So how do we do it? See for yourself at www.bpp.com/acca or call 0845 833 7275 quoting ref ACCA/SADM *As part of the Approved Learning Partner – student tuition programme. With the exception of BPP Professional Education (Newcastle) which holds Gold Status from the ACCA for student tuition. BPP Study Centres outside of the UK are also excluded. **BPP Learning Media has been awarded Platinum status from the ACCA as part of the Approved Learning Partner – content programme. † Terms and conditions apply. See www.bpp.com/passassurance for full details. See the difference with BPP Here at BPP, we go the extra mile to make sure you achieve your potential in your ACCA exams through our proven methods. No wonder the ACCA have awarded us two Platinum awards, for student tuition* and content**. But don’t just take their word for it. Our ACCA pass rates are exceptionally high and for the majority of centres exceed ACCA’s global pass rates. We offer a variety of study options including our pioneering online study, in fact we’re so confident about the quality of our tuition that we offer free Pass Assurance † . Pass with Confidence
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So how do we do it? See for yourself at www.bpp.com/acca or call 0845 833 7275 quoting ref ACCA/SADM
*As part of the Approved Learning Partner – student tuition programme. With the exception of BPP Professional Education (Newcastle) which holds Gold Status from the ACCA for student tuition. BPP Study Centres outside of the UK are also excluded. **BPP Learning Media has been awarded Platinum status from the ACCA as part of the Approved Learning Partner – content programme. †Terms and conditions apply. See www.bpp.com/passassurance for full details.
See the difference with BPP Here at BPP, we go the extra mile to make sure you achieve your potential in your ACCA exams through our proven methods. No wonder the ACCA have awarded us two Platinum awards, for student tuition* and content**. But don’t just take their word for it.Our ACCA pass rates are exceptionally high and for the majority of centres exceed ACCA’s global pass rates. We offer a variety of study options including our pioneering online study, in fact we’re so confi dent about the quality of our tuition that we offer free Pass Assurance†.
Pass with Confi dence
ALL YOU NEED TO KNOWArticles on key examinable topics to support your studies
TECHNICAL
28 VALUE ADDED TAX: PART 2Relevant to ACCA Qualification Paper F6 (UK)
CAPITAL GAINS TAX: PARTS 1 AND 2Relevant to ACCA Qualification Paper F6 (UK)
INTRODUCTION TO ISLAMIC FINANCERelevant to ACCA Qualification Paper F9
VALUE ADDED TAX – PART 2RELEVANT TO ACCA QUALIFICATION PAPER F6 (UK)Following on from David Harrowen’s first article on VAT, this article explains how VAT will be examined in the Paper F6 (UK) exams.
ACCESS RESOURCES RELEVANT TO ACCA QUALIFICATION PAPER F6 (UK)www.accaglobal.com/students/acca/exams/f6/
CAPITAL GAINS TAX – PARTS 1 AND 2RELEVANT TO ACCA QUALIFICATION PAPER F6 (UK)Question 3 of Paper F6 (UK) focuses on capital gains in either a personal or a corporate context, and a small element of capital gains might also be included in Questions 1 or 2. David Harrowven, examiner for Paper F6 (UK), describes how capital gains tax will be examined in Paper F6 (UK).
ACCESS RESOURCES RELEVANT TO ACCA QUALIFICATION PAPER F6 (UK)www.accaglobal.com/students/acca/exams/f6/
AN INTRODUCTION TO ISLAMIC FINANCERELEVANT TO ACCA QUALIFICATION PAPER F9Islamic finance has been introduced into the Paper F9 syllabus from the June 2011 exams. Read about the key elements of the topic.
ACCESS RESOURCES RELEVANT TO ACCA QUALIFICATION PAPER F9www.accaglobal.com/students/acca/exams/f9/
GUIDANCE ON APPROACH TO QUESTIONS IN SECTION A OF PAPER P6 (UK)RELEVANT TO ACCA QUALIFICATION PAPER P6 (UK)The two questions in Section A of the Paper P6 (UK) exam are important because they represent between 50% and 70% of the marks on the paper. They usually contain quite a lot of information and tend to involve a number of requirements and a combination of taxes such that they could appear to be somewhat overwhelming.
In order to be successful in the exam it is important to have a structured approach to these questions and to have practised as many of them as possible. Rory Fish, examiner for Paper P6 (UK), outlines some key advice for students.
