Director 1 Way To Easily Calculate Capital Gains Tax In The UK

Tony Dhanjal

This Article Contains

When you dispose of an asset for more than you paid for it then the profit you make is known as a capital gain. Here in the UK these gains are not taxed under the income tax system that most of us are more familiar with. Instead capital gains tax in the UK has it’s own tax system and rules.

In todays article we will cover when a capital gain arises, how to calculate a gain, the rates of tax that apply and right the way through to how capital gains tax in the UK is reported to HMRC.

When Do We Pay Capital Gains Tax In The UK?

You may need to consider capital gains tax in the UK when a chargeable person makes a chargeable disposal of a chargeable asset

In plain English, most of us will be a chargeable person because we are resident in the UK. A chargeable disposal most commonly takes place when you sell an asset but also when you gift it to someone else, lose it or damage it and finally a chargeable asset is typically any asset that isn’t otherwise exempt.

 Exemptions to capital gains tax in the UK exist for certain assets with the most common being for:

  • Your principle private residence which is usually the home that you live in permanently
  • Motor cars (this specific exemption doesn’t include vans, lorries, bikes etc but these assets can sometimes be covered via another exemption
  • Tangible moveable items (known as chattels) that are disposed of for £6,000 or less
  • Chattels with a useful life of 50 years or less unless used in a business and qualifying for capital allowances
  • Individual savings accounts (ISA’s)
  • Winnings from betting & gambling
If an asset does not benefit from a specific exemption then it will be considered a chargeable asset but it should be noted that where an asset falls into one of these exempt categories then any capital loss that is made would not be allowable under capital gains tax in the UK either.
 

How To Calculate A Gain

 In order to determine any liability to capital gains tax in the UK you must first work through each chargeable event and calculate the gain or loss on disposal. The calculation will look something like this:
 
Disposal Value – Incidental Costs On Disposal – Allowable Expenditure = Chargeable Gain/Loss
 
Disposal value – will often be the proceeds of a sale however where an item is not sold or possibly not sold on an arms length basis then the market value is used instead.
Incidental costs on disposal – will usually relate to legal fees, having an asset valued, auctioneers fees, agency fees etc
Allowable expenditure – will include the acquisition cost of the asset (or possibly the market value on acquisition as above). It will also include any incidental costs on acquisition, enhancement expenditure, valuation fees and costs relating to defending the owners title to the asset.
 
This calculation needs to be applied to all chargeable disposals. The next steps would be to consider the overall gain/loss in a tax year by following these steps:
 
  1.  Deduct allowable losses from chargeable gains in the same period to leave you with the net gain. Where a net loss occurs this can be carried forward to set against future gains
  2. If there is a net gain for the year then any losses being carried forward from previous tax years would be set against the gain (see treatment of losses below)
  3. The capital gains allowance can then be applied. If the allowance does not alleviate the full gain then the balance that remains will be the taxable gain. If the allowance alleviates the full gain then the taxable gain is nil and any unused allowance is lost as it cannot be carried forward
After applying the above if you are left with a gain then this will represent the taxable gain and will be subject to capital gains tax in the UK. 
 
To learn more about CGT and how to reduce a liability via tax planning don’t forget to check out the full course from The Accounting & Tax Academy.
 

Losses

Where allowable losses in a tax year exceed chargeable gains then the loss can be carried forward and must be set against the first available gain but this should only be done to the extent that the gain is reduced to an amount equal to the capital gains allowance. This ensures maximum efficiency and makes the best possible use of those losses.

Remember though this does not apply in the year that a loss is incurred as in that first year a loss must be set against gains from the same period until the net gain reaches nil (where possible) this means the year the loss is incurred you cannot preserve the capital gains allowance.

In the year of an individuals death the situation is complicated by the fact that any losses can no longer be carried forward. Any disposals made in the year prior to death are still chargeable to capital gains tax in the UK and the individual will benefit from a full years capital gains allowance irrelevant of the date they died. 

If the individual incurred a net loss in the year of death then that loss can be carried back for up to 3 tax years and set against previous gains in order of most recent first. Again the gain only needs to offset to the extent that any remaining amount is covered by the CGT allowance.

Rates Of CGT

Capital gains tax in the UK can be charged at a number of different rates. The rate that applies will depend on the type of asset that was disposed of and the individuals other income during a tax year.
 
 There is also a special rate of CGT (not detailed on the table below) that applies to gains that qualify for business asset disposal relief or BADR which can apply when you sell all or part of a business that you own. Any gains that do qualify for BADR will always be taxed at 10% irrelevant of which tax bracket the individual usually belongs to although there is a lifetime limit that applies of £1,000,000.
 
The main rates of CGT are detailed in the table below.

