ACCA Applied Skills · Taxation (UK)

Exemptions and Reliefs on Disposal of Capital Assets

These reliefs and exemptions cut or postpone the capital gains tax on a disposal. Exempt assets and the £3,000 annual exempt amount remove gains. Principal private residence relief and business asset disposal relief reduce tax. Holdover, rollover and incorporation reliefs defer it. Losses and spouse transfers help planning. Work through each in order.

What this chapter covers

This chapter is about what happens after you can compute a gain. You already know how to find the gain on a disposal. Now you learn how to reduce it, defer it, or cut the rate of tax on it. Some assets are exempt. Everyone has an annual exempt amount of £3,000. Some gains are covered by principal private residence relief. Others qualify for a 14% rate under business asset disposal relief or investors' relief, up to a £1,000,000 lifetime limit for each relief.

The rest of the chapter covers deferral. Gift holdover relief, rollover relief and incorporation relief do not remove a gain. They move it into the base cost of another asset, so tax is paid later. You then study capital losses, and how to plan disposals using spouses, timing and payment dates.

This chapter links to the rest of the paper. The gain computation, the rates of 18% and 24%, and the order of income and gains all feed in. It also links to inheritance tax, because a gift can be both a CGT disposal and a lifetime IHT transfer. For companies, rollover relief returns in the corporation tax chapters. Expect a Section C question on individuals or businesses to ask you to compute the tax and then advise on the best option.

Reliefs turn a basic gain computation into a full tax question, so they are where many marks are won or lost. Objective test questions on them are marked all or nothing, so you need the exact conditions. In a constructed response question you must apply the conditions to the facts, calculate the relief, and then advise. Candidates who only memorise the names of the reliefs lose marks on the details, such as time limits, restrictions for non-business use, and which gain is reduced first. Learning these once gives you marks in several sections.

The use of exemptions and reliefs in deferring and minimising tax liabilities arising on the disposal of capital assets: topics in the order to study them

1Exempt Assets and the Annual Exempt AmountStart here. It sets the baseline: which assets are ignored and the £3,000 annual exempt amount that every later computation uses.
2Principal Private Residence ReliefThis is the most common relief in the exam. It is also a good test of whether you can handle periods of occupation and absence.
3Business Asset Disposal Relief and Investors' ReliefThese change the rate of tax to 14%, so you need to know the rates and the £1,000,000 limits before you look at deferral.
4Gift Holdover ReliefThis is the first deferral relief. It shows how a gain is moved into the donee's base cost.
5Rollover Relief on Replacement of Business AssetsThis builds on holdover. It uses the same idea of reducing a base cost, but adds reinvestment conditions and time limits.
6Incorporation Relief and Share ReorganisationsThis extends deferral to a business transferred to a company. Share reorganisations follow because both involve exchanging one holding for another.
7Capital Losses and Loss Relief PlanningLosses interact with the annual exempt amount and with the reliefs above, so study them once you know how gains are reduced.
8Tax Planning for Disposals: Spouses, Timing and PaymentFinish with this. It brings everything together into advice: who should own the asset, when to sell, and when the tax is due.

How to prepare The use of exemptions and reliefs in deferring and minimising tax liabilities arising on the disposal of capital assets

Treat this chapter as a set of rules with conditions. For each relief, you should be able to say what qualifies, what the relief does, and what it costs you later. Practise by doing, not by reading.

Learn the exempt assets and the £3,000 annual exempt amount first. Make a short list and test yourself until you can write it from memory.
For each relief, write a one-line summary of the conditions on a card: who, what asset, what time limit, and what the relief does to the gain or base cost.
Work at least two numerical examples for each relief. Include a partial case, such as part business use for PPR or incomplete reinvestment for rollover.
Learn how to apply the rates and limits: the 18% and 24% rates, the 14% rate and the £1,000,000 limits. You do not need to memorise the figures, because they are provided in the exam in the tax rates and allowances. ACCA gives the figures but not the rules, so spend your time on when and how each one applies.
Practise the order of set-off: current-year losses first, then brought forward losses only as far as needed to reduce the gains to the annual exempt amount, then deduct the annual exempt amount. Use the rate that applies to the remaining gain.
Do past objective test cases, then full Section C questions. For each question, write the computation first, then a short, clear conclusion or advice.
Finish by writing a planning checklist: transfers between spouses, using both annual exempt amounts, timing across tax years, and the payment date.