ACCESS RESOURCES RELEVANT TO ACCA QUALIFICATION PAPER P6 (UK)www.accaglobal.com/students/acca/exams/p6/
PAPER 2www.accaglobal.com/students/cat/exams/t2/tech_articles/
PAPER 3www.accaglobal.com/students/cat/exams/t3/tech_articles/
PAPER 4www.accaglobal.com/students/cat/exams/t4/tech_articles/
PAPER 5www.accaglobal.com/students/cat/exams/t5/tech_articles/
PAPER 6www.accaglobal.com/students/cat/exams/t6/tech_articles/
PAPER 7www.accaglobal.com/students/cat/exams/t7/tech_articles/
PAPER 8www.accaglobal.com/students/cat/exams/t8/tech_articles/
PAPER 9www.accaglobal.com/students/cat/exams/t9/tech_articles/
PAPER 10www.accaglobal.com/students/cat/exams/t10/tech_articles/
ACCA ONLINE STUDY RESOURCESACCA is committed to providing support to all its students. Examiner reports, examiner interviews and a wide variety of technical articles are available in a range of different media on the ACCA website at www.accaglobal.com/students/
Access the Student Accountant technical article archive at www.accaglobal.com/students/student_accountant/archive/
CHANGES TO THE ACCA QUALIFICATION FROM JUNE 2011Read more at www.accaglobal.com/students/student_accountant/archive/2010/108/3333957
FOUNDATIONS IN ACCOUNTANCYLearn more about ACCA’s suite of entry-level qualifications – Foundations in Accountancy at www.accaglobal.com/fia
Capital gains: Part 1 This two-part article is relevant to those of you taking Paper F6 (UK) in
either the June or December 2011 sittings, and is based on tax legislation as it applies to the tax year 2010–11 (Finance Acts (No 1)
and (No 2) 2010).
Question 3 of Paper F6 (UK) focuses on capital gains in either a personal or a corporate context, and will be for 15 marks. A small element of capital gains might also be included in Questions 1 (focusing
on income tax) or 2 (focusing on corporation tax).
Personal capital gains Scope of capital gains tax (CGT)
CGT is charged when there is a chargeable disposal of a chargeable asset by a chargeable person.
A chargeable disposal includes part disposals and the gift of assets. However, the transfer of an asset upon death is an exempt disposal. A
person who inherits an asset takes it over at its value at the time of death.
All forms of property are chargeable assets unless exempted. The most
important exempt assets as far as Paper F6 (UK) is concerned are: • Certain chattels (see later)
• Motor cars • UK Government securities (Gilts).
In determining whether or not an individual is chargeable to CGT it is necessary to consider their residence status.
Example 1
Explain when a person will be treated as resident or ordinarily resident in the UK for a particular tax year and state how a person’s residence
status establishes whether or not they are liable to CGT. • A person will be resident in the UK during a tax year if they are
present in the UK for 183 days or more. • A person will also be treated as resident if they make substantial
visits to the UK, with visits averaging 91 days or more over four
consecutive tax years. • Ordinary residence is not precisely defined, but a person will
normally be ordinarily resident in the UK if this is where they habitually reside.
2 CAPITAL GAINS TAX: PART 1 RELEVANT TO PAPER F6 (UK) MARCH 2011
For the tax year 2010–11 Nim has chargeable gains of £17,100. He has unused capital losses of £16,700 brought forward from the tax year 2009–10.
Nim’s taxable gains for 2010–11 are as follows:
£ Chargeable gains 17,100
Capital losses brought forward (7,000) ______
Chargeable gains 10,100 Annual exemption (10,100)
______ Taxable gains Nil ______
• The set off of the brought forward capital losses is restricted to
£7,000 (17,100 – 10,100) so that chargeable gains are reduced to the amount of the annual exemption.
• Nim, therefore, has capital losses carried forward of £9,700 (16,700 – 7,000).
Rates of capital gains tax The rate of CGT is linked to the level of a person’s taxable income.
Taxable gains are taxed at a lower rate of 18% where they fall within the basic rate tax band of £37,400, and at a higher rate of 28% where they
exceed this threshold. Remember that the basic rate band is extended if a person pays personal pension contributions or makes a gift aid
donation.
CGT is collected as part of the self-assessment system, and is due in one amount on 31 January following the tax year. Therefore, a CGT liability for the tax year 2010–11 will be payable on 31 January 2012.
Payments on account are not required in respect of CGT.
Example 4 For the tax year 2010–11 Adam has a salary of £39,475, and during the
year he made net personal pension contributions of £4,400. On 15 August 2010 Adam sold an antique table and this resulted in a
chargeable gain of £17,400.
For the tax year 2010–11 Bee has a trading profit of £56,475. On 20 August 2010 she sold an antique vase and this resulted in a chargeable
gain of £18,100.
4 CAPITAL GAINS TAX: PART 1 RELEVANT TO PAPER F6 (UK) MARCH 2011
For the tax year 2010–11 Chester has a salary of £36,475. On 25 August
2010 he sold an antique clock and this resulted in a chargeable gain of £23,800.
Adam Adam’s taxable income is £33,000 (39,475 less the personal allowance
of 6,475). His basic rate tax band is extended to £42,900 (37,400 + 5,500 (4,400 x 100/80)), of which £9,900 (42,900 – 33,000) is unused.
Adam’s taxable gain of £7,300 (17,400 less the annual exemption of
10,100) is fully within the unused basic rate tax band, so his CGT liability for 2010–11 is therefore £1,314 (7,300 at 18%).
Bee Bee’s taxable income is £50,000 (56,475 – 6,475), so all of her basic
rate tax band has been used. The CGT liability for 2010–11 on her taxable gain of £8,000 (18,100 – 10,100) is therefore £2,240 (8,000 at
28%).
