Paper F6 study guide for chargeable gains under headings: 2
• C5 The computation of capital gains tax
• C6 The use of exemptions and reliefs in deferring and minimising tax liabilities arising on the disposal of capital assets
(g) The use of exemptions and reliefs in deferring and minimising tax liabilities arising on the disposal of capital assets: 3
(i) Understand and apply enterprise investment scheme reinvestment relief
(ii) Understand and apply seed enterprise investment scheme reinvestment relief
(iii) Advise on the availability of entrepreneurs’ relief in relation to associated disposals
(iv) Understand and apply the relief that is available on the transfer of an unincorporated business to a limited company.
(v) Understand the capital gains tax implications of the variation of wills
Exam guide
Deferring and minimising tax liabilities is likely to feature at some point in your exam. The methods of deferring capital gains should be very familiar to you.

This chapter revises entrepreneurs’ relief, gift relief and rollover relief for the replacement of business assets which you will have studied in Paper F6. The examination team has identified essential underpinning knowledge from the F6 syllabus which is particularly important that you revise as part of your P6 studies. In this chapter, the relevant topics are:
Intellectual level
C5 The computation of capital gains tax
(b) Explain and apply entrepreneurs’ relief 2
C6 The use of exemptions and reliefs in deferring and minimising tax liabilities arising on the disposal of capital assets
(a) Explain and apply capital gains tax reliefs:
(i) Rollover relief 2
(ii) Holdover relief for the gift of business assets 2
The chapter extends your studies on entrepreneurs’ relief. Gift relief for gifts to trusts, incorporation relief, EIS and SEIS reinvestment reliefs, and the CGT consequences of varying a will are new.
There are no changes in 2015/16 from the material studied at F6 level in 2014/15.
1 Entrepreneurs’ relief 12/12, 12/13, 6/14, 6/15, 9/15
Entrepreneurs’ relief applies on the disposal of a business and certain trading company shares. The rate of tax on gains qualifying for entrepreneurs’ relief is 10%.
FAST FORWARD

One of the competencies you require to fulfil Performance Objective 17 Tax planning and advice of the PER is to assess the tax implications of proposed activities or plans of an individual or entity with reference to relevant and up to date legislation. You can apply the knowledge you obtain from this section of the text to help to demonstrate this competence.

1.1 Conditions for entrepreneurs’ relief
Entrepreneurs’ relief is available where there is a material disposal of business assets. There are three categories of disposal, as explained below.
1.1.1 Disposal of the whole or part of a business
The first category is a disposal of the whole or part of a business. The business must have been owned by the individual throughout the period of one year ending with the date of the disposal. It is important to note that there has to be a disposal of the whole or part of the business as a going concern, not just a disposal of individual assets in a continuing business.
The business must be a trade, profession or vocation conducted on a commercial basis with a view to the realisation of profits. It can be a sole trader business or one carried on as a partnership of which the individual is a partner.
Relief is only available on relevant business assets. These are assets used for the purposes of the business and cannot include shares and securities nor assets held as investments.
In certain circumstances, goodwill is not a relevant business asset. This restriction is discussed later in this Chapter.
1.1.2 Disposal of assets used in a business which has ceased
The second category is a disposal of one or more assets in use for the purposes of a business at the time when the business ceases to be carried on. The following conditions must be satisfied:
(a) The business has been owned by the individual throughout the period of one year ending with the date on which the business ceases to be carried on; and
(b) The date of cessation is within three years before the date of the disposal.
As for the first category, relief is only available on relevant business assets, not shares and securities nor assets held as investments.
1.1.3 Disposal of shares or securities
The third category is a disposal by an individual of shares or securities in a company. The following conditions must be usually be satisfied:
(a) The company is the individual’s personal company (see further below); and (b) The company is either a trading company or holding company of a trading group; and (c) The individual is an officer or employee of the company (or a group company).
These conditions must be satisfied either:
(a) Throughout the period of one year ending with the date of the disposal; or
(b) Throughout the period of one year ending with the date on which the company (or group) ceases to be a trading company (or trading group) and that date is within the period of three years ending with the date of the disposal.
A personal company in relation to an individual is one where:
(a) The individual holds at least 5% of the ordinary share capital; and
(b) The individual can exercise at least 5% of the voting rights in the company by virtue of that holding of shares.
If the shares are qualifying EMI (Enterprise Management Incentive) shares, the conditions are slightly different. The shares must have been acquired under an option that had been granted at least one year prior to the date of disposal of the shares and the individual must have been an officer or an employee of the trading company (or one of the companies in the trading group) throughout that one year period. There is no minimum ownership period for the shares themselves nor a minimum percentage shareholding.
1.2 The operation of the relief
Where there is a material disposal of business assets which results in both gains and losses, losses are netted off against gains to give a single chargeable gain on the disposal of the business assets.
The rate of tax on this chargeable gain is 10%.
An individual may use losses on assets not qualifying for entrepreneurs’ relief and the annual exempt amount in the most beneficial way. This means that these amounts should first be set against gains which do not qualify for entrepreneurs’ relief in order to save tax at either 18% or 28% rather than at 10%.
The chargeable gain qualifying for entrepreneurs’ relief is treated as the lowest part of the amount on which an individual is chargeable to capital gains tax. Although this does not affect the tax on the gain qualifying for entrepreneurs’ relief (which is always at 10%), it may have an effect on the rate of tax on other taxable gains.
1.3 Example: entrepreneurs’ relief
Simon sells his business, all the assets of which qualify for entrepreneurs’ relief, in September 2015. The chargeable gain arising is £12,000.
Simon also made a chargeable gain of £24,000 in December 2015 on an asset which did not qualify for entrepreneurs’ relief.
Simon has taxable income of £18,000 in 2015/16.
The CGT payable for 2015/16 is calculated as follows:
Gains CGT
£ £
Gains qualifying for entrepreneurs’ relief
Taxable gain 12,000
CGT @ 10% 1,200
Gains not qualifying for entrepreneurs’ relief
Gain 24,000
Less: annual exempt amount (best use) (11,100)
Taxable gain 12,900
CGT on £(31,785 – 18,000 – £12,000) = 1,785 @ 18%
321
CGT on £(12,900 – 1,785) = 11,115 @ 28% 3,112
CGT 2015/16 4,633

Note that the £12,000 gain qualifying for entrepreneurs’ relief is deducted from the basic rate limit for the purposes of computing the rate of tax on the gain not qualifying for entrepreneurs’ relief.
1.4 Lifetime limit
There is a lifetime limit of £10 million of gains on which entrepreneurs’ relief can be claimed.

Maureen sells a shareholding in January 2016, realising a gain of £9,300,000. The conditions for entrepreneurs’ relief are satisfied for this disposal and Maureen makes a claim for the relief to apply.
Maureen had already made a claim for entrepreneurs’ relief in respect of gains totalling £900,000. Maureen also makes an allowable loss of £(20,000) in 2015/16 on an asset not qualifying for entrepreneurs’ relief. Her taxable income for 2015/16 is £200,000.
Calculate the CGT payable by Maureen for 2015/16.

