Calculating capital gains tax Flashcards
Capital gains tax Calculating the chargeable gain or loss Calculating the tax Part disposals Disposals to connected persons Disposals to spouse/civil partner Tax planning
For there to be a capital gain, there must have been?
A chargeable disposal by a chargeable person of a chargeable asset.
A capital gain occurs when a chargeable person disposes of a chargeable asset, resulting in profit, subject to Capital Gains Tax (CGT). Disposal includes sales, gifts, or transfers. The gain is calculated as the difference between the disposal proceeds and the allowable costs.
What is a chargeable disposal?
A chargeable disposal occurs when:
- An asset is sold.
- An asset is gifted.
- An asset is lost or destroyed.
The term “disposal” refers to events where ownership of an asset changes, either through sale, transfer, or destruction. Gifts, even if no money changes hands, are considered disposals unless specific exemptions apply (such as gifts to spouses or charities).
When are gifts exempt from Capital Gains Tax (CGT)?
Gifts are exempt from CGT if:
The gift is made upon death (as this is taxed under inheritance tax rules).
The gift is made to a charity.
The gift is made to a spouse or civil partner, as these transfers are treated as no gain, no loss.
Certain transfers, like those between spouses or to charities, are exempt from CGT, encouraging charitable giving and allowing spouses to tax plan effectively without triggering a taxable gain.
What is a chargeable person?
A chargeable person is any individual resident in the UK who is liable to pay Capital Gains Tax on their worldwide assets.
UK residents are subject to CGT on the disposal of assets regardless of where they are located. Non-residents are typically only liable for CGT on certain UK property and land disposals.
What is a chargeable asset?
A chargeable asset refers to all assets unless specifically exempt.
Assets like shares, property (excluding principal private residence), and valuable collectibles are chargeable. Exempt assets include certain personal items and government securities.
What 11 assets are exempt from Capital Gains Tax?
- Cars
- UK government bonds (gilts)
- Principal private residence (main home)
- Wasting chattels (lifespan of less than 50 years)
- Non-wasting chattels bought/sold for under £6,000
- Qualifying corporate bonds
- Gambling/lottery winnings
- Stocks in an ISA
- Bravery medals (if awarded, not purchased)
- Foreign currency for personal use
- Gold sovereigns minted after 1837
Some assets are exempt from CGT to simplify taxation on everyday items (like cars) or encourage investments (like ISAs). Principal private residences also benefit from full exemption under specific conditions.
What are gross proceeds?
Gross proceeds refer to:
- The sale value of an asset.
- The market value if the asset is a gift or sold to a connected party.
Gross proceeds form the starting point for calculating any capital gain. For non-arm’s length transactions (gifts or sales to connected persons), the market value is used to ensure fairness in CGT calculations.
What are Incidental costs of sale?
Costs incurred that are necessary for the sale, such as:
- Advertising
- Estate agent’s fees
- Auctioneer’s fees
These expenses are deducted from the gross proceeds when calculating the capital gain. They must be directly related to the sale to qualify as allowable deductions.
What is Enhancement expenditure?
This is capital expenditure that increases the value of the asset and remains intact at the date of disposal. Examples include:
- An extension added to a property.
Enhancement expenditure refers to improvements that add to an asset’s value and are still in place when the asset is sold. These costs are deductible, reducing the taxable gain.
What is a chargeable gain?
A chargeable gain is the gain after deducting all allowable expenses from the net proceeds.
The chargeable gain is the amount subject to CGT, after accounting for costs such as the original purchase price, enhancement expenditure, and incidental costs.
When is Capital Gains Tax payable?
CGT is payable on 31 January following the end of the tax year in which the gain arose.
For example, if a gain occurs in the 2023/24 tax year, the CGT must be paid by 31 January 2025. Late payments can result in penalties and interest charges.
What are the Capital Gains Tax rates?
For 2023/24, the rates are:
- 10% on gains up to the unused portion of the basic rate band (£37,700).
- 20% on gains above this threshold.
- The basic rate band can be extended by personal pension contributions or gift aid donations.
CGT rates differ for basic rate and higher rate taxpayers. Gains are taxed at 10% within the basic rate band and 20% thereafter. The rates for residential property disposals are higher.
What is the annual exempt amount for CGT?
For 2023/24, the annual exempt amount is £6,000.
It can only reduce gains to nil but cannot create a loss or be carried forward.
The annual exempt amount (AEA) reduces the taxable gain, ensuring that only gains above this threshold are taxed. Unused exemptions cannot be carried forward or transferred.
How must capital losses be offset?
Losses must be offset:
- In full against current year gains.
- Carried forward to offset future gains.
Losses should only be used to reduce gains down to the annual exempt amount (AEA).
Losses can help reduce taxable gains. However, they should only be used to reduce gains to the AEA level, as further reduction would waste the exemption.
How do you calculate a part disposal?
Original cost × (A / (A + B)), where:
- A = Market value of part disposed of (gross proceeds).
- B = Market value of the remainder of the asset
Part disposal calculations are necessary when only part of an asset is sold or disposed of. This formula allocates the original acquisition cost proportionately.