Chester Chester’s taxable income is £30,000 (36,475 – 6,475), so £7,400
(37,400 – 30,000) of his basic rate tax band is unused. The CGT liability for 2010-11 on Chester’s taxable gain of £13,700 (23,800 – 10,100) is therefore calculated as follows:
£ 7,400 at 18% 1,332
6,300 at 28% 1,764 _____
3,096 _____
In each case, the CGT liability will be due on 31 January 2012.
Entrepreneurs’ relief A reduced CGT rate of 10% applies if a disposal qualifies for
entrepreneurs’ relief. This rate applies regardless of the level of a person’s taxable income. Entrepreneurs’ relief can be claimed when an
individual disposes of a business or a part of a business as follows: • A disposal of the whole or part of a business run as a sole trader.
Relief is only available in respect of chargeable gains arising from the disposal of assets in use for the purpose of the business. This will
exclude chargeable gains arising from investments. • The disposal of shares in a trading company where an individual has
at least a 5% shareholding in the company and is also an employee
5 CAPITAL GAINS TAX: PART 1 RELEVANT TO PAPER F6 (UK) MARCH 2011
or director of the company. Provided the limited company is a trading company, there is no restriction to the amount of relief if it
holds non-trading assets such as investments. The relief covers the first £5m of qualifying gains that a person makes
during their lifetime. Gains in excess of the £5m limit are taxed as normal at the 18% or 28% rates.
There is no age requirement in order to claim entrepreneurs’ relief, but
assets must have been owned for one year prior to the date of disposal in order to qualify.
Example 5
On 25 January 2011 Michael sold a 30% shareholding in Green Ltd, an unquoted trading company. The disposal resulted in a chargeable gain of £800,000. Michael had owned the shares since 1 March 2004, and
was an employee of the company from that date until the date of disposal.
He has taxable income of £8,000 for the tax year 2010–11.
Michael’s CGT liability for 2010–11 is as follows:
£ Chargeable gain 800,000
Annual exemption (10,100) _______
789,900 _______
Capital gains tax: 789,900 at 10% 78,990
_______ Although chargeable gains that qualify for entrepreneurs’ relief are
always taxed at a rate of 10%, they must be taken into account when establishing which rate applies to other chargeable gains. Chargeable
gains qualifying for entrepreneurs’ relief therefore reduce the amount of any unused basic rate tax band.
The annual exemption and any capital losses should be initially
deducted from those chargeable gains that do not qualify for entrepreneurs’ relief. This approach will save CGT at either 18% or 28%,
compared to just 10% if used against chargeable gains that do qualify for relief.
6 CAPITAL GAINS TAX: PART 1 RELEVANT TO PAPER F6 (UK) MARCH 2011
• The transfer of the 20,000 £1 ordinary shares in Elf plc to Cathy does not give rise to any chargeable gain or capital loss, because it is a
transfer between spouses. Cathy Dew – CGT liability 2010–11
£ £ House 45,000
Ordinary shares in Elf plc
Disposal proceeds 70,000 Cost (48,000)
______ 22,000 ______
67,000 Annual exemption (10,100) ______
56,900 ______
Capital gains tax: 56,900 at 28% 15,932
______
• Bill’s original cost is used in calculating the capital gain on the disposal of the shares in Elf plc.
Part disposals When just part of an asset is disposed of then the cost must be
apportioned between the part disposed of and the part retained.
Example 8 On 16 February 2011 Furgus sold three acres of land for £285,000. He
had originally purchased four acres of land on 17 July 2009 for £220,000. The market value of the unsold acre of land as at 16 February 2011 was £90,000.
• The cost relating to the three acres of land sold is £167,200
(220,000 x 285,000/375,000 (285,000 + 90,000)). • The chargeable gain on the land is therefore £117,800 (285,000 –
167,200). • The base cost of the remaining acre of land is £52,800 (220,000 –
167,200).
Chattels Special rules apply to chattels. A chattel is tangible moveable property.
9 CAPITAL GAINS TAX: PART 1 RELEVANT TO PAPER F6 (UK) MARCH 2011
Example 9 On 18 August 2010 Gloria sold an antique table for £5,600 and an
antique clock for £7,200. The antique table had been purchased on 27 May 2009 for £3,200, and the antique clock had been purchased on 14 June 2009 for £3,700.
• The antique table is exempt from CGT because the gross sale
proceeds were less than £6,000. • The chargeable gain on the antique clock is restricted to £2,000
(7,200 – 6,000 = 1,200 x 5/3) as this is less than the normal gain of £3,500 (7,200 – 3,700).
Wasting assets
A wasting asset is one which has a remaining useful life of 50 years or less. The cost of such an asset must be adjusted for the expected depreciation over the life of the asset.
Example 10
On 31 March 2011 Mung sold a copyright for £9,600. The copyright had been purchased on 1 April 2006 for £10,000 when it had an unexpired
life of 20 years.
The chargeable gain on the copyright is as follows: £
Disposal proceeds 9,600 Cost (10,000 x 15/20) (7,500)
_____ 2,100
_____
• The cost of £10,000 is depreciated based on an unexpired life of 20 years at the date of acquisition and an unexpired life of 15 years at the date of disposal.