Gains CGT

Gain qualifying for entrepreneurs’ relief £ £
£(10,000,000 – 900,000) 9,100,000
CGT @ 10% on £9,100,000 910,000
Gains not qualifying for entrepreneurs’ relief
£(9,300,000 – 9,100,000) 200,000
Less allowable loss (best use) (20,000)
Net gain 180,000
Less: annual exempt amount (best use) (11,100)
Taxable gain 168,900
CGT @ 28% on £168,900 47,292
Total CGT due 957,292

1.5 Goodwill: restriction NEW
For disposals on or after 3 December 2014, goodwill is not a relevant business asset for entrepreneurs’ relief if it is transferred directly or indirectly by a person to a close company, where the person is a related party to the close company. This typically occurs when an unincorporated business is incorporated by a sole trader or partnership by transferring assets to a company (to the extent that incorporation relief does not apply – see later in this Chapter). The purpose of this restriction (together with changes to the treatment of acquired goodwill for companies – see later in this Text) is to remove incentives for incorporation for tax, rather than genuine commercial, reasons.
A close company is a company controlled by its shareholder-directors or by five or fewer shareholders. The person is a related party to the close company if he is, or is an associate of, a participator in the close company (see later in this Text for further detail on these definitions, but broadly a participator is a shareholder of a company).
If a partnership incorporates, any partner who leaves the business at that time is still a related party to the new company, as he is an associate of the other partners. However, a specific exclusion exists so that this restriction on entrepreneurs’ relief does not apply to a person who is a retiring partner. A retiring partner is one who is not, and no arrangements exist under which he could become, a participator in the close company.

Edna, Frank and George have been trading in partnership for many years sharing profits equally. The chargeable assets of the partnership consist of a freehold building which was acquired for £60,000 and goodwill which has been built up since the partnership started business.
Edna has decided to retire from the partnership and Frank and George now wish to carry on the business through the medium of a company. Frank and George have therefore set up a new company, FG Ltd, in which they subscribed £100,000 each for 10,000 ordinary shares.
On 1 March 2016, Edna, Frank and George sold the partnership business to FG Ltd. The value of the building at that date was £105,000 and the goodwill was valued at £72,000. Edna was paid cash for her share of the partnership business and Frank and George’s entitlements are held on loan accounts in FG Ltd.
Show the CGT positions of Edna, Frank and George on the sale of the partnership business to FG Ltd. Assume they have no other chargeable assets and are higher rate taxpayers.

Edna
Gains CGT
£ £
Gains qualifying for entrepreneurs’ relief
Gain on building £(105,000 – 60,000)  1/3 15,000
Gain on goodwill £(72,000 – 0)  1/3 24,000
Less annual exempt amount (11,100)
Taxable gain 27,900
CGT £27,900 @ 10%
Edna is a retiring partner so the restriction on goodwill does not apply to her.
Frank and George 2,790

Gains CGT
£ £
Gains qualifying for entrepreneurs’ relief
Gain on building £(105,000 – 60,000)  1/3 15,000
CGT @ 10% 1,500
Gains not qualifying for entrepreneurs’ relief
Gain on goodwill £(72,000 – 0)  1/3 24,000
Less annual exempt amount (best use) (11,100)
Taxable gain 12,900
CGT on £12,900 @ 28% 3,612
CGT 5,112

Frank and George are related to FG Ltd as they are participators (shareholders). Therefore entrepreneurs’ relief only applies to the gain on the building.

1.6 Associated disposals 12/12
Entrepreneurs’ relief is also available on associated disposals.
An associated disposal asset is an asset which is owned by an individual and used for at least one year for business purposes by a partnership of which he is a partner or by his personal trading company.
An associated disposal is one which is associated with a material disposal of all or part of the individual’s partnership interest or a disposal of shares in the company, as relevant. The disposal must be made as part of the withdrawal from participation in the business of the partnership or the company by the individual. There should also normally not be a significant time interval between the material disposal and the associated disposal.
If the individual charged rent to the partnership or company, entrepreneurs’ relief will be restricted. If a full market rent was charged, there will be no entrepreneurs’ relief. If less than a full market rent was charged, a just and reasonable proportion of gain will be eligible for entrepreneurs’ relief. For example if the rental charged was 75% of the full market rent (100 – 75) = 25% of the gain will be eligible for entrepreneurs’ relief.
Exam focus The December 2012 exam required a statement of the conditions necessary for the disposal of an asset to point be an associated disposal for the purposes of entrepreneurs’ relief. The examiner commented that this was not well done. He went on to say that ‘This is not an area of the syllabus that one would expect to see examined regularly and many candidates will have known immediately on reading the requirement that they did not know the answer. However, the sensible approach would then have been to write a very brief answer with some sensible comments on entrepreneurs’ relief. It was pretty likely that this would then score one of the three marks available.’
1.7 Interaction with share reorganisations and takeovers
This topic was dealt in Chapter 12 Section 3.8 and you may wish to re-read this section now.
1.8 Claim
An individual must claim entrepreneurs’ relief: it is not automatic.
The claim deadline is the first anniversary of 31 January following the end of the tax year of disposal. For a 2015/16 disposal, the taxpayer must claim by 31 January 2018.
2 Gift relief (holdover relief) 12/12, 6/13, 12/13, 6/15
2.1 The relief
FAST FORWARD
Gift relief is available on both outright gifts and sales at an undervalue of business assets. Gift relief is also available on gifts which are immediately chargeable to inheritance tax.
One of the competencies you require to fulfil Performance Objective 17 Tax planning and advice of the PER is to mitigate and/or defer tax liabilities through the use of standard reliefs, exemptions and incentives. You can apply the knowledge you obtain from this section of the text to help to demonstrate this competence.
If an individual gives away a qualifying asset, the transferor and the transferee can jointly elect, or where a trust is the transferee, the transferor alone can elect, within four years after the end of the tax year of the transfer (by 5 April 2020 for a disposal in 2015/16), that the transferor’s gain be reduced, possibly to nil. The transferee is then deemed to acquire the asset for market value at the date of transfer less the transferor’s deferred gain.
If a disposal involves actual consideration rather than being an outright gift but is still not a bargain made at arm’s length, the proceeds are deemed to be the market value of the asset and any excess of actual consideration over allowable cost is chargeable immediately and only the balance of the gain is deferred. The amount chargeable immediately is limited to the full gain.

On 6 December 2015 Angelo sold to his son Michael a freehold shop valued at £200,000 for £50,000, and claimed gift relief. Angelo had originally purchased the shop from which he had run his business in July 2007 for £30,000. He continued to run his business from another shop. Michael decided to sell the shop in May 2016 for £195,000. Compute any chargeable gains arising. Assume the rules of CGT in 2015/16 continue to apply in May 2016.

(a) Angelo’s CGT position (2015/16)
£
Proceeds (market value) 200,000
Less cost (30,000)
Gain 170,000
Less gain deferred (150,000)
Chargeable gain £(50,000 – 30,000) 20,000
(b) Michael’s CGT position (2016/17)
£
Proceeds 195,000
Less cost £(200,000  150,000) (50,000)
Gain 145,000

You may need to consider whether it would be more beneficial for an individual to claim entrepreneurs’ relief or gift relief or both reliefs. Remember that entrepreneurs’ relief is only available on the disposal of the whole or part of a business and not on individual business assets, so it is possible that only gift relief will apply to the disposal anyway.
An individual might wish to claim entrepreneurs’ relief instead of gift relief if only a very small amount of gains are left in charge and are taxable at the advantageous rate of 10%.
If both reliefs are claimed, gift relief will apply first and then entrepreneurs’ relief will apply to the remaining gain. This may be relevant if there is actual consideration paid so that gift relief covers only part of the gain.

