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4 Example: additional Class 4 contributions

4 Example: additional Class 4 contributions

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Chapter Roundup


Class 1 NICs are payable by employees and employers on earnings.



The employment allowance enables an employer to reduce its total Class 1 secondary contributions by up
to £2,000 per tax year.



Class 1A NICs are payable by employers on benefits provided for employees.



The self-employed pay Class 2 and Class 4 NICs. Class 2 NICs are paid at a flat weekly rate. Class 4 NICs
are based on the level of the individual's profits.

Quick Quiz
1
2
3
4

180

What national insurance contributions are payable by employers and employees?
On what are Class 1A NICs based?
Class 2 NICs are paid by an employer. True/False?
How are Class 4 NICs calculated?

12: National insurance contributions  Part B Income tax and national insurance contributions

Answers to Quick Quiz
1

Employees – Class 1 primary contributions
Employers – Class 1 secondary contributions
Class 1A contributions

2

Class 1A NICs are based on taxable benefits paid to P11D employees.

3

False. Class 2 contributions are paid by the self-employed.

4

The main rate is a fixed percentage (9% in 2015/16) of an individual's tax profits between an upper profits
limit and lower profits limit. The additional rate (2%) applies above the upper profits limit.
Now try the questions below from the Practice Question Bank

Number

Type

Marks

Time

Q28

Section A

6

12 mins

Q29

Section B

10

19 mins

Q30

Section C

15

29 mins

Part B Income tax and national insurance contributions  12: National insurance contributions

181

182

12: National insurance contributions  Part B Income tax and national insurance contributions

P
A
R
T
C

Chargeable gains for
individuals

183

184

Computing
chargeable gains
Topic list

Syllabus reference

1 Chargeable persons, disposals and assets

C1(a), (b)

2 Computing a gain or loss

C2(a), (b)

3 The annual exempt amount

C5(a)

4 Capital losses

C2(b)

5 CGT payable by individuals

C5(a)

6 Transfers between spouses/civil partners

C2(c)

7 Part disposals

C2(d)

8 The damage, loss or destruction of an asset

C2(e)

Introduction
Now that we have completed our study of the income tax and national
insurance liabilities we turn our attention to the capital gains tax computation.
We deal with individuals in this chapter. Chargeable gains for companies are
dealt with later in this Study Text.
We look at the circumstances in which a chargeable gain or allowable loss may
arise. Then we look at the detailed calculation of the gain or loss on a disposal
of an asset.
We then consider the annual exempt amount and look at the relief for capital
losses, including the interaction between capital losses brought forward and
the annual exempt amount. This enables us to compute CGT payable by
individuals.
Following on from this, we start to identify the different types of disposals you
may be presented with in the exam. We look first at part disposals. If only part
of an asset has been disposed of we need to know how to allocate the cost
between the part disposed of and the part retained.
Finally, for this chapter we consider the damage or destruction of an asset and
the receipt of compensation or insurance proceeds, and look at the reliefs
available where the proceeds are applied in restoring or replacing the asset.
In the following chapters we look at further rules, including those for disposals
of shares, and various CGT reliefs that may be available.

185

Study guide
Intellectual
level
C1

The scope of the taxation of capital gains

(a)

Describe the scope of capital gains tax.

2

(b)

Recognise those assets which are exempt.

1

C2

The basic principles of computing gains and losses

(a)

Compute and explain the treatment of capital gains.

2

(b)

Compute and explain the treatment of capital losses.

2

(c)

Understand the treatment of transfers between a husband and wife or
between a couple in a civil partnership.

2

(d)

Understand the amount of allowable expenditure for a part disposal.

2

(e)

Recognise the treatment where an asset is damaged, lost or destroyed, and
the implications of receiving insurance proceeds and reinvesting such
proceeds.

2

C5

The computation of capital gains tax

(a)

Compute the amount of capital gains tax payable.

2

Exam guide
Section A questions on the topics in this chapter may include dealing with losses or computing the amount
of capital gains tax payable. You may have to deal with a number of disposals in a Section B question. You
are almost certain to have to prepare a detailed capital gains computation, whether for an individual or
company in Section C. Learn the basic layout, so that slotting in the figures becomes automatic. Then in the
exam you will be able to turn your attention to the particular points raised in the question. The A/(A+B)
formula for part disposals must be learnt.