Insurance proceeds
If an asset is lost or destroyed then the receipt of insurance proceeds is treated as a normal disposal. However, rollover relief is available if the
insurance monies are used to purchase a replacement asset within a period of 12 months.
Example 11 On 20 October 2010 an antique table owned by Claude was destroyed in a fire. The table had been purchased on 23 November 2008 for £50,000. Claude received insurance proceeds of £74,000 on 6
10 CAPITAL GAINS TAX: PART 1 RELEVANT TO PAPER F6 (UK) MARCH 2011
December 2010 and on 18 December 2010 he paid £75,400 for a replacement table.
• The insurance proceeds of £74,000 received by Claude have been
fully reinvested in a replacement table.
• There is therefore no disposal on the receipt of the insurance proceeds.
• The gain of £24,000 (insurance proceeds of £74,000 less original cost of £50,000) is set against the cost of the replacement table, so
its base cost becomes £51,400 (75,400 – 24,000).
If an asset is damaged then the receipt of insurance proceeds is treated as a part disposal. However, if all the proceeds are used to restore the
asset then a claim can be made to ignore the part disposal rules. Example 12
On 1 October 2010 an antique carpet owned by Juliet was damaged by a flood. The carpet had been purchased on 17 November 2006 for
£69,000. Juliet received insurance proceeds of £12,000 on 12 December 2010, and she spent a total of £13,400 during December
2010 restoring the carpet. Juliet has made a claim to ignore the part disposal rules.
• The insurance proceeds of £12,000 received by Juliet have been fully
applied in restoring the carpet.
• There is therefore no disposal on the receipt of the insurance proceeds.
• The revised base cost of the carpet is £70,400 (69,000 – 12,000 + 13,400).
Principal private residences
A gain on the disposal of a principal private residence is exempt where the owner has occupied the house throughout the whole period of ownership. The final 36 months of ownership are always treated as a
period of ownership. The following periods of absence are also deemed to be periods of occupation:
• Periods up to a total of three years for any reason. • Any periods where the owner is required to live abroad due to their
employment. • Periods up to four years where the owner is required to live elsewhere
in the UK due to their work.
These deemed periods of occupation must normally be preceded and followed by actual periods of occupation.
11 CAPITAL GAINS TAX: PART 1 RELEVANT TO PAPER F6 (UK) MARCH 2011
Capital gains: Part 2 This article is relevant to those of you taking Paper F6 (UK) in either the
June or December 2011 sittings, and is based on tax legislation as it applies to the tax year 2010–11 (Finance Acts (No 1) and (No 2) 2010).
Question 3 of Paper F6 (UK) will focus on capital gains in either a personal or a corporate context, and will be for 15 marks. A small
element of capital gains might also be included in Questions 1 (focusing on income tax) or 2 (focusing on corporation tax).
PERSONAL CAPITAL GAINS (CONTINUED)
Shares The disposal of shares can create a particular problem. This is because
the shares disposed of might have been purchased at different times, and it is then difficult to identify exactly which shares have been sold. Disposals of shares are matched with purchases in the following order:
• Shares purchased on the same day as the disposal. • Shares purchased within the following 30 days.
• Shares in share pool.
The share pool aggregates all purchases made up to the day of the disposal.
Example 16 Ivy has had the following transactions in the shares of Jing plc:
1 June 2003 Purchased 4,000 shares for £6,200.
30 April 2008 Purchased 2,000 shares for £8,800 15 July 2010 Purchased 500 shares for £2,500 15 July 2010 Sold 4,500 shares for £27,000
Ivy’s chargeable gain for 2010–11 is as follows:
£ £ Purchase 15 July 2010
Disposal proceeds (27,000 x 500/4,500) 3,000 Cost (2,500)
____ 500 Share pool Disposal proceeds (27,000 x 4,000/4,500) 24,000
Cost (10,000) ______ 14,000
______ 14,500
______
2 CAPITAL GAINS TAX: PART 2 RELEVANT TO PAPER F6 (UK) MARCH 2011
£ £ Purchase 1 June 2003 4,000 6,200 Purchase 30 April 2008 2,000 8,800
_____ ______ 6,000 15,000
Disposal 15 July 2010 (15,000 x 4,000/6,000) (4,000) (10,000)
_____ ______ Balance carried forward 2,000 5,000
_____ ______
• The disposal is first matched with the same day purchase and then against the share pool.
The reason that disposals are matched with shares purchased within the following 30 days is to prevent a practice known as bed and
breakfasting. A person might sell shares at the close of business one day and then buy them back at the opening of business the next day.
Previously, a chargeable gain or a capital loss could thus be established without a genuine disposal being made. The 30-day matching rule
makes bed and breakfasting much more difficult, since the subsequent purchase cannot take place within 30 days.
Example 17 Keith purchased 1,000 shares in Long plc on 5 July 2010 for £10,000.
The shares have fallen in value, so he would like to establish a capital loss. Therefore, the shares were sold on 2 December 2010 for £2,000,
and purchased back on 10 December 2010 for £1,900.