On 10 January 2016, Zack sold his business to his son, Darren. The only chargeable assets were goodwill which Zack had built up from the start of his business and a freehold shop which Zack had bought in September 2004 for £35,000. The goodwill was valued at £25,000 and the shop at £80,000. Darren paid Zack £10,000 for the goodwill and £60,000 for the shop.
Zack made a claim for entrepreneurs’ relief and Zack and Darren made a claim for gift relief. Zack has no other chargeable assets.
Show the CGT positions of Zack and Darren.

(a) Zack’s CGT position
Goodwill £ £
Market value 25,000 Less cost (nil)
Gain 25,000
Less gain deferred (15,000)
Chargeable gain £(10,000 – nil) 10,000
Shop
Market value 80,000
Less cost (35,000)
Gain 45,000
Less gain deferred (20,000)
Chargeable gain £(60,000 – 35,000) 25,000
Gains left in charge after gift relief 35,000
Less annual exempt amount (11,100)
Taxable gains 23,900

CGT @ 10% 2,390

(b) Darren’s CGT position
Goodwill £
Market value 25,000
Less gain deferred (15,000)

Shop £
Market value 80,000
Less gain deferred (20,000)
Cost for future disposal 60,000
Cost for future disposal 10,000

2.2 Qualifying assets
Gift relief can be claimed on gifts or sales at undervalue as follows. (a) Transfers of business assets
(i) Trade assets
(ii) Agricultural property (whether farmed by the owner or tenant – see further below)
(iii) Shares and securities (except where the transferee is a company)
(b) Transfers of any assets subject to an immediate inheritance tax (IHT) charge. IHT is covered later in this Text.
Transfers of business assets are transfers of assets
(a) Used in a trade, profession or vocation carried on:
(1) By the donor
(2) If the donor is an individual, by a trading company which is his ‘personal company’ or a member of a trading group of which the holding company is his ‘personal company’ (a personal company is one in which the individual can exercise at least 5% of the voting rights).
(3) If the donor is a trustee, by the trustee or by a beneficiary who has an interest in possession in the settled property (see later in this Text).
If the asset was used for the purposes of the trade, profession or vocation for only part of its period of ownership, the gain to be held over is the gain otherwise eligible  period of such use/total period of ownership.
If the asset was a building or structure only partly used for trade, professional or vocational purposes, only the part of the gain attributable to the part so used is eligible for gift relief
(b) Agricultural property which would attract inheritance tax agricultural property relief (see later in this Text). The restrictions for periods of non-trade use and for partial trade use mentioned above do not apply.
(c) Shares and securities in trading companies, or holding companies of trading groups, where:
(1) The shares or securities are not listed on a recognised stock exchange, or
(2) If the donor is an individual, the company concerned is his personal company (defined as above), or
(3) If the donor is a trustee, the trustee can exercise 25% or more of the voting rights.
If the company has chargeable non-business assets (ie investments) at the time of the gift, and either (2) or (3) applied at any time in the last 12 months, the gain to be held over is the gain otherwise chargeable  the market value of the chargeable business assets/the market value of the chargeable assets.

Morris gifts shares in his personal company to his son Minor realising a gain of £100,000. The market values of the assets owned by the company at the date of the gift are:
£
Freehold factory and offices 150,000
Leasehold warehouse 80,000
Investments 120,000
Current assets 200,000
You are required to show the gain qualifying for hold-over relief and the chargeable gain.

Gain qualifying for hold-over relief:
Chargeable business assets (CBA) 150+80
£100,000  = £100,000 
Chargeable assets (CA) 150+ +80 120
= £100,000 
= £65,714
The gain which is not held-over (ie chargeable in current year) is £100,000 – £65,714 = £34,286

If relief is claimed on a transfer of business assets, and that transfer is (or later becomes) chargeable to inheritance tax, then when the transferee disposes of the assets his gain is reduced by the IHT finally payable (but not so as to create a loss).
Transfers subject to an immediate IHT charge include most gifts to trusts. A transfer will be regarded as
chargeable to IHT even if it falls within the nil rate band of that tax or is covered by the IHT annual exemption. Gifts to settlor interested trusts, however, do not qualify for gift relief.
If a transfer of business assets could also be subject to an immediate charge to inheritance tax, the rules relating to the latter category apply and the restrictions related to period of use and to chargeable business assets therefore do not apply.
Remember that IHT is covered in detail later in this Text. You should return to this section once you have studied the relevant chapters.
2.3 Anti-avoidance rules 6/15
The general rule is that gift relief is not available if the transferee is not resident in the UK at the time of the gift. However, gift relief is available if the asset is UK residential property (see later in this Text).
If the transferee is an individual who becomes non-UK resident in any of the six tax years following the year of the transfer and before disposing of the asset transferred, then the gain held over is chargeable on him as if it arose immediately before he becomes not resident in the UK.
It is not possible to claim gift relief on transfers to a settlor-interested trust (see later in this Text).
Exam focus Gift relief is normally used whenever a business or business asset is gifted, but you should look out for point the restriction for a non-resident donee.
You should also consider whether retaining the asset until death so as to obtain the tax free uplift to probate value would be advantageous.
3 The replacement of business assets (rollover relief)
3.1 Conditions
FAST FORWARD
When assets falling within certain classes are sold and other such assets are bought, it is possible to defer gains on the assets sold by claiming rollover relief.
One of the competencies you require to fulfil Performance Objective 17 Tax planning and advice of the PER is to mitigate and/or defer tax liabilities through the use of standard reliefs, exemptions and incentives. You can apply the knowledge you obtain from this section of the text to help to demonstrate this competence.
A gain may be ‘rolled over’ (deferred) where it arises on the disposal of a business asset which is replaced. This is rollover relief. A claim cannot specify that only part of a gain is to be rolled over. A claim for the relief must be made by the later of four years from the end of the tax year in which the disposal of the old asset takes place and four years from the end of the tax year in which the new asset is acquired. For example, if the old asset is disposed of in 2014/15 and the new asset is acquired in 2015/16, the time limit for a claim to roll-over relief is 5 April 2020 (four years from the end of the tax year in which the new asset is acquired).
All the following conditions must be met.
(a) The old asset sold and the new asset bought are both used only in the trade or trades carried on by the person claiming rollover relief. Where part of a building is in non-trade use for all or a substantial part of the period of ownership, the building (and the land on which it stands) can be treated as two separate assets, the trade part (qualifying) and the non-trade part (non-qualifying). This split cannot be made for other assets.
(b) The old asset and the new asset both fall within one (but not necessarily the same one) of the following classes.
(i) Land and buildings (including parts of buildings) occupied, as well as used, only for the purpose of the trade
(ii) Fixed (that is, immovable) plant and machinery
(iii) Goodwill (not for companies)
(c) Reinvestment of the proceeds of the old asset takes place in a period beginning one year before and ending three years after the date of the disposal.
(d) The new asset is brought into use in the trade on its acquisition (not necessarily immediately, but not after any significant and unnecessary delay).
The new asset can be for use in a different trade from the old asset.
A rollover claim is not allowed when a taxpayer buys premises, sells part of the premises at a profit and then claims to roll over the gain into the part retained. However, a rollover claim is allowed (by concession) when the proceeds of the old asset are spent on improving a qualifying asset which the taxpayer already owns. The improved asset must already be in use for a trade, or be brought into trade use immediately the improvement work is finished.
3.2 Operation of relief
FAST FORWARD
If an amount less than the proceeds of the old asset is invested in the new assets, a gain equal to the difference will be chargeable up to a maximum of the actual gain.
Deferral is obtained by deducting the chargeable gain from the cost of the new asset. For full relief, the whole of the consideration for the disposal must be reinvested. Where only part is reinvested, a part of the gain equal to the lower of the full gain and the amount not reinvested will be liable to tax immediately.
The new asset will have a base cost for chargeable gains purposes, of its purchase price less the gain rolled over into its acquisition.