1 Chargeable persons, disposals and assets
FAST FORWARD

Key term

A gain is chargeable if there is a chargeable disposal of a chargeable asset by a chargeable person.
For a chargeable gain to arise there must be:




A chargeable person; and
A chargeable disposal; and
A chargeable asset

otherwise no charge to tax occurs.

1.1 Chargeable persons
FAST FORWARD

Capital gains are chargeable on individuals and companies.
The following are chargeable persons.



186

Individuals
Companies

13: Computing chargeable gains  Part C Chargeable gains for individuals

UK resident individuals are chargeable persons in relation to the disposal of assets situated anywhere
in the world. Residence is defined for CGT in the same way as for income tax (see Section 1.2 in Chapter
2).

Exam focus
point

The computation of capital gains arising on overseas assets is not examinable in F6 (UK).
We will look at the taxation of chargeable gains on companies later in this Text. Note that individuals
pay capital gains tax (CGT) on capital gains, whilst companies bring chargeable gains into their
corporation tax computation and pay corporation tax on them.

1.2 Chargeable disposals
The following are chargeable disposals.




Sales of assets or parts of assets
Gifts of assets or parts of assets
The loss or destruction of assets

A chargeable disposal occurs on the date of the contract (where there is one, whether written or oral), or
the date of a conditional contract becoming unconditional. This may differ from the date of transfer of the
asset. However, when a capital sum is received for example on the loss or destruction of an asset, the
disposal takes place on the day the sum is received.
Where a disposal involves an acquisition by someone else, the date of acquisition for that person is
the same as the date of disposal.
Transfers of assets on death are exempt disposals.

1.3 Chargeable assets
All forms of property, wherever in the world they are situated, are chargeable assets unless they are
specifically designated as exempt (see further below).

1.4 Exempt assets
The following are exempt assets.











Motor vehicles suitable for private use
National Savings and Investments certificates and premium bonds
Gilt-edged securities (treasury stock)
Qualifying corporate bonds (QCBs)
Certain chattels
Investments held in individual savings accounts (ISAs)
Foreign currency bank accounts held by individuals
Decorations for bravery where awarded, not purchased
Damages for personal or professional injury
Debts (except debts on a security)

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

Exam focus
point

In the exam, if you think that an asset is exempt just state this – don't waste time working out a gain or
loss.

Part C Chargeable gains for individuals  13: Computing chargeable gains

187

2 Computing a gain or loss
FAST FORWARD

A gain or loss is computed by taking the proceeds and deducting the cost. Incidental costs of acquisition
and disposal are deducted together with any enhancement expenditure reflected in the state and nature of
the asset at the date of disposal.

2.1 Basic calculation
A gain (or an allowable loss) is generally calculated as follows.
Disposal consideration
Less incidental costs of disposal
Net proceeds
Less allowable costs
Gain

£
45,000
(400)
44,600
(21,000)
23,600

Usually the disposal consideration is the proceeds of sale of the asset, but a disposal is deemed to
take place at market value:




Where the disposal is not a bargain at arm's length
Where the disposal is made for a consideration which cannot be valued
Where the disposal is by way of a gift

Special valuation rules apply for shares (see later in this Text).
Incidental costs of disposal may include:





Valuation fees
Estate agency fees
Advertising costs
Legal costs

Allowable costs include:




The original cost of acquisition
Incidental costs of acquisition
Capital expenditure incurred in enhancing the asset

Enhancement expenditure is capital expenditure which enhances the value of the asset and is reflected in
the state or nature of the asset at the time of disposal, or expenditure incurred in establishing, preserving
or defending title to, or a right over, the asset. Excluded from this category are:





Costs of repairs and maintenance
Costs of insurance
Any expenditure deductible from trading profits
Any expenditure met by public funds (for example council grants)

Question

Calculating the gain

Joanne bought a piece of land as an investment for £20,000. The legal costs of purchase were £250.
Joanne spent £2,000 on installing drainage pipes on the land which enhanced its value.
Joanne sold the land on 12 December 2015 for £35,000. She incurred estate agency fees of £700 and
legal costs of £500 on the sale.
Calculate Joanne's gain on sale.