Keith’s transactions are caught by the 30-day matching rule. The disposal on 2 December 2010 will be matched with the purchase on 10 December 2010, and so for 2010–11 he will have a chargeable gain of
£100 (2,000 – 1,900).
With individuals it might be necessary to establish a market value figure where the shares are disposed of by way of a gift rather than being sold.
Example 18
Maude made a gift of her entire shareholding of 10,000 £1 ordinary shares in Night plc to her daughter. On the date of the gift the shares
were quoted at £5.10 – £5.18, with recorded bargains of £5.00, £5.15 and £5.22.
3 CAPITAL GAINS TAX: PART 2 RELEVANT TO PAPER F6 (UK) MARCH 2011
• Quinn was issued with 20,000 (40,000 x 1/2) new ordinary shares under the rights issue at a cost of £60,000 (20,000 x £3.00).
• The cost of the shares sold is therefore £80,000 (100,000 + 60,000 = 160,000 x 30,000/(40,000 + 20,000)).
A paper for paper takeover or reorganisation is not a chargeable disposal. The new shares simply take the place of the original shares,
and are deemed to have been purchased at the same time and for the same cost. Where more than one class of new share is acquired as a
result of the takeover, the original cost is apportioned according to the market values of the new shares immediately after the takeover.
Example 21
On 28 March 2011 Rita sold her entire holding of £1 ordinary shares in Sine plc for £55,000. Rita had originally purchased 10,000 shares in Sine plc on 5 May 2008 for £14,000. On 7 August 2009 Sine plc had a
reorganisation whereby each £1 ordinary share was exchanged for two new £1 ordinary shares and one £1 preference share. Immediately after
the reorganisation each £1 ordinary share in Sine plc was quoted at £2.50 and each £1 preference share was quoted at £1.25.
Rita’s chargeable gain for 2010–11 is as follows:
£ Disposal proceeds 55,000 Cost (11,200)
______ 43,800
______
• On the reorganisation Rita received new ordinary shares valued at £50,000 (2 x 10,000 x £2.50) and preference shares valued at
£12,500 (10,000 x £1.25). • The cost attributable to the ordinary shares is £11,200 (14,000 x
50,000/(50,000 + 12,500).
Rollover relief
Rollover relief allows a chargeable gain to be deferred (rolled over) where the disposal proceeds of the old asset are reinvested in a new
asset. The deferral is achieved by deducting the chargeable gain from the cost of the new asset.
To qualify for rollover relief both the old asset and the new asset must
be qualifying assets. The most relevant types of qualifying asset as far as Paper F6 (UK) is concerned are:
5 CAPITAL GAINS TAX: PART 2 RELEVANT TO PAPER F6 (UK) MARCH 2011
• Goodwill. It is not necessary for the old asset and the new asset to be in the same
category.
Example 22 What are the conditions that must be met in order that rollover relief can
be claimed?
• The reinvestment must take place between one year before and three years after the date of disposal.
• The old and new assets must both be qualifying assets and be used for business purposes.
• The new asset must be brought into business use at the time that it
is acquired.
Where the disposal proceeds of the old asset are not fully reinvested in the new asset, the amount not reinvested reduces the amount of
chargeable gain that can be rolled over. Therefore, if the amount not reinvested is greater than the chargeable gain no rollover relief is
available. Where the new asset is a depreciating asset, then the gain does not
reduce the cost of the new asset but is instead held over. A depreciating asset is an asset with a predictable life of less than 60 years. The only
types of depreciating asset that you need to be aware of are fixed plant and machinery and short leaseholds.
Example 23
Violet sold a factory on 15 August 2010 for £320,000, and this resulted in a chargeable gain of £85,000. She is considering the following alternative ways of reinvesting the proceeds from the sale of her factory:
• A freehold warehouse can be purchased for £340,000. • A freehold office building can be purchased for £275,000.
• A leasehold factory on a 40-year lease can be acquired for a premium of £350,000.
The reinvestment will take place during November 2010.
Warehouse • The sale proceeds are fully reinvested, and so the whole of the
chargeable gain can be rolled over. • The base cost of the warehouse will be £255,000 (340,000 –
85,000).
6 CAPITAL GAINS TAX: PART 2 RELEVANT TO PAPER F6 (UK) MARCH 2011
Office building • The sale proceeds are not fully reinvested, and so £45,000 (320,000
– 275,000) of the chargeable gain cannot be rolled over. • The base cost of the office building will be £235,000 (275,000 –
(85,000 – 45,000).
Factory
• The sale proceeds are fully reinvested, and so the whole of the chargeable gain can be held over.
• The factory is a depreciating asset, and so the base cost of the factory is not adjusted.
• The chargeable gain is held over until the earlier of November 2020 (10 years from the date of acquisition), the date that the factory is
sold, or the date that it ceases to be used in the business. When the asset disposed of was not used entirely for business purposes,
then the proportion of the chargeable gain relating to the non-business use does not qualify for rollover relief.
Example 24
Willow sold a freehold factory on 8 November 2010 for £146,000, and this resulted in a chargeable gain of £74,000. The factory was
purchased on 15 January 2008. 75% of the factory had been used for business purposes by Willow as a sole trader, but the other 25% was never used for business purposes. Willow purchased a new freehold
factory on 10 November 2010 for £156,000.