A freehold factory was purchased by Zoë for business use in August 2005. It was sold in December 2015 for £70,000, giving rise to a gain of £17,950. A replacement factory was purchased in June 2016 for £60,000. Compute the base cost of the replacement factory, taking into account any possible rollover of the gain from the disposal in December 2015.

£
Total gain 17,950
Less gain rolled over )
Chargeable immediately (ie amount not reinvested: £(70,000 – 60,000))
Cost of new factory 60,000
Less rolled over gain ) Base cost of new factory

You may need to consider whether an individual should claim rollover relief or entrepreneurs’ relief or both reliefs. It will be relatively unusual for both reliefs to be available. This is because entrepreneurs’ relief only applies on the disposal of a business or part of a business and rollover relief is typically relevant where there is the sale of an individual business asset and the individual continues to carry on the business.
However, if both reliefs can be claimed, consider whether it would better for the individual to claim entrepreneurs’ relief instead of rollover relief if only a very small amount of gains are left in charge and are taxable at the advantageous rate of 10%.
If both reliefs are claimed, entrepreneurs’ relief will apply to the gain left in charge after rollover relief has been applied. This will be relevant when there is an amount not reinvested so that rollover relief does not cover the whole of the gain.
3.3 Non-business use
Where the old asset has not been used in the trade for a fraction of its period of ownership, the amount of the gain that can be rolled over is reduced by the same fraction. If the proceeds are not fully reinvested the restriction on rollover by the amount not reinvested is also calculated by considering only the proportion of proceeds relating to the part of the asset used in the trade or the proportion relating to the period of trade use.

John bought a factory for £150,000 on 11 January 2011, for use in his business. From 11 January 2012, 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 2015 for £225,000. On 13 January 2016, he purchased another factory for use in his business. This second factory cost £100,000.
Calculate the chargeable gain on the sale of the first factory and the base cost of the second factory.

Gain on first factory
Non-business Business
£ £
Proceeds of sale (24:30) (W1) 100,000 125,000
Less cost (24:30) (66,667) (83,333)
Gain before rollover relief 33,333 41,667
Less rollover relief (16,667)
Gain (W2)
Base cost of second factory 33,333 25,000
£
Cost 100,000
Less gain rolled over (16,667)
Base cost c/f
Workings
1 Use of factory
Total ownership period:
11.1.11 – 10.07.15 = 54 months
Attributable to non business use:
11.1.12 – 10.1.14 = 24 months 83,333
Attributable to business use (remainder: 54m – 24m) = 30 months
2 Proceeds not reinvested
£
Proceeds of business element 125,000
Less: cost of new factory (100,000)
Not reinvested 25,000

3.4 Depreciating assets
Where the replacement asset is a depreciating asset, the gain is not rolled over by reducing the cost of the replacement asset. Rather it is ‘frozen’, ie deferred, until it crystallises (ie becomes chargeable) on the earliest of:
(a) The disposal of the replacement asset
(b) The date the replacement asset ceases to be used in the trade (but the gain does not crystallise on the taxpayer’s death)
(c) Ten years after the acquisition of the replacement asset
An asset is a depreciating asset if it is, or within the next ten years will become, a wasting asset. So, any asset with an expected life of 60 years or less is covered by this definition. Plant and machinery is always treated as depreciating.
Key term

Norma bought a freehold shop for use in her business in June 2013 for £125,000. She sold it for £140,000 on 1 August 2014. On 10 July 2014, Norma bought some fixed plant and machinery to use in her business, costing £150,000. Norma makes a claim to defer the gain on the shop in relation to the acquisition of the plant and machinery. She then sells the plant and machinery for £167,000 on 19 November 2015. Show Norma’s CGT position.

Gain deferred
£
Proceeds of shop 140,000
Less cost (125,000) Gain 15,000

Sale of plant and machinery
£
Proceeds 167,000
Less cost (150,000) Gain 17,000

Total gain chargeable on sale (gain on plant and machinery plus crystallised gain)
£(15,000 + 17,000) £32,000