188

13: Computing chargeable gains  Part C Chargeable gains for individuals

Answer
£
35,000
(1,200)
33,800
(20,250)
(2,000)
11,550

Proceeds of sale
Less costs of disposal £(700 + 500)
Less

costs of acquisition £(20,000 + 250)
costs of enhancement

Gain

3 The annual exempt amount
FAST FORWARD

An individual is entitled to an annual exempt amount for each tax year.
There is an annual exempt amount for each tax year. For each individual for 2015/16 it is £11,100.
The annual exempt amount is deducted from the chargeable gains for the year after the deductions of
losses and other reliefs. The resulting amount is the individual's taxable gains.
An individual who has gains taxable at more than one rate of tax may deduct the annual exempt
amount for that year in the way that produces the lowest possible tax charge.

4 Capital losses
FAST FORWARD

Losses are set off against gains of the same year and any excess carried forward. Brought forward losses
are only set off to reduce net gains down to the amount of the annual exempt amount.

4.1 Allowable losses of the same year
Allowable capital losses arising in a tax year are deducted from gains arising in the same tax year.
An individual who has gains taxable at more than one rate of tax may deduct any allowable losses in
the way that produces the lowest possible tax charge.
Any loss which cannot be set off is carried forward to set against future gains. Losses must be used as
soon as possible (but see below).

4.2 Allowable losses brought forward
Allowable losses brought forward are only set off to reduce net current year gains to the annual
exempt amount. No set-off is made if net chargeable gains for the current year do not exceed the annual
exempt amount.
Net current year gains are current year gains less current year allowable losses. Note that if a claim is
made to set trading losses against capital gains in any tax year (as we saw earlier in this Text), they will be
set off before capital losses brought forward. Unlike capital losses brought forward, trading losses cannot
be restricted to preserve the annual exempt amount.

4.3 Example: the use of losses
(a)

George has gains for 2015/16 of £13,000 and allowable losses of £6,000. As the losses are current
year losses they must be fully relieved against the £13,000 of gains to produce net gains of £7,000
despite the fact that net gains are below the annual exempt amount.

Part C Chargeable gains for individuals  13: Computing chargeable gains

189

(b)

Bob has gains of £15,000 for 2015/16 and allowable losses brought forward of £6,000. Bob
restricts his loss relief to £3,900 so as to leave net gains of £(15,000  3,900) = £11,100, which
will be exactly covered by his annual exempt amount for 2015/16. The remaining £2,100 of losses
will be carried forward to 2016/17.

(c)

Tom has gains of £10,500 for 2015/16 and losses brought forward from 2014/15 of £4,000. He
will not use any of his brought forward losses in 2015/16 and instead will carry forward all of his
losses to 2016/17. His gains of £10,500 are covered by his annual exempt amount for 2015/16.

5 CGT payable by individuals
FAST FORWARD

Capital gains tax is usually payable at the rate of 18% or 28% depending on the individual's taxable
income.
One of the competencies you require to fulfil Performance Objective 15 Tax computations and
assessments of the PER is to prepare or contribute to the computation or assessment of tax computations
for individuals. You can apply the knowledge you obtain from this section of the text to help to
demonstrate this competence.
Taxable gains are usually chargeable to capital gains tax at the rate of 18% or 28% depending on the
individual's taxable income.
To work out which rate applies, follow these rules:

Is taxable income equal to or in excess
of basic rate limit?

Yes

No

Taxable gains taxed at 28%

Is the total of taxable income and
taxable gains less than basic rate limit?

Yes

Taxable gains taxed at 18%

No

Taxable gains taxed at 18% up
to basic rate limit less taxable
income, then at 28% on excess

Remember that the basic rate band limit will usually be £31,785 for 2015/16 but the limit will be
increased by the gross amount of gift aid donations and personal pension contributions.

190

13: Computing chargeable gains  Part C Chargeable gains for individuals