Willow’s chargeable gain for 2010–11 is as follows: £
Gain 74,000 Rollover relief (74,000 – 18,500) (55,500)
______ 18,500
______
• The proportion of the chargeable gain relating to non-business use is
£18,500 (74,000 x 25%), and this amount does not qualify for rollover relief.
• The sale proceeds are fully reinvested, and so the balance of the gain can be rolled over.
• The base cost of the new factory is £100,500 (156,000 – 55,500).
Holdover relief Holdover relief allows a chargeable gain to be deferred (held over) when a gift is made of a qualifying business asset. The deferral is achieved by
7 CAPITAL GAINS TAX: PART 2 RELEVANT TO PAPER F6 (UK) MARCH 2011
deducting the chargeable gain of the donor who has made the gift from the base cost of the donee who has received the gift.
Holdover relief is also available when a sale is made at less than market value. In this case there will be an immediate charge to CGT where the
sale proceeds exceed the original cost of the asset.
For Paper F6 (UK) the most relevant types of qualifying business asset are as follows:
• Assets used for trade purposes by a sole trader.
• Shares in a personal company (where the individual has at least a 5% shareholding).
• Shares in unquoted trading companies. Remember that the market value of an asset is used rather than the
actual proceeds when a gift is made between family members since they will be connected persons.
Example 25
On 15 August 2010 Xia sold 10,000 £1 ordinary shares in Yukon Ltd, an unquoted trading company, to her daughter for £75,000. The market
value of the shares on that date was £110,000. The shareholding was purchased on 10 July 2009 for £38,000. Xia and her daughter have elected to hold over the gain as a gift of a business asset.
Xia’s chargeable gain for 2010–11 is as follows:
£ Deemed proceeds 110,000
Cost (38,000) _______
72,000 Holdover relief (72,000 – 37,000) (35,000)
_______
37,000 _______
• Xia and her daughter are connected persons, and therefore the
market value of the shares sold is used. • The consideration paid for the shares exceeds the allowable cost by
£37,000 (75,000 – 38,000). This amount is immediately chargeable to CGT.
8 CAPITAL GAINS TAX: PART 2 RELEVANT TO PAPER F6 (UK) MARCH 2011
Where the disposal consists of shares in a personal company, holdover relief will be restricted if the company has chargeable non-business
assets. Example 26
On 5 October 2010 Zia made a gift of her entire holding of 20,000 £1 ordinary shares in Apple Ltd, a personal company, to her daughter. The
market value of the shares on that date was £200,000. The shares had been purchased on 1 January 2010 for £140,000. On 5 October 2010
the market value of Apple Ltd’s chargeable assets was £150,000, of which £120,000 was in respect of chargeable business assets. Zia and
her daughter have elected to hold over the gain as a gift of a business asset.
Zia’s chargeable gain for 2010–11 is as follows: £
Deemed proceeds 200,000 Cost (140,000)
_______ 60,000
Holdover relief (48,000) _______
12,000 _______
• Holdover relief is restricted to £48,000 (60,000 x 120,000/150,000), being the proportion of chargeable assets to chargeable business
assets.
The transfer of a business to a limited company Rollover relief is available when an unincorporated business is
incorporated. For relief to be available all the assets of the unincorporated business must be transferred to the new limited company in exchange for a consideration that must be wholly or partly
in the form of shares.
The deferral is achieved by deducting the chargeable gains arising on the disposal of the assets of the unincorporated business from the value
of the shares received from the new limited company.
Where some of the consideration is in the form of cash or a loan, then that proportion of the chargeable gains cannot be rolled over.
9 CAPITAL GAINS TAX: PART 2 RELEVANT TO PAPER F6 (UK) MARCH 2011
Example 27 On 8 August 2010 Bua incorporated a business that she had run as a
sole trader since 1 March 2006. The market value of the business on 8 August 2010 was £250,000. All of the business assets were transferred to a new limited company, with the consideration consisting of 200,000
£1 ordinary shares valued at £200,000 and £50,000 in cash. The only chargeable asset of the business was goodwill, and this was valued at
£100,000 on 8 August 2010. The goodwill had a nil cost.
Bua’s chargeable gain for 2010–11 is as follows: £
You have seen how individuals are subject to CGT. Although there are a lot of similarities in the way in which the chargeable gains of a limited company are taxed, there are also some very important differences:
• A limited company’s chargeable gains form part of the taxable total profits. They are not taxed separately.
• The annual exemption is not available. • Indexation allowance is given when calculating chargeable gains for a
limited company. • Limited companies can only benefit from rollover relief, and this is
applied after taking account of any indexation allowance. They cannot benefit from entrepreneurs’ relief, holdover relief for the gift
of business assets or for rollover relief upon incorporation. Basic computation
The basic computation for a limited company is virtually the same as for an individual. However, you may also be expected to calculate the
indexation allowance: • The indexation allowance is given from the month of acquisition up to
the month of disposal. • The indexation factor is normally rounded to three decimal places.
• The indexation allowance cannot be used to create or increase a capital loss.
