How do you calculate a capital gain or loss? What costs are deductible? Can you offset losses against capital gains?
This is a freeview 'At a glance' guide to how to compute a capital gain or loss for individuals and trustees.
Subscribers see How to calculate a capital gain or loss (subscribers).
At a glance
Capital gains and losses are calculated after deducting:
- The costs of acquisition and enhancing the asset.
- Incidental costs of buying and selling, including Stamp Duty Land Tax (SDLT), Land and Buildings Transaction Tax (LBTT), Land Transaction Tax (LTT), legal fees, agent fees etc.
- Capital losses: current year and brought forward.
- Surplus trading losses.
- The Capital Gains Tax (CGT) annual exemption.
- Any available tax reliefs.
Section 38 TCGA 1992 deals with what costs are deductible for CGT. See CGT: Deductible expenditure
The rate of CGT that applies will be either:
- 18% or 28% for residential property
- 10% or 20% for all other assets
depending on the taxpayer's other income levels and whether any CGT reliefs are available to reduce the rate of tax such as:
- Business Asset Disposal Relief
- Investors' Relief
- Seed Enterprise Investment Scheme and Enterprise Investment Scheme reliefs
There are special rules for part disposals.
The gains on the disposal of some assets are subject to Income Tax rates. See Overview below.
Care should be taken to consider whether the disposal of a particular asset is subject to CGT as some are exempt.
There may be special rules which need to be applied in particular cases, for example in relation to Chattels.
See How to calculate a capital gain or loss (subscribers) for the layout of a standard CGT computation.
Step 1: disposal proceeds
These are the total sales proceeds received including any deferred ascertainable consideration. See Selling the business: Deferred consideration and earn-outs
- If the disposal is by way of a gift, or not a bargain at arm's length, the proceeds are market value on the date of disposal.
Step 2: deduct selling costs
These will include estate agents, legal and valuation fees and non-recoverable VAT.
Step 3: deduct acquisition costs (base cost)
In most cases, this will be the price originally paid for the asset.
- If the asset was inherited it will be probate value. See CGT: Death
- If the asset was held as at 31 March 1982 it will be the 31 March 1982 value.
- If the asset was acquired from a Connected party including a gift, this will be the market value at the date of acquisition.
- If a gift or Holdover Relief claim was made on acquisition the base cost will be the market value at the date of acquisition less the held-over gain.
- If the asset had a gain from the disposal of a previous business asset rolled into it on acquisition the base cost will be the acquisition cost less that Rolled-over gain.
- Where the asset disposed is a wasting asset, there may be a restriction to the costs that are allowable.
Where there is a part disposal only a proportion of the original cost will be allowable. This is calculated by the formula:
A + B
Where A = the disposal consideration, and B = the value of the part retained at the time of the part-disposal.
Step 4: deduct enhancement expenditure
This is the cost of capital expenditure incurred on the asset since acquisition:
- Wholly and exclusively for the purposes of enhancing the value of the asset which is reflected in the nature and state of the asset on disposal.
- Wholly and exclusively incurred in establishing, preserving or defending title to, or to a right over, the asset.
Expenses that are allowable for Income Tax are not deductible for CGT.
Step 5: deduct costs of purchase
- These will include legal fees, Stamp Duty Land Tax (SDLT), Land and Buildings Transaction Tax (LBTT) in Scotland, Land Transaction Tax (LTT) in Wales, surveyors and valuers fees and irrecoverable VAT.
- Fees for the cost of abortive purchases are not allowable for CGT, nor are mortgage arrangement or financing fees.
Purchase expenditure may be subject to restrictions, for example where there is a part disposal (see above).
Step 6: deduct current year capital losses
Allowable capital losses that occur in the same tax year must be offset against a gain made in the same year before other losses, capital losses brought forward, or the CGT annual exemption may be offset.
A loss will not be allowable if it is a 'Clogged' loss.
Step 7: deduct surplus Income Tax losses eligible for sideways loss relief claim
An unrelieved loss of a trade, profession or vocation may also be used to Offset capital gains. This is subject to restrictions. See How to calculate a capital gain or loss (subscribers)
The Sideways loss relief cap does not apply to relief against capital gains.
Step 8: deduct Annual Exemption
- Each individual has their own Annual Exemption (AE).
- From 6 April 2023, the AE was reduced from £12,300 to £6,000. It will decrease again from 6 April 2024 to £3,000.
- For trustees, the AE is 50% of the standard AE amount.
Step 9: deduct capital losses brought forward
Brought forward capital losses do not have to be used before the CGT annual exemption. A partial claim to relief can be made, to avoid wasting the AE.
Step 10: apply eligible reliefs
These might include:
- Gift or Holdover Relief
- Incorporation Relief
- EIS Deferral Relief
- SEIS Reinvestment Relief
- Rollover Relief
- Private Residence Relief
Some reliefs may apply before steps 6 to 9. It is necessary to consider at which stage of the gain calculation each relief applies.
Step 11: determine the rate of tax
Gains on residential property are subject to tax at 18% or 28% depending on the taxpayer’s other income levels. Higher and additional rate taxpayers pay CGT at 28%.
Gains on other assets are subject to tax at 10% or 20% depending on the taxpayer’s other income levels. Higher and additional rate taxpayers pay CGT on these assets at 20%.
There are a few types of assets where, although referred to as chargeable gains or chargeable events, Income Tax rates apply. These include:
- Offshore income gains.
- Disposals of life insurance bonds.
Step 12: ensure applicable reliefs are claimed within the relevant time limits
Most CGT reliefs have to be claimed on the Self Assessment return and the deadline is therefore the deadline for amending the return that is, 12 months from 31 January after the end of the relevant tax year.
There are exceptions, see How to calculate a capital gain or loss (subscribers)