Where a gain on disposal is deferred on the purchase of a replacement depreciating asset it is possible to transfer the deferred, or ‘frozen’, gain to a non-depreciating asset provided the non-depreciating asset is bought before the deferred gain has crystallised.
3.5 Identifying availability of reliefs
It can be confusing to identify the availability of replacement of business assets (rollover) relief and/or gift relief and/or entrepreneurs’ relief on a disposal because the conditions are similar. The following examples show whether these reliefs are available in a variety of circumstances. Remember that all of these reliefs require a claim so it is possible to choose which relief to claim and that it may be possible to claim more than one relief on a disposal.
3.6 Example: rollover relief, gift relief and entrepreneurs’ relief
(a) Gary sold 10,000 ordinary shares in N Ltd for their market value of £20,000. Gary had acquired the shares four years previously when he also became an employee of N Ltd, but the shares are not EMI shares. N Ltd has always been a trading company. The shares represent 10% of the ordinary shares in N Ltd and carry the same percentage of voting rights in the company. Two months later, Gary acquired a 5% shareholding in Q plc, another unquoted trading company, for £20,000.
Relief Available Comments
Rollover relief No Shares are not qualifying assets for replacement of business assets relief (neither as the old assets nor the new asset).
Gift relief No Sale at market value does not have an element of gift (must be either outright gift or sale at less than market value).
Entrepreneurs’ relief Yes (a) N Ltd is Gary’s personal company (at least 5% ordinary share capital and voting rights); and
(b) N Ltd is a trading company; and (c) Gary is an employee of N Ltd and these conditions are satisfied throughout the period of one year ending with the date of the disposal.
(b) Morton sold a freehold warehouse for £150,000 (market value) which he had occupied and used for five years in his sole trader business. The gain arising was £45,000. He had bought a freehold shop which he immediately occupied and started using in his trade for £130,000 eight months previously.
Relief Available Comments
Rollover relief Yes – partially (a) The old asset sold and the new asset bought are both used only in the trade or trades carried on by the person claiming rollover relief.
(b) The old asset and the new asset both fall within one of the classes of assets (here both are land and buildings).
(c) Reinvestment of the proceeds of the old asset takes place in a period beginning one year before and ending three years after the date of the disposal.
(d) The new asset is brought into use in the trade on its acquisition.
The excess proceeds not reinvested £(150,000 – 130,000) = £20,000 are chargeable immediately. The remainder of the gain £(45,000 – 20,000) = £25,000 is rolled over into the base cost of the new asset.
Gift relief No Sale at market value does not have an element of gift (must be either outright gift or sale at less than market value).
Entrepreneurs’ relief No The disposal of individual assets in a continuing business does not qualify for entrepreneurs’ relief.
(c) Lynne had been in business as a sole trader for five years. She closed her business which had two assets, a freehold shop she had owned for three years and a freehold warehouse she had owned for six months. Immediately after cessation, she sold the warehouse to her son Steven at less than market value. The price paid by Steven was £9,000 more than Lynne had paid for the warehouse.
Four months after cessation, she sold the shop to Joss at market value. The gain on the warehouse based on market value is £15,000.
Relief Available Comments
Rollover relief No There is no acquisition of replacement assets.
Gift relief No – on shop
Yes – partial on warehouse Sale at market value.
Sale at undervalue of asset used in business by donor (there is no qualifying period). £9,000 of the gain is chargeable immediately. The remaining £(15,000 – 9,000) = £6,000 is available for gift relief.
Entrepreneurs’ relief Yes on both shop and warehouse Disposal of one or more assets in use for the purposes of a business at the time at which the business ceases to be carried on since:
(a) The business was owned by Lynne throughout the period of one year ending with the date on which the business ceased to be carried on; and
(b) The date of cessation is within three years before the date of the disposal.
The qualifying period applies to the business, not to individual assets and so entrepreneurs’ relief is still available on the warehouse.
3.7 Example: gift relief and entrepreneurs’ relief
Here we consider the availability of gift relief and entrepreneurs’ relief on the gift of shares in a company. When considering reliefs in relation to shares, it is particularly important to look at the percentage shareholding represented by the shares, whether the company is quoted or not, and whether the individual is an employee or officer of the company.
These conditions are illustrated in the examples below where we have assumed that the shares have been owned for two years prior to the disposal (and are not EMI shares) and other circumstances relevant for entrepreneurs’ relief (eg whether the company is a trading company, whether the shareholder is an officer or employee of the company) have existed throughout the period of ownership.
Trading company or holding
company of trading group Unquoted company Percentage shareholding and
voting rights Officer or employee of
company or group company Gift relief available? Entrepreneurs’
relief available?
Yes Yes 3% No Yes – any % of unquoted trading co. shares, no employment condition. No – must be officer or
employee
No Yes 8% Yes No – must be trading
company No – must be trading
company
Yes Yes 4% Yes Yes – any % of unquoted trading co.
shares No – must be personal company (at least 5% ordinary share capital and
Trading company or holding
company of trading group Unquoted company Percentage shareholding and
voting rights Officer or employee of
company or group company Gift relief available? Entrepreneurs’
relief available?
voting rights)
Yes No 8% No Yes – quoted company but personal company (at least 5% of the voting rights),
no employment condition. No – must be officer or
employee
Yes No 15% Yes Yes – personal company (at least 5% of the voting rights). Yes – personal company (at least 5% ordinary share capital and voting rights) and officer or employee.
4 The transfer of a business to a company (incorporation relief) 12/13
4.1 The relief
When an individual transfers his unincorporated business to a company, the gain arising will be deducted from the cost of the shares received, unless the individual elects otherwise.
FAST FORWARD

One of the competencies you require to fulfil Performance Objective 17 Tax planning and advice of the PER is to mitigate and/or defer tax liabilities through the use of standard reliefs, exemptions and incentives. You can apply the knowledge you obtain from this section of the text to help to demonstrate this competence.

If an individual transfers his business to a company, he makes a disposal of the business assets for CGT purposes and realises net chargeable gains (chargeable gains less allowable losses) on those assets. It is, however, clearly undesirable to discourage traders from incorporating their businesses and so a relief is available.
The relief can also apply where an individual sells his unincorporated business to a company where the vendor and the company were not connected prior to the sale.
The relief (called incorporation relief) is automatic (so no claim need be made). All or some of the gains are held over if all the following conditions are met.
(a) The business is transferred as a going concern
(b) All its assets (or all its assets other than cash) are transferred (c) The consideration is wholly or partly in shares
The amount deferred is found by applying the fraction:
Formula to learn
Value of shares receivedfromthecompany
 gain before relief
Total value of consideration from the company
This amount is then deducted from the base cost of the shares received. The company is deemed to acquire the assets transferred at their market values.

Mr P transferred his business to a company in July 2015, realising a gain of £240,000 on its only business asset (a factory). The consideration comprised cash of £150,000 and shares at a market value of £750,000.
(a) What is the gain on the transfer after incorporation relief but before any other reliefs?
(b) What is the base cost of the shares for any future disposal?

(a) £
Gain before incorporation relief 240,000
Less incorporation relief:  £240,000 (200,000)
Gain after incorporation relief 40,000

(b) £
Market value 750,000
Less gain deferred (200,000)
Base cost of shares 550,000

4.2 Election to disapply incorporation relief
An individual can elect not to receive incorporation relief. The election must usually be made by 31 January, 34 months after the end of the tax year of disposal. An election might be made if the taxpayer can set losses and/or the annual exempt amount against the gains which would otherwise be deferred under incorporation relief. The election therefore results in a higher base cost of the shares received on incorporation and so a lower gain on a future disposal of the shares.
Since incorporation usually involves the disposal of the whole or part of a business, entrepreneurs’ relief can usually also be claimed on incorporation (except on goodwill – see earlier in this chapter). If the election is made to disapply incorporation relief, entrepreneurs’ relief can then be claimed. This may be beneficial if only a small amount of gains are left in charge and are taxable at the advantageous rate of 10%.

Willow transferred her business to B Ltd on 1 December 2015, comprising the following assets:
Asset Market value Gain on disposal
£ £
Freehold shop 150,000 8,000
Goodwill 20,000 20,000
Inventory 25,000 n/a
Cash 5,000 n/a
The consideration for the transfer was 200,000 £1 B Ltd ordinary shares. B Ltd is a close company and Willow is a participator of B Ltd.
Willow had losses brought forward from 2014/15 of £(7,000). She made no other disposals in 2015/16 and does not intend to make any disposals in the foreseeable future. She is a higher rate taxpayer.
Explain the capital gains tax implications if either:
(a) incorporation relief applies on the transfer; or
(b) Willow makes an election to disapply incorporation relief and claims entrepreneurs’ relief.
On the basis of these computations, what advice should be given to Willow?