• Because the indexation allowance is not available in respect of the
incidental costs of disposal, it is necessary to show these separately in the computation.
Example 28
Delta Ltd sold a factory on 15 February 2011 for £340,000. The factory was purchased on 24 October 1995 for £164,000, and was extended at
a cost of £37,000 during March 1997. Delta Ltd incurred legal fees of £3,600 in connection with the purchase
of the factory, and legal fees of £6,200 in connection with the disposal. Retail price indices (RPIs) are as follows:
October 1995 149.8
March 1997 155.4 February 2011 230.0
11 CAPITAL GAINS TAX: PART 2 RELEVANT TO PAPER F6 (UK) MARCH 2011
Introduction to Islamic finance The Paper F9 syllabus now contains a section on Islamic finance (Section E3). All components of this section will be examined at intellectual level 1, knowledge and comprehension. Although the concept of Islamic finance can be traced back about 1,400 years, its recent history can be dated to the 1970s when Islamic banks in Saudi Arabia and the United Arab Emirates were launched. Bahrain and Malaysia emerged as centres of excellence in the 1990s. It is now estimated that worldwide around US $1 trillion of assets are managed under the rules of Islamic finance. Islamic finance rests on the application of Islamic law, or Shariah, whose primary sources are the Qur'an and the sayings of the Prophet Muhammad. Shariah, and very much in the context of Islamic finance, emphasises justice and partnership. The main principles of Islamic finance are that: • Wealth must be generated from legitimate trade and asset-based investment.
(The use of money for the purposes of making money is expressly forbidden.) • Investment should also have a social and an ethical benefit to wider society
beyond pure return. • Risk should be shared. • All harmful activities (haram) should be avoided. The prohibitions
The following activities are prohibited: • Charging and receiving interest (riba). The idea of a lender making a straight
interest charge, irrespective of how the underlying assets fare, transgresses the concepts of risk sharing, partnership and justice. It represents the money itself being used to make money. It also prohibits investment in companies that have too much borrowing (typically defined as having debt totalling more than 33% of the firm’s stock market value over the last 12 months).
• Investments in businesses dealing with alcohol, gambling, drugs, pork, pornography or anything else that the Shariah considers unlawful or undesirable (haram).
• Uncertainty, where transactions involve speculation, or extreme risk. This is seen as being akin to gambling. This prohibition, for example, would rule out speculating on the futures and options markets. Mutual insurance (which relates to uncertainty) is permitted if it is related to reasonable, unavoidable business risk. It is based upon the principle of shared responsibility for shared financial security, and that members contribute to a mutual fund, not for profit, but in case one of the members suffers misfortune.
• Uncertainty about the subject matter and terms of contracts – this includes a prohibition on selling something that one does not own. There are special financial techniques available for contracting to manufacture a product for a customer. This is necessary because the product does not exist, and therefore cannot be owned, before it is made. A manufacturer can promise to produce a specific product under certain agreed specifications at a
determined price and on a fixed date. Specifically, in this case, the risk taken is by a bank which would commission the manufacture and sell the goods on to a customer at a reasonable profit for undertaking this risk. Once again the bank is exposed to considerable risk. Avoiding contractual risk in this way, means that transactions have to be explicitly defined from the outset. Therefore, complex derivative instruments and conventional short sales or sales on margin are prohibited under Islamic finance.
The permitted
As mentioned above, the receipt of interest is not allowed under Shariah. Therefore, when Islamic banks provide finance they must earn their profits by other means. This can be through a profit-share relating to the assets in which the finance is invested, or can be via a fee earned by the bank for services provided. The essential feature of Shariah is that when commercial loans are made, the lender must share in the risk. If this is not so then any amount received over the principal of the loan will be regarded as interest. There are a number of Islamic financial instruments mentioned in the Paper F9 syllabus and which can provide Shariah-compliant finance: • Murabaha is a form of trade credit for asset acquisition that avoids the
payment of interest. Instead, the bank buys the item and then sells it on to the customer on a deferred basis at a price that includes an agreed mark-up for profit. The mark-up is fixed in advance and cannot be increased, even if the client does not take the goods within the time agreed in the contract. Payment can be made by instalments. The bank is thus exposed to business risk because if its customer does not take the goods, no increase in the mark-up is allowed and the goods, belonging to the bank, might fall in value.
• Ijara is a lease finance agreement whereby the bank buys an item for a customer and then leases it back over a specific period at an agreed amount. Ownership of the asset remains with the lessor bank, which will seek to recover the capital cost of the equipment plus a profit margin out of the rentals payable.
