CAPITAL GAINS TAX

NOTE a question may only ask you to calculate some parts of the calculation eg taxable chargeable gain

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what are the steps to calculate CGT?

STEP 1- What is income? what is capital?
STEP 2- Calculate the sale proceeds of each capital asset
STEP 3- Deduct allowable expenditure from the sale proceeds
STEP 4 - Deduct the annual exempt amount
STEP 5- Carry forward any losses
STEP 6- Apply the rele

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STEP 1 - What is income? what is capital?

eg painting and shares are capital assets. The following are exempt capital assets or the purpose of calculating CGT
- Principal private residences (first homes)
- Cars
- Wasting chattels (goods with a life of fewer than 50 years, which depreciate in val

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STEP 2- Calculate the sale proceeds of each capital asset

If the asset is sold at arms length, then the sale proceeds= the consideration received.
If the asset is transferred to another as a gift, then the sale proceeds = the asset's actual market value
If the asset is sold at an undervalue (less than market val

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STEP 3- Deduct allowable expenditure from the sale proceeds

allowable expenditure includes-
- base price of an asset (cost of acquiring asset)
- Any costs that were incidental to acquiring the asset
- Subsequent expenditure on enhancing the value of the asset
- Expenditure on defending title to the asset
- The co

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STEP 4 - Deduct the annual exempt amount (AEA)

The AEA for the 2020/21 tax year is £12,300 (except for trusts, which have an allowance of £6,150). Deduct this from the figure reached in step 3. The full calculation is -
sale proceeds - allowable expenditure- AEA = (Taxable) chargeable gain
If the figu

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STEP 5- Carry forward any losses

If any net capital losses were made in previous years, carry those forward to reduce the taxable charge gain

Taxable chargeable gain - Net capital losses

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STEP 6- Apply the relevant tax rate

the rate depends upon taxable income- work out the band reached in step 4 of the income tax rates. if there is any amount of the basic rate (£37,500) band remaining, tax the chargeable gain at the standard rate until the upper limit of that band is reache

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Standard rate

10% (except for gains on sales of residential property and carried interest, which are taxed at 18%)

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Higher Rate

20% (except for gains on sales of residential property and carried interest, which are taxed at 28%)

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BADR (Business asset disposal relief)

10%
If this applies, then thechargeable gain is taxed at the flat rate of 10%
Assets which qualify for BADR include:
- disposals of shares in a trading company (held for at least 2 years prior) where seller was an employee or officer and held a 5% intere

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STEP 7 - Does any relief apply?

Rollover relief business assets- applies where the whole of the sale proceeds of the asset are used to buy a new asset within 3 years of disposing of the old one eg factory selling its machinery and using the proceeds to buy new machinery.
Rollover relief

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STEP 7- contd...

Hand-over relief- applies where a donor gifts shares or business asset or sells those assets or shares for less than they are worth. Both the donor and the donee jointly opt to hold-over, then the liability to CGT is transferred to the donee and deferred

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STEP 8- calculate Total tax payable

If rollover or holdover relief applies, then the tax liability is deferred. If rollover or holdover relief does not apply, then calculate tax based on step 6 and add up the total tax liability.

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CAPITAL GAINS TAX

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