 

Tax Bracket CGT Rate On Assets CGT Rate On Property
Basic Rate 10% 18%
Additional & Higher Rate 20% 28%

Ready to know your numbers?

Get access to exclusive courses, resources & videos on our FREE membership site.

Disposing Of Shares

When disposing of shares in a company there are a specific set of rules known as the share matching rules that need to be followed. These are needed in situations where a shareholding has been built up over a period of time. Often an investor will buy the the same shares on a number of different occasions at different price points to build up their position. If part of the holding is later disposed of then it is impossible to determine which shares are actually being disposed of and therefore the share matching rules are needed. 

Shares in the same company of the same class must be matched in the following order:

  1. First against shares acquired on the same day as disposal
  2. Then against any shares acquired within 30 days of disposal
  3. Finally against shares held in the section 104 pool which is a theoretical pooling of all remaining shares held prior to the disposal that haven’t already been matched against previous disposals. An average acquisition cost for shares held in the section 104 pool is used
The share matching rules apply to shares in the same company of the same class. You will often hear the share matching rules referred to as bed & breakfasting rules as they are designed to prevent people from realising a gain in order to gain a tax advantage which otherwise wouldn’t have been available. This technique is known as bed & breakfasting and involves disposing of an asset and shortly after, repurchasing the same asset to retain exposure.
 

Reporting A Gain

The reporting period for capital gains tax in the UK is the same as the regular tax year and runs from the 6th April to the 5th April the following year. A gain/loss can be reported in a number of different ways. 
 
Taxable gains relating to the disposal of UK property need to be reported within 30 days of disposal via a capital gains tax on UK property account
 
For other gains the individual can either use the real time capital gains reporting service which requires gains/losses to be reported by the 31 December in the tax year that follows the disposal or they can report via a self assessment tax return which has a deadline for online filing of 31 January following the end of the tax year.
 
Usually where a net gain is covered by the capital gains allowance of £12,300 (21/22) then it won’t need reporting to HMRC at all however if the individual is already registered for self assessment and the proceeds from the sale of assets was greater than 4 x the allowance then HMRC require that individual to provide details on the self assessment. Even though no tax would be payable.
 

Exemptions & Reliefs

There are a number of additional exemptions and reliefs that have not been covered to far in this article. The most notable being:

  • Transfers between spouses & civil partners – are made on a nil gain nil loss basis meaning that assets can be passed between the two without a capital gain or loss arising
  • Business asset disposal relief – qualifying business assets include all or part of a business that the individual has owned for 2 years prior to the date of disposal and some shares in a trading company that the individual was an employee or director of
  • Incorporation relief – can apply when transferring a business and it’s assets to a ltd company set up. Certain qualifying criteria apply but if qualifying then the transfer will be exempt from capital gains tax in the UK
There are also reliefs available for damaged and destroyed assets, business assets that are being replaced, the gifting of a business asset, for loans to traders and also where you reinvest some disposal proceeds into the enterprise investment scheme.
 

Watch our in-depth video on Cryptocurrency and assets

Ready to know your numbers?

Get access to exclusive courses, resources & videos on our FREE membership site.

Practice based accountant with over 10 years experience, specialising in SME's, Freelancers and Personal Tax. "I take pride in proactively recognising tax planning opportunities on behalf of clients to help them operate more efficiently."

Here’s what our clients say

Browse by category:

Categories

You might also like…

Blog

5 Simple Ways Part Qualified Accountants Can Fast Track Their Accountancy Career

If you’re looking to start an accountancy career or maybe you’re a part qualified accountant who already has their foot in the door of the …

Read More
Blog

5 UK Accounting Qualifications That Will Supercharge Your Career – Which Is The Best Accounting Qualification

A career in accountancy & tax can be very rewarding. With roles at all possible levels of the corporate structure it’s a career that could …

Read More
Blog

How To Avoid The Inheritance Tax in 3 steps

The original idea of inheritance tax was that when wealthier individuals died, part of their wealth was redistributed via the tax system. Many would argue …

Read More
photo png

I hope this blog post empowers you...

...do you want higher quality accounting and tax content? Stuff that can really help you save £000's in tax, legally? Head over to our Academy where you can get access to all this ...

Grow & Give Back

We believe in growth and giving back to our community. A percentage of every penny we make goes straight to our charitable partner Nishkam SWAT, serving the homeless in London

Aidhan & Partners is a trading style of a joint venture between Aidhan (Financial Services Ltd), a limited company registered in England under company number 04953002 and Simply Accountants Ltd, a limited company registered in England under company number 08535253.  Our registered office is: Aidhan, 199 Bishopsgate, London EC2M 3TY
Disclaimer – all our content is for general guidance only and does not constitute formal advice. We always recommend you take professional advice.

© Aidhan Financial

2021