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The computation is split into parts.
Compute the gain on each asset
Deduct any capital losses
Calculate the capital gains tax due.
The basic calculation is as follows:
Disposal consideration (or market value) n
Less incidental costs of disposal (n)
Less allowable costs (n)
----
Unindexed gain/(loss) n
Less indexation allowance (n)
Less taper relief (n)
----
Taxable gain/(loss) n
The disposal consideration is the amount of money received when the asset is sold. A market value is used in the following cases:
the disposal is not made as a 'bargain at arms length' (bargain does not mean a discount in this sense)
the disposal is made by way of barter
the disposal is a gift (husband and wife transfers are exempt)
The incidental costs of disposal will include items like valuation fees, estate agency fees, advertising costs and legal costs.
The allowable costs includes the amount originally paid for the asset plus any incidental costs of acquisition (same type of things as incidental costs of disposal) plus any expenditure to enhance the asset (eg extend a building). Enhancement expenditure excludes costs of repairs or maintenance, insurance, any amount that can be claimed as a deduction against income tax and any expenditure from public funds (eg council grants).
Indexation allowance provides relief for the effects of inflation. It may not be used to create or increase a loss. Indexation allowance applies from 1/4/82 to 5/4/98. Thereafter it is replaced by taper relief which gives relief at two different rates for business and non-business assets.
Further details of the computations required for assets and for stocks and shares are given in their own topics.
Losses are set against other capital gains arising in the year. Any unused losses are kept and used against future capital gains. Losses that arise in the year are set against gains before deducting the annual exemption. Losses brought forward from an earlier year are deducted only to the extent that the annual exemption is not lost. For example, if there are gains in the year of £12,000 in 2010-11 and losses of £4,000 with £2,000 losses brought forward from an earlier year, all of the losses (4,000) arising in the year will be used but the losses brought forward will be carried forward:
|
Gains Current year losses
Overall gain Less annual exemption
Taxable gains Loss to carry forward |
12,000 -4,000 --------- 8,000 -10,100 --------- Nil 2,000 |
If there had been no losses arising in the year and £6,000 losses brought forward, £1,900 of the losses would have been utilised leaving £4,100 to carry forward.
The basic CGT computation is as follows:
Gains (after deducting losses) n
Less annual exemption (n)
----
Taxable gain n
==
a @ 10% gains qualifying for Entrepreneur's Relief = n
b @ 18% gains before 23/06/10 = n
c @ 18% gains after 22/06/10 at basic rate = n
d @ 28% gains after 22/06/10 at higher rate = n
Additional liability n
----
Capital Gains Tax Due n
==
The additional liability mentioned is in relation to non-resident or dual resident trusts. The tax rates shown in this example apply from 2010-11 onwards. In 2009-10 and 2008-09 Capital Gains tax was charged at a flat rate of 18% before this it was charged at variable rates of 10%, 20% and 40% based on levels of income and gains. The amounts a, b, c and d will add up to the taxable gain.
The capital gains use up any remaining basic rate bands unused for income tax, the higher rate of tax applies to any excess.
Top-slicing relief may be available where the taxpayer has a life assurance gain that has accrued over two or more years. The relief for capital gains purposes is similar to the relief against income tax. The amount of basic rate band utilised by income is deemed to include only one-year's-worth of the life assurance gain.
For example, a taxpayer has taxable income after personal allowances of £35,000 including £3,000 life assurance gain with a 3 year term in 2010-11 and a capital gain (after annual exemption) of £10,000. (Note there is separate a separate computation of top-slicing relief for income.) The taxable income for capital gains purposes will be deemed to be £33,000 (£32,000 of income plus £1,000 one-year's worth of the life assurance gain):
|
Capital Gain |
|
|
4,400 @18% |
792.00 |
|
5,600 @ 28% |
1,568.00 |
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|
------------- |
|
CGT |
1,720.00 |
|
1,400 @ 20% 3,600 @ 40%
|
280.00 1,440.00 ------------ 1,720.00 |
A small amount of relief is available here because the taxable income based on one-year's-worth of the life assurance gain is below the 2000-01 higher rate threshold of £37,400. Note that income tax would have been paid on taxable income of £29,000 but for the purpose of working out the amount of basic rate band remaining for capital gains, the taxable income is based on the inclusion of just one-year's-worth of the life assurance gain.