How to calculate Capital Gains Tax
You may use the services of an accountant but it is important for you to know how to calculate Capital Gains Tax.
Your investments should accumulate over time. And it is important that you take steps to keep the tax charges on them under control.
This is, of course, particularly important where you are investing outside of ISAs, pensions, VCTs and other tax efficient investments.
Capital Gains Tax provides an annual exempt amount so it is important that you check your tax position annually.
How to calculate Capital Gains Tax
How to calculate capital gains tax? To calculate a capital gain you should follow these simple steps.
- What are the disposal proceeds?
- What is the allowable expenditure (including the base value)?
- Deduct the allowable expenditure from the disposal proceeds to arrive at the net gain (or loss).
Once you have calculated the gains for the year (net of any losses), you should deduct the annual exemption. Your annual exemption in 2022/23 is £12,300. The result you then have is the net amount of the chargeable gain.
The way that your chargeable gains are computed is quite different from the rules that determine assessable income for tax purposes. Different rates of Capital Gains Tax apply depending on whether you are a basic or higher rate taxpayer.
If you held the asset at 31 March 1982 then its value at that date must be substituted for the actual cost. The table below will show you how your capital gain is calculated.
Where you have a complicated series of gains then you should seek the assistance of an accountant.
The rates of Capital Gains Tax
As part of working out how to calculate capital gains tax you need to be aware of your income tax situation. This is because the rate of capital gains tax is not set in isolation. It depends on your income tax situation in the year in which the gain is made.
If you are a basic rate tax payer (i.e. those taxed at 20% in 2022/23) the net amount of the chargeable gain is taxed at 10% (18% on residential property). What if you realise chargeable gains that, when added to your income for the year, exceed the basic rate tax band for that year? In that case the excess gains are taxed at 20% (28% on residential property).
Where you are a higher or additional rate tax payer (i.e. those taxed at 40% or 45%) the net amount of the chargeable gain is taxed at 20% (28% on residential property).
Hazel has taxable income (actual income minus her Personal Allowance and any Income Tax reliefs) of £32,000 and her taxable gains are £28,000. Her gains are not from residential property.
We first deduct the Capital Gains Tax exempt amount of £12,300 from her taxable gain of £28,000 which leaves £15,700 to pay tax on.
We then add the £15,700 to her taxable income of £32,000. The combined amount is £47,700.
The basic rate tax band for 2022/23 is £37,700. Hazel will pay 10% Capital Gains Tax on the first £5,700 (i.e. £37,700 – £32,000) of her taxable gain (=£570) and 20% CGT on the excess of £10,000 (i.e. £47,700 – £37,700) of her taxable gain (=£2,000). This equates to a total of £2,570 in Capital Gains Tax or a combined Capital Gains Tax rate of 16.37% on the taxable gain after the annual exempt amount is taken off or just 9.17% on the actual taxable gain.
Dealing with losses
It is a fact of life that your investments and other assets must sometimes be sold at a loss. Your losses are calculated in exactly the same way as your gains.
The treatment of a loss depends on whether it occurs:
- in the same year tax year as the gains
- in a previous tax year
- in the year in which the taxpayer dies
You claim for your loss by including it on your tax return or writing to HMRC. It is not essential for you to report losses straight away. You can claim up to 4 years after the end of the tax year that you disposed of the asset.
There is a normal rule for when you sell an asset at a loss but have also made a gain on one or more other assets during the same tax year. The rule is that such losses must be set against your gains in that tax year.
The loss must be set against your capital gains in this year before applying the exemption. In other words, you cannot use the Capital Gains Tax annual exemption to reduce the gains in order to allow a loss to be carried forward.
What if you suffer an overall loss in any tax year that you cannot offset against any other gains in that year? In this instance you can carry the loss forward to a future tax year to be offset against gains in that year. You cannot carry losses back to previous tax years except in the year of death.
There is no limit to how long you can carry losses forward. However you must set them off against gains at the first opportunity.
If in a future tax year your total taxable gain is above the annual exempt amount, you can deduct unused losses from previous tax years. If they reduce your gain to the annual exempt amount, you can carry forward the remaining losses to a future tax year.
This example shows current year losses only
| Tax Year 2022/23 | Amount £ |
|---|---|
| Capital gain | 17,000 |
| Losses | 6,000 |
| Net gain | 11,000 |
The gain is fully covered by the annual CGT exemption.
In this example there are both current year losses and losses brought forward from previous tax years
| Tax Year 2022/23 | Amount £ |
|---|---|
| Capital gain | 19,800 |
| Losses | 5,000 |
| Net gain | 14,800 |
| Annual exemption | 12,300 |
| Gain after exemption | 2,500 |
| Brought forward losses | 14,000 |
| Losses carried forward to 2023/24 | 11,500 |
The annual exemption is set off against the net gains for 2022/23 before any of the brought forward losses are used.
This is an example where there are losses brought forward but no current year losses
| Tax Year 2022/23 | Amount £ |
|---|---|
| Capital gain | 19,800 |
| Losses | Nil |
| Net gain | 19,800 |
| Annual exemption | 12,300 |
| Gain after exemption | 7,500 |
| Brought forward losses | 14,000 |
| Losses carried forward to 2023/24 | 6,500 |
June, a widow, sold some shares in May 2022 which conveniently produced a chargeable gain of £12,100, nicely within the annual exempt amount. Now, she has decided to cut her losses with another shareholding which has performed badly over the last couple of years. The loss would be around £9,000 but she feels there is little chance of the share recovering in the near future and her money would be better invested elsewhere.