(a) If incorporation relief applies on the transfer, the gains of £(8,000 + 20,000) = £28,000 are deferred (ie will not be chargeable in 2015/16). The gains are deducted from the base cost of the shares received. The base cost of the shares is £(200,000 – 28,000) = £172,000.
(b) If Willow makes an election to disapply incorporation relief, the gains of £28,000 will be chargeable in 2015/16. If she makes a claim for entrepreneurs’ relief, her capital gains tax payable in 2015/16 will be as follows:
Gains CGT
£ £
Gains qualifying for entrepreneurs’ relief
Gain on shop 8,000
CGT @ 10% 800
Gains not qualifying for entrepreneurs’ relief
Gain on goodwill 20,000
Less losses b/f (best use) (7,000)
Net gains 13,000
Less annual exempt amount (best use) (11,100)
Taxable gain 1,900
CGT on £1,900 @ 28% 532 CGT 1,332
The base cost of the shares will be £200,000.
On the basis of these computations, Willow should be advised to make an election to disapply incorporation relief and to claim entrepreneurs’ relief. This will use her brought forward loss (which is unlikely to be utilised in the foreseeable future) and annual exempt amount for 2015/16 and results in only a relatively small amount of capital gains tax being payable. The base cost of the shares in B Ltd is increased by £28,000 which will result in a smaller gain on their eventual disposal.

Another situation where it may be beneficial to disapply incorporation relief and claim entrepreneurs’ relief is where the shares received on incorporation will not qualify for entrepreneurs’ relief and there are plans to dispose of them. It may be better to pay some capital gains tax on incorporation at 10% and have a higher base cost for the shares received, rather than deferring the gains on incorporation into the base cost of the shares and paying capital gains tax at 18% or 28% on their sale.

Briony is a dentist who has run her dental practice as a sole trader since 2005. On 1 December 2015, Briony accepted an offer from a company, Brighter Smiles Ltd, to transfer her business to the company in exchange for 25,000 ordinary shares valued at £10 each. These shares represent a 2.5% shareholding in Brighter Smiles Ltd, which is an unquoted trading company. Brighter Smiles Ltd is not a close company. The gains on disposal of the assets of the sole trade on the transfer amounted to £120,000.
Briony also became an employee of Brighter Smiles Ltd at the time of the transfer of her business on fixed term contract until 30 November 2017. On that date she intends to sell her shareholding in Brighter Smiles Ltd. The value of shares in Brighter Smiles Ltd on 30 November 2017 can be taken to be £15 per share and the rates of capital gains tax in 2017/18 can be assumed to be the same as in 2015/16.
Briony makes disposals of quoted shares each year to exactly utilise her annual exempt amount. She is a higher rate taxpayer.
Compute the total capital gains tax payable on the transfer of the business and the disposal of the shares in Brighter Smiles Ltd if either:
(a) incorporation relief applies on the transfer; or
(b) Briony makes an election to disapply incorporation relief and claims entrepreneurs’ relief on the transfer.
On the basis of these computations, what advice should be given to Briony?

(a) If incorporation relief applies on the transfer, the gains of £120,000 will not be chargeable in 2015/16. The base cost of the shares in Brighter Smiles Ltd will therefore be £([25,000  £10] – 120,000) = £130,000.
On the disposal of the Brighter Smiles Ltd shares in 2017/18, CGT will be payable as follows:
£
Proceeds 25,000  £15 375,000
Less cost (130,000)
Taxable gains 245,000

Capital gains tax on £245,000 @ 28% 68,600
The conditions for entrepreneurs’ relief are not satisfied on this disposal as Brighter Smiles Ltd is not Briony’s personal company since she only owns a 2.5% shareholding (less than the 5% required).
The total capital gains tax payable is therefore £68,600.
(b) If Briony makes an election to disapply incorporation relief and claims entrepreneurs’ relief, capital gains tax will be payable as follows: £
Taxable gains 120,000

Capital gains tax on £120,000 @ 10% 12,000
On the disposal of the Brighter Smiles Ltd shares in 2017/18, CGT will be payable as follows:
£
Proceeds 25,000  £15 375,000 Less cost 25,000  £10 (250,000)
Taxable gains 125,000

Capital gains tax on £125,000 @ 28% 35,000
Again, conditions for entrepreneurs’ relief are not satisfied on this disposal as Brighter Smiles Ltd is not Briony’s personal company since she only owns a 2.5% shareholding.
The total capital gains tax payable is therefore £(12,000 + 35,000) = £47,000.
On the basis of these computations, Briony should be advised to make an election to disapply incorporation relief and claim entrepreneurs’ relief as this will save capital gains tax of £(68,600 – 47,000) = £21,600. However, she must be made aware that £12,000 of the capital gains tax will be payable by 31 January 2017, with the balance of £35,000 payable by 31 January 2019, rather than the whole amount being payable by 31 January 2019 if incorporation relief applies.

4.3 Optimising the use of incorporation relief
Although the relief cannot be restricted to utilise losses brought forward, and the annual exempt amount, it is possible to manipulate the amount of non-share consideration received (whether in cash, loan stock, or left on loan account) so that the gain remaining chargeable is equal to losses plus the annual exempt amount.

Antonio transferred his business (market value £120,000) to a company on 16 August 2015, realising a gain of £90,000. He had capital losses brought forward of £6,900.
Advise Antonio how much of the consideration he should take as shares and how much he should leave on loan account.

Antonio should take shares worth £96,000 and leave the balance of £24,000 (£120,000 – £96,000) on loan account. These figures are found as follows:
£
Gain before incorporation relief 90,000
Less incorporation relief (W) (72,000)
Gain after incorporation relief 18,000
Less losses brought forward (6,900)
11,100
Less annual exempt amount (11,100)
Taxable gain nil
Working
£
Annual exempt amount 11,100
Add losses 6,900
Gain covered by annual exempt amount/losses 18,000
Less total gain (90,000)
Incorporation relief required 72,000
Work backwards to calculate the incorporation relief required to defer sufficient gains to utilise annual exempt amount and losses:
Once the incorporation relief figure is obtained, we can calculate the share consideration required:
Total consideration  Deferred gain
Gain
£120,000  £96,000

When advising on the amount of share consideration to take on an incorporation, taking into account losses and the annual exempt amount, you may find it easier to work backwards from the annual exempt amount.
Exam focus point
A claim for entrepreneurs’ relief may usually be made where not all of the consideration is received in the form of shares. In this case, entrepreneurs’ relief may apply to the gains left in charge after incorporation relief has been applied. If the gains left in charge include a part of a gain on goodwill which would not qualify for entrepreneurs’ relief, the proportion of the gains not eligible for entrepreneurs’ relief will be the same proportion as the gain on goodwill in relation to the total gains, before incorporation relief.
5 EIS deferral relief and SEIS reinvestment relief
FAST FORWARD
Gains can be deferred if an individual invests in shares in an EIS company and can be partially exempted if an individual invests in shares in a SEIS company.
5.1 EIS deferral relief 12/13
5.1.1 Introduction
One of the competencies you require to fulfil Performance Objective 17 Tax planning and advice of the PER is to mitigate and/or defer tax liabilities through the use of standard reliefs, exemptions and incentives. You can apply the knowledge you obtain from this section of the text to help to demonstrate this competence.
An individual may defer a gain arising on the disposal of any type of asset if he invests in qualifying Enterprise Investment Scheme (EIS) shares (see earlier in this Text). The ‘frozen’, or deferred, gain will usually become chargeable when the shares are disposed of (subject to a further claim for the relief being made).
It is not necessary for the shares acquired to qualify for the EIS income tax relief.
Where both EIS deferral relief and entrepreneurs’ relief can be claimed on the gain, the individual must choose which relief to claim. However, where a gain exceeds the £10 million lifetime limit for
entrepreneurs’ relief an individual can claim entrepreneurs’ relief on the gain up to that limit and then defer the gain above the limit under the EIS rules. Special rules provide that deferred EIS gains, where entrepreneurs’ relief would have been available if deferral had not been claimed, do still qualify for entrepreneurs’ relief when the gain comes back into charge (see later in this chapter).
5.1.2 Calculation of relief
The amount of the gain that can be deferred is the lower of:
(a) The amount subscribed by the investor for his shares, which has not previously been matched under this relief, and
(b) The amount specified by the investor in the claim. This can take into account, for example the annual exempt amount and losses.