Emirates Airlines regularly uses Ijara to finance its expansion Another example of the Ijara structure is seen in Islamic mortgages. In 2003, HSBC was the first UK clearing bank to offer mortgages in the UK designed to comply with Shariah. Under HSBC’s Islamic mortgage, the bank purchases a house then leases or rents it back to the customer. The customer makes regular payments to cover the rental for occupying or otherwise using the property, insurance premiums to safeguard the property, and also amounts to pay back the sum borrowed. At the end of the mortgage, title to the property can be transferred to the customer. The demand for Islamic mortgages in the UK has shown considerable growth. • Mudaraba is essentially like equity finance in which the bank and the
customer share any profits. The bank will provide the capital, and the borrower, using their expertise and knowledge, will invest the capital. Profits will be shared according to the finance agreement, but as with equity finance
there is no certainty that there will ever be any profits, nor is there certainty
that the capital will ever be recovered. This exposes the bank to considerable investment risk. In practice, most Islamic banks use this is as a form of investment product on the liability side of their statement of financial position, whereby the investor or customer (as provider of capital) deposits funds with the bank, and it is the bank that acts as an investment manager (managing the funds).
• Musharaka is a joint venture or investment partnership between two parties. Both parties provide capital towards the financing of projects and both parties share the profits in agreed proportions. This allows both parties to be rewarded for their supply of capital and managerial skills. Losses would normally be shared on the basis of the equity originally contributed to the venture. Because both parties are closely involved with the ongoing project management, banks do not often use Musharaka transactions as they prefer to be more ‘hands off’.
• Sukuk is debt finance. A conventional, non-Islamic bond or debenture is a simple debt, and the bondholder’s return for providing capital to the bond issuer takes the form of interest. Islamic bonds, or sukuk, cannot bear interest. So that the sukuk are Shariah-compliant, the sukuk holders must have a proprietary interest in the assets which are being financed. The sukuk holders’ return for providing finance is a share of the income generated by the assets. Most sukuk, are ‘asset-based’, not ‘asset-backed’, giving investors ownership of the cash flows but not of the assets themselves. Asset-based is obviously more risky than asset backed in the event of a default.
There are a number of ways of structuring sukuk, the most common of which are partnership (Musharaka) or lease (Ijara) structures. Typically, an issuer of the sukuk would acquire property and the property will generally be leased to tenants to generate income. The sukuk, or certificates, are issued by the issuer to the sukuk holders, who thereby acquire a proprietary interest in the assets of the issuer. The issuer collects the income and distributes it to the sukuk holders. This entitlement to a share of the income generated by the assets can make the arrangement Shariah compliant. The cash flows under some of the approaches described above might be the same as they would have been for the standard western practice paying of interest on loan finance. However, the key difference is that the rate of return is based on the asset transaction and not based on interest on money loaned. The difference is in the approach and not necessarily on the financial impact. In Islamic finance the intention is to avoid injustice, asymmetric risk and moral hazard (where the party who causes a problem does not suffer its consequences), and unfair enrichment at the expense of another party. Advocates of Islamic finance claim that it avoided much of the recent financial turmoil because of its prohibitions on speculation and uncertainty, and its emphasis on risk sharing and justice. That does not mean, of course, that the system is free from all risk (nothing is), but if you are more exposed to a risk you are likely to behave more prudently.
The Shariah board is a key part of an Islamic financial institution. It has the responsibility for ensuring that all products and services offered by that institution are compliant with the principles of Shariah law. Boards are made up of a committee of Islamic scholars and different institutions can have different boards. An institution’s Shariah board will review and oversee all new product offerings before they are launched. It can also be asked to deliver judgments on individual cases referred to it, such as whether a specific customer’s business proposals are Shariah-compliant. The demand for Shariah-compliant financial services is growing rapidly and the Shariah board can also play an important role in helping to develop new financial instruments and products to help the institution to adapt to new developments, industry trends, and customers’ requirements. The ability of scholars to make pronouncements using their own expertise and based on Shariah, highlights the fact that Islamic finance remains innovative and able to evolve, while crucially remaining within the bounds of core principles. Developments
Perhaps the main current problem is the absence of a single, worldwide body to set standards for Shariah compliance, meaning that there is no ultimate authority for Shariah compliance. Each Islamic bank’s adherence to the principles of Shariah law is governed by its own Shariah board. Some financial aspects of Shariah law, and, therefore, the legitimacy of the financial instruments used can be open to interpretation, with the result that some Islamic banks may agree transactions that would be rejected by other banks. Therefore, a contract might unexpectedly be declared incompatible with Shariah law and thus be invalid. In Malaysia, the world’s biggest market for sukuk, the Shariah advisory council, ensures consistency to help creating certainty across the market. Some industry bodies, notably the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) in Bahrain, have also been working towards common standards. To quote the AAOFI website: ‘AAOIFI is supported by institutional members (200 members from 45 countries, so far) including central banks, Islamic financial institutions, and other participants from the international Islamic banking and finance industry, worldwide. AAOIFI has gained assuring support for the implementation of its standards, which are now adopted in the Kingdom of Bahrain, Dubai International Financial Centre, Jordan, Lebanon, Qatar, Sudan and Syria. The relevant authorities in Australia, Indonesia, Malaysia, Pakistan, Kingdom of Saudi Arabia, and South Africa have issued guidelines that are based on AAOIFI’s standards and pronouncements.’ However, despite these movements towards consistency, some differences between national jurisdictions are likely to remain.
Ken Garrett is a freelance author and lecturer
RELEVANT TO ACCA QUALIFICATION PAPER P6 (UK)
Studying Paper P6 Performance objectives 19 and 20 are relevant to this exam