Common mistakes in The use of exemptions and reliefs in deferring and minimising tax liabilities arising on the disposal of capital assets

Applying relief in the wrong order, for example deducting the annual exempt amount before losses or reliefs.
Fix: Always follow the same order: compute each gain, apply reliefs, deduct current-year losses, then brought-forward losses only as far as needed to reduce the gains to the annual exempt amount, then deduct the annual exempt amount.
Using business asset disposal relief or investors' relief without checking the conditions and the lifetime limit.
Fix: Check the type of asset, the shareholding or business conditions, and how much of the £1,000,000 limit is already used before applying 14%.
Treating holdover, rollover and incorporation relief as exemptions.
Fix: State clearly that the gain is deferred and reduces the base cost of the new or transferred asset. Show the reduced base cost.
Ignoring partial restrictions, such as part private use of a residence or incomplete reinvestment under rollover relief.
Fix: Read every scenario for facts that limit the relief. Do the computation of the restricted part separately and show your workings.
Wasting the annual exempt amount or missing spouse planning.
Fix: In any advice question, check whether a transfer to a spouse, or a sale spread over two tax years, would use more annual exempt amounts or lower rates.
Giving a vague written answer in Section C.
Fix: Link each statement to the facts and the figures. Write the rule, apply it, then give the conclusion in one or two short sentences.

Last-day revision: The use of exemptions and reliefs in deferring and minimising tax liabilities arising on the disposal of capital assets

The annual exempt amount is £3,000. It is lost if unused and cannot be carried forward.
CGT rates are 18% and 24%. Gains are taxed at 18% only to the extent that the basic rate band is unused.
Business asset disposal relief and investors' relief both give a 14% rate, up to a £1,000,000 lifetime limit for each. Other gains use any unused basic rate band first, so they are more likely to be taxed at 18%. Gains that qualify for these reliefs are treated as using the basic rate band last, after other gains, and are taxed at 14% regardless.
Exempt assets include private cars, gilts and qualifying corporate bonds. Gains on investments held within ISAs are exempt. Chattels sold for proceeds of £6,000 or less are exempt, and wasting chattels are exempt. The £6,000 chattel limit is a rule you must learn, because it is not given in the tax tables.
Principal private residence relief covers periods of occupation plus the final 9 months of ownership (36 months for a disabled person or a person in long-term care, if conditions are met). Some periods of absence are also exempt, but only if the owner occupied the property before the absence and actually resumes occupation after it. The exception is where the owner cannot resume occupation because of work circumstances. The permitted absences are: up to 3 years for any reason, any length of time if the owner is employed abroad, and up to 4 years if the owner's employment or work location is elsewhere in the UK. The employment-related periods (abroad and the 4 years) apply only to absence caused by work.
Gift holdover relief is for gifts of business assets, and also for gifts that are immediately chargeable to inheritance tax, such as a gift into a relevant property trust. The held-over gain reduces the donee's base cost.
Rollover relief needs qualifying business assets and reinvestment within the permitted period, from 12 months before to 36 months after the disposal.
Incorporation relief applies automatically when a business is transferred as a going concern, with all its assets (other than cash), to a company in exchange for shares. It can be disapplied by election. The gain reduces the base cost of the shares.
Current-year losses are set against current-year gains in full, even if this wastes the annual exempt amount.
Brought-forward losses are deducted after current-year losses and before the annual exempt amount. They are used only as far as needed to reduce the gains to the annual exempt amount.
Transfers between spouses or civil partners living together are made at no gain, no loss. Use this to share assets and both annual exempt amounts.
Check the payment date. CGT on a disposal of UK residential property must be reported and paid within 60 days of completion. This 60-day rule is not in the tax tables, so learn it. CGT on other gains is due by 31 January following the end of the tax year.

The use of exemptions and reliefs in deferring and minimising tax liabilities arising on the disposal of capital assets practice questions

The use of exemptions and reliefs in deferring and minimising tax liabilities arising on the disposal of capital assets in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

The use of exemptions and reliefs in deferring and minimising tax liabilities arising on the disposal of capital assets: frequently asked questions

Which reliefs in this chapter defer a gain rather than remove it?

Gift holdover relief, rollover relief and incorporation relief defer the gain. The gain is deducted from the base cost of the asset you get or hold, so it is taxed on a later disposal. Principal private residence relief and the annual exempt amount remove the gain.

What CGT rate applies under business asset disposal relief?

The rate is 14% on qualifying gains, up to a lifetime limit of £1,000,000. Investors' relief also gives 14% with a separate £1,000,000 lifetime limit. Gains above the limit are taxed at the normal 18% or 24% rates.

Can I carry forward the annual exempt amount if I do not use it?

No. The £3,000 annual exempt amount is lost if you do not use it in the tax year. This is why timing disposals and sharing assets between spouses are part of tax planning.

How are capital losses used against gains?

Current-year losses must be set against current-year gains first, even if this wastes the annual exempt amount. Losses brought forward are used only as far as needed to reduce the gains to the annual exempt amount. Remember that unused losses can be carried forward.

How should I prepare for the written Section C question on this chapter?

Set out the computation clearly, with each relief shown on its own line and workings labelled. Then add short, specific advice linked to the facts, such as using a spouse's annual exempt amount or claiming holdover relief. Marks go to applied points, not general statements.