Robert made a gain of £196,000 on the disposal of a property in 2015/16. He subscribed for some shares in a company which qualified under the EIS rules. What will the gain to defer be if:
(a) The shares cost £200,000 and Robert wants to take the maximum deferral relief possible. (b) The shares cost £170,000 and Robert wants to take the maximum deferral relief possible.
(c) The shares cost £200,000 and Robert, who has no other chargeable assets, wishes to utilise his annual exempt amount.

(a) £196,000. The qualifying expenditure on the shares exceeds the gain, so the whole gain can be deferred.
(b) £170,000. The gain deferred is restricted to the qualifying expenditure. The remainder of the gain of £26,000 will remain in charge (subject to relief for any further investment).
(c) A claim can be made to defer £184,900. This is calculated as follows:
£
Gain before relief 196,000
Less EIS reinvestment relief (balancing figure) )
Gain
Less annual exempt amount (11,100) Taxable gain Nil

5.1.3 Conditions for the relief
The gain must either arise due to the disposal of an asset or on a gain coming back into charge under this relief.
The investor must be an individual who is UK resident at the time the gain to be deferred was made and at the time the investment was made in the shares.
The company must be a qualifying company under the EIS rules (see earlier in this Text).
The shares must be qualifying shares under the EIS rules (see earlier in this Text).
The shares must be issued to the investor within the period of one year before and three years after the gain to be deferred accrues (or such longer period as HMRC may allow). If the gain accrues after the issue of the shares, the shares must still be held by the investor at the time that the gain arises.
A claim for relief must be made by within four years after the end of the tax year in which the gain to be deferred arose ie by 5 April 2020 for a disposal in 2015/16.
5.1.4 Gain coming back into charge
The deferred gain will crystallise, ie come back into charge, on the following events:
(a) The investor disposing of the shares except by an inter-spouse disposal.
(b) The spouse/civil partner of an investor disposing of the shares, if the spouse/civil partner acquired the shares from the investor.
(c) The investor becoming non resident, broadly within three years of the issue of the shares (except if employed full time abroad for up to three years and retaining the shares until his return to the UK).
(d) The spouse/civil partner of an investor becoming non resident, broadly within three years of the issue of the shares (except if employed full time abroad for up to three years and retaining the shares until his return to the UK), if the spouse/civil partner acquired the shares from the investor.
(e) The shares ceasing to be eligible shares, eg the company ceases to be a qualifying company, the money subscribed not being used for a qualifying business activity. However, relief is not withdrawn if the company becomes a quoted company. This is provided that there were no arrangements in existence at the time of the issue of the shares for the company to cease to be unquoted.
Note that the gain becomes chargeable in the year of the event, not the year when the original gain was made (if different). It will be charged on the holder of the shares at the date of the event, eg on the investor if he/she still holds the shares or the spouse/civil partner if the shares have been passed to her/him.
If the original gain would have been eligible for entrepreneurs’ relief if it had not been deferred under EIS reinvestment relief, a claim can be made for entrepreneurs’ relief to apply to the deferred gain when it comes back into charge. This claim must be made by the first anniversary of 31 January following the tax year in which the deferred gain comes back into charge.
5.1.5 Anti-avoidance
The same provisions that apply for EIS income tax relief apply here (see earlier in this Text).
5.2 SEIS reinvestment relief
5.2.1 Calculation of relief
If an individual makes a chargeable gain and, in the same year, subscribes for shares on which SEIS income tax relief is claimed, the gain can be matched with any amount of that SEIS expenditure, as specified in a claim made by the individual. 50% of the amount of the gain matched with the SEIS expenditure is then treated as exempt.
The relief is therefore the lower of:
• 50% of the amount of the gain reinvested in SEIS shares (maximum 50% of the £100,000 SEIS income tax limit), and
• The amount specified in the claim for SEIS reinvestment relief.

Raymond subscribed for shares worth £70,000 in an SEIS company on 14 May 2015. On 28 October 2015 he made a gain of £200,000 on the disposal of an investment property.
What is the maximum amount of SEIS reinvestment relief that Raymond can claim?

£70,000 of the gain can be matched with £70,000 of the SEIS subscription. 50% of this amount of the gain is treated as exempt. Therefore, the maximum SEIS reinvestment relief Raymond can claim in 2015/16 is £70,000 × 50% = £35,000.

The time limit for making the claim is five years from 31 January following the end of the tax year in which the SEIS shares are issued ie by 31 January 2022 if the shares are issued in 2015/16.
If a claim has been made, for income tax purposes, for all or some of the SEIS shares to be treated as issued in the previous tax year then, if a claim for SEIS reinvestment relief is made, it must also apply to gains made in that previous tax year.
5.2.2 Withdrawal of relief
If SEIS income tax relief is withdrawn or reduced on SEIS shares, for example if they are disposed of within three years of issue, there is a corresponding withdrawal or reduction of SEIS reinvestment relief.
SEIS income tax relief will be withdrawn if the disposal of the shares is not at arm’s length such as a gift or a sale to a connected person. The corresponding withdrawal of the SEIS reinvestment relief is effected by a chargeable gain being treated as arising in the tax year in which the shares were issued. This gain is equal to the amount of SEIS reinvestment relief attributable to those shares.
SEIS income tax relief will be reduced if the disposal of the shares is at arm’s length. The corresponding reduction in the SEIS reinvestment relief is effected by a chargeable gain being treated as arising in the tax year in which the shares were issued. This gain is equal to the same proportion of the SEIS reinvestment relief gain as the reduction in the SEIS income tax relief.

On 11 July 2015, Megan subscribed for 50,000 shares worth £75,000 in an SEIS company. Megan was entitled to SEIS income tax relief of £75,000 × 50% = £37,500 in 2015/16.
On 12 August 2015, Megan sold a painting and realised a chargeable gain of £48,000. She made the maximum SEIS reinvestment relief claim for 2015/16 of £48,000 × 50% = £24,000.
Megan sold all her SEIS shares on 12 December 2016 for £22,500 in an arm’s length transaction. This resulted in a reduction of £22,500 × 50% = £11,250 in her SEIS income tax relief since the shares had not been held for three years.
What is gain chargeable on this disposal as a result of the reduction of Megan’s SEIS reinvestment relief?