If she sells the lossmaking share now the £9,000 loss will be offset against the £12,100 gain, producing an overall gain of £3,100 which will be covered by the annual exemption. This is of no benefit to her as the £12,100 gain is covered by the annual exemption anyway.
June might decide to delay selling the lossmaking share until after 5 April 2023 so that the loss (whatever it is at that time) can be offset against any gains in 2023/2024. If June has a gain which is larger than the annual exemption next year the loss will come in handy to reduce that.
What if you have unused personal allowances for income tax in the year in which you make a capital gain? Unfortunately you cannot set them off against the gain, they simply go to waste.
Deductible expenditure
When you are learning how to calculate capital gains tax you will need to be aware of expenditure you can deduct. You can normally deduct the following items from the proceeds of disposal:
- acquisition cost (price paid) of the asset including any incidental costs. These would include professional fees, e.g. valuation, survey etc., as well as the cost of advertising and stamp duty
- expenditure incurred wholly and exclusively for the purpose of enhancing the value of the asset. Examples would be renovation, upgrading etc.
- expenditure wholly and exclusively incurred in establishing, preserving or defending title to the asset
- incidental costs of disposal, e.g. fees, commission, remuneration of professional advisers such as accountants or surveyors, stamp duty and any other conveyancing charges, advertising etc.
Non-deductible expenditure
Certain items of expenditure are specifically disallowed in computing your profits or losses for Capital Gains Tax and these include the following:
- expenditure which is deductible in computing profits or losses for income tax purposes
- insurance premiums paid to cover the risk of damage or loss or depreciation of the asset
- any expenditure recoverable from any government or public or local authority
- interest on borrowing, except where the money is borrowed by a company for financing allowable expenditure on the construction of the building (interest on borrowing by individuals or trustees is never allowed)
- income tax chargeable on shares acquired under certain employee share schemes, i.e. generally speaking a charge in respect of unapproved share schemes
Colin acquired a painting in 2000 for £175,000. The painting had suffered some damage prior to Colin’s acquisition. He decided to have it restored. In 2001 the restoration was completed at a cost of £54,000. Each year Colin paid £3,500 in insurance premiums in respect of the painting. During 2010 and 2012 the painting was put in safe storage while Colin travelled around the world. Storage costs totalled £4,500.
For Capital Gains Tax purposes the base cost is £175,000 plus £54,000. The storage and insurance costs are not allowable
Diana bought a flat as an investment for £95,000 in 2004. At the time she paid solicitor’s fees of £800 and stamp duty of £950 in addition to the purchase price. The flat is sold in June 2022 for £360,000. Agent’s fees were £3,600 and solicitor’s fees £2,000. The computation is as follows:
Proceeds £360,000
Less incidental disposal costs £5,600
Less original cost £95,000
Less incidental acquisition costs £1,750
Capital Gain £257,650
If Diana’s annual exemption has not been used elsewhere the gain will be reduced by £12,300 with the balance of £245,350 being taxed at 18%/28% depending on her personal tax position.
Death of an individual
No discussion of how to calculate capital gains tax would be complete without considering the situation on your death. On your death your assets are deemed to have been disposed of. This does not include your jointly held assets or assets in trust. At the same time your assets are deemed to be reacquired by the personal representatives at their market value at the time of your death. No Capital Gains Tax is chargeable on such disposals.
What if you deferred any capital gains during your lifetime? You might, for example, have used the deferral relief provisions of an Enterprise Investment Scheme (EIS). Such deferred capital gains are not brought back into charge on your death. That is, they are wiped out.
That is not the case for any outstanding income tax or capital gains tax liabilities. Where these were incurred before your death they must be settled by your personal representatives. What if during the tax year of your death you incurred capital losses which were greater than your capital gains? In this case it is possible to carry back the net losses for up to 3 tax years.
Temporary non-residence
The basic position is that if you are not resident in the UK when the disposal takes place there is no charge to Capital Gains Tax. This is true no matter where the asset is situated.
However, you may remain chargeable to Capital Gains Tax on assets that you acquired before you left the UK. This would be the case if your period of residence abroad is less than five complete tax years.
Links to more information
- Capital Gains Tax
- Capital Gains Tax exemptions
- Capital Gains Tax planning
- Practical guide to paying Capital Gains Tax
- Special Capital Gains Tax situations
- HMRC notes on Capital Gains Tax
- If you need personal financial advice on How to Calculate Capital Gains Tax then I am happy to introduce you to Flying Colours Life who have access to independent financial advisers throughout the UK
Important
This information does not constitute personal advice and should not be treated as a substitute for specific advice based on your circumstances.
Information given relating to tax legislation is based on my understanding of legislation and practice currently in force. Whilst I believe my interpretation of current law and practice to be correct in these areas, I cannot be responsible for the effects of any future legislation or any change in interpretation or treatment. In particular you are warned that levels of tax and tax reliefs are subject to alteration and, in any case, the value of such reliefs and benefits may depend on an individual’s circumstances.
If you are in any doubt as to whether any course of action is suitable for you, then you should discuss the matter with a suitably qualified independent financial adviser or other specialist.