The percentage reduction in Megan’s SEIS income tax relief is (11,250/37,500) × 100 = 30%.
The gain arising as a result of the reduction of Megan’s SEIS reinvestment relief is therefore £24,000 × 30% = £7,200.
This gain is treated as arising in the year of issue of the shares (2015/16), not the year in which the sale was made (2016/17).

6 Altering dispositions made on death 12/14
FAST FORWARD
A variation or disclaimer can be used to vary a will after death. This can have IHT and CGT consequences.
6.1 Variations and disclaimers
A variation or disclaimer can be used to secure a fairer distribution of a deceased person’s estate. They can also be used for tax planning.
A variation of a will is usually made by rewriting the terms of the will so that the assets will pass in accordance with the variation, rather than the original will. For example, if Julius dies leaving an asset to his sister, Kathleen, Kathleen can make a variation which rewrites the will to pass the asset to someone else, such as her son, Luke.
If a beneficiary under a will makes a disclaimer, the disclaimed assets pass under the terms of the will to the beneficiary next entitled. Consider the situation where Petra dies and her will passes her house to her brother, Quayle and the residue of her estate to her sister, Ruby. If Quayle disclaims his entitlement under the will, the house will pass to Ruby as part of the residue of the estate. If this is not what Quayle wants to happen to the house, for example, if he wants it to pass to his daughter, Samantha, he should make a variation, rather than a disclaimer.
6.2 CGT implications of altering dispositions made on death
If, within two years of a death the terms of a will are changed, in writing, either by a variation of the terms of the will made by the persons who benefit or would benefit under the dispositions, or by a disclaimer, the change will not be a disposal for CGT purposes. The assets disposed of are taken by the new beneficiaries at their probate value (ie market value at death), rather than at the value at the date of the disclaimer or variation, as if the assets had been left directly to those persons by the deceased.
If the beneficiaries making a variation wish the relevant terms of the will to be treated as replaced by the terms of the variation for CGT purposes, it is necessary to state this in the variation. Where a disclaimer is made, the relevant terms in the will are automatically treated as replaced by the terms of the disclaimer for CGT purposes, regardless of whether this is stated in the disclaimer or not.
6.3 Example: passing on assets received on death
Trevor bought a 4% shareholding in an unquoted trading company in August 2007 for £10,000. He died in May 2015. In his will he left the shares, then worth £15,000 to Clive. You will remember from earlier in this Text that transfers of assets on death are exempt disposals. Clive inherits the shares as if he had bought them at Trevor’s death for their then market value of £15,000. There is no capital gain or allowable loss on Trevor’s death.
In February 2016, Clive wishes to pass on the shares, now worth £28,000, to his daughter, Imogen. He can do this in either of two ways:
(a) Give the shares to Imogen. If Clive and Imogen make a joint gift relief claim (any shareholding in an unquoted trading company is a business asset for the purposes of gift relief), the gain between Trevor’s death and the date of the gift of £(28,000 – 15,000) = £13,000 will be deducted from the Imogen’s base cost, giving her a revised base cost of £(28,000 – 13,000) = £15,000. Clive has no CGT liability on the gift.
(b) Vary Trevor’s will and include a statement for CGT that the shares are to be treated as passing in Trevor’s will to Imogen. She takes them at the value at Trevor’s death which is £15,000. The variation is not a CGT disposal by Clive.
The practical effect is the same for both methods – Imogen receives the shares with a base cost of £15,000 and Clive has no CGT liability when he passes the shares to Imogen.
Note that if the shares had been a 4% shareholding in a quoted trading company, gift relief would not be available since the company would not be Clive’s personal company (requires at least 5% of the voting rights). In this case, only method (b) would pass the shares to Imogen at their value at Trevor’s death.
6.4 IHT implications of altering dispositions made on death
Similar provisions apply for IHT purposes (see later in this Text).
Chapter roundup
• Entrepreneurs’ relief applies on the disposal of a business and certain trading company shares. The rate of tax on gains qualifying for entrepreneurs’ relief is 10%.
• Gift relief is available on both outright gifts and sales at an undervalue of business assets. Gift relief is also available on gifts which are immediately chargeable to inheritance tax.
• When assets falling within certain classes are sold and other such assets are bought, it is possible to defer gains on the assets sold by claiming rollover relief.
• If an amount less than the proceeds of the old asset is invested in the new assets, a gain equal to the difference will be chargeable up to a maximum of the actual gain.
• When an individual transfers his unincorporated business to a company, the gain arising will be deducted from the cost of the shares received, unless the individual elects otherwise.
• Gains can be deferred if an individual invests in shares in an EIS company and can be partially exempted if an individual invests in shares in a SEIS company.
• A variation or disclaimer can be used to vary a will after death. This can have IHT and CGT consequences.
Quick quiz
1 Peter sells his business as a going concern to another sole trader in August 2015, realising gains of £500,000. He has not made any previous disposals. Calculate Peter’s CGT on the disposal.
2 Which disposals of shares qualify for gift relief?
3 What assets are eligible for rollover relief on the replacement of business assets by an individual?
4 What deferral of a gain is available when a business asset is replaced with a depreciating business asset?
5 What are the conditions for deferring gains on the incorporation of a business?
6 When is EIS deferral relief available?
7 When will a gain deferred using EIS deferral relief come back into charge?
8 Tamara sells an antique vase on 12 June 2015 for £120,000 realising a gain of £40,000. If she makes an investment of £50,000 in qualifying SEIS shares in September 2015, £25,000 of the gain will be deferred until the SEIS shares are sold. TRUE/FALSE?
Answers to quick quiz
1
£
Gains 500,000
Less annual exempt amount (11,100)
Taxable gain 488,900

CGT @ 10% 48,890

2 Shares which qualify for gift relief are those in trading companies which • are not listed on a recognised stock exchange, or
• where the donor is an individual, which are in that individual’s personal company, or
• where the donor is a trustee, where the trustee can exercise 25% or more of the voting rights in the company
3 Assets eligible for rollover relief by an individual are:
• land and buildings
• fixed plant and machinery
• goodwill
4 Where a depreciating asset is acquired, the gain is ‘frozen’, or deferred until it crystallises on the earliest of the disposal of the replacement asset, the date the replacement asset ceases to be used in the trade and ten years after the acquisition of the replacement asset.
5 The conditions for incorporation relief are:
• the business is transferred as a going concern,
• all of its assets (or all assets other than cash) are transferred,
• the consideration is wholly or partly in shares
6 EIS deferral relief is available where an individual makes a gain (on any type of asset) and invests in EIS shares within a certain time period.
7 A deferred gain will come back into charge where:
• investor disposes of the shares (except inter-spouse/civil partner)
• investor’s civil partner/spouse disposes of shares (if acquired from investor)
• investor (or investor’s spouse/civil partner who acquires shares from investor) becomes nonresident within 3 years of issue of shares, unless employed full-time abroad for up to 3 years
• shares cease to be eligible shares (does not generally include becoming quoted)
8 FALSE. The gain of £40,000 is matched with £40,000 of the subscription in the SEIS company. 50% of the amount of the gain matched with the SEIS expenditure is treated as exempt ie £20,000. In addition, this amount is exempt, not just deferred until the SEIS shares are sold.

Number Level Marks Time
Q14 Examination 12 23 mins

 

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