The following articles have been extracted under a licence from the R&C website:
Introduction
Assets and disposals
Working out the chargeable gain
Reliefs (other than taper relief)
Allowable losses
Taper relief: qualifying holding period
Taper relief: business assets and non-business assets
Working out the tapered chargeable gains
Working out the amount chargeable to CGT
Working out the tax due
Post transaction valuation checks for CGT
Indexation allowance
Taper relief on disposals of business assets on or before 5 April 2000
Introduction
This series of articles tell you the basic rules of Capital Gains Tax (CGT) for individuals.
You will find this article useful as a guide to work out the chargeable gain that is, the money you owe on your assets. You can do this by applying some simply principles of Capital Gains Tax. For example, if you have disposed of an asset and need to know whether to report a chargeable gain or an allowable loss to your Tax Office. It is also useful if you are contemplating a transaction and are wondering what the CGT implications might be.
It covers only common situations and does not contain all the guidance you will need to work out your chargeable gain or allowable loss in every case, or how much CGT you will have to pay.
When can a chargeable gain arise?
You may have a chargeable gain when
- you dispose of an asset, or
- you derive a capital sum from your ownership of an asset.
Typically, you have a chargeable gain where the asset is worth more when you dispose of it than it was when you acquired it.
The rest of this article tells you how to work out chargeable gains, including how to take account of allowable costs and (where you acquired the asset before April 1998) of indexation allowance.
If you dispose of an asset that you already held on 31 March 1982 there are special rules, called the rebasing rules, that ensure that only any increase in value after that date is taken into account when working out your chargeable gain.
You may qualify for reliefs that eliminate, reduce or defer your chargeable gains (see Article 4 - Reliefs). In some cases a disposal of one asset may bring into charge a gain that had been deferred from the earlier disposal of another asset.
A gain will not be a chargeable gain if it forms part of your income for income tax purposes.
A summary of the calculation
In outline, a calculation of a chargeable gain on the disposal of an asset will use the format below. The terms used will be explained in the following pages.
Disposal proceeds £25,000
Minus Allowable Costs £14,100
(a) Cost of acquisition £8,000
(b) Incidental costs of acquisition £900
(c) Enhancement costs £3,500
(d) Costs of establishing or defending title £500
(e) Incidental disposal costs £1,200
Equals Gain before indexation £10,900
Minus Indexation allowance on a, b, c and d only £3,250
(for periods to April 1998 only)
Equals Chargeable gain £7,650
If the calculation of the gain before indexation produces a negative number, you have made a loss.
What are the disposal proceeds?
In most cases, the disposal proceeds are the amount you actually receive for disposing of the asset, including:
- cash payable now or in the future
- the value of any asset you receive in exchange for the asset you have disposed of
- the value of a right to receive future payments which are uncertain and depend on future events.
In certain circumstances, you may be treated as disposing of an asset for an amount other than the actual amount (if any) that you receive.
When am I treated as receiving disposal proceeds equal to the market value of an asset?
If you dispose of an asset
- to a connected person (other than your husband or wife), or
- under a bargain that is not made at arms length (for example, a gift or a sale for a price that you know is below market value), or
- in return for something that cannot be valued
you are treated as receiving disposal proceeds equal to the market value of the asset at the time you disposed of it, rather than the actual amount (if any) that you receive.
There are different rules if you sell or give an asset to your husband or wife.
Who are connected persons?
Examples of connected persons are
- your husband or wife
- your relatives
- your husbands or wifes relatives
- your business partners and their husbands, wives and relatives
- a company that you control, either by yourself or with any of the persons listed above
- the trustees of a settlement of which you are a settlor, or of which a person who is still alive and who is connected with you is a settlor.
Relative means a brother, sister, ancestor or lineal descendant. It does not include nephews, nieces, uncles and aunts.
What is market value?
This is the price that an asset might reasonably have been expected to fetch if it had been sold on the open market.
In the case of shares or securities quoted in the London Stock Exchange Daily Official List, the market value is worked out according to a special rule. You should use the lower of
- a figure one-quarter up from the lower of the two prices in the quotations for the relevant day, or
- the figure halfway between the highest and lowest prices of normal recorded bargains for that day.
What about loans and mortgages?
You should ignore loans and mortgages that you took out to finance your purchase of an asset, even if you use the disposal proceeds to pay off the loans.
For CGT, what matters is the change in value of the asset itself and the allowable costs. Neither the repayments of the loan itself nor interest on loans and mortgages is an allowable cost.
What are allowable costs?
When you are working out your chargeable gain you can deduct five kinds of allowable costs. These are:
- acquisition costs
- incidental costs of acquisition
- enhancement costs
- expenditure on defending or establishing your rights over the asset
- incidental costs of disposal.
You cannot deduct any costs which could be taken into account when working out your income or losses for income tax purposes.
If you dispose of
- part of your interest in an asset, or
- part of a holding of shares of the same class in the same company, or
- part of a holding of units in the same unit trust
you can deduct part of the allowable costs of the asset or holding when working out your chargeable gain.
Allowable costs may be reduced
- if the asset is a wasting asset,
- by some reliefs.
What are acquisition costs?
Usually, these are the actual amounts you paid to acquire the asset. If you bought the asset, this will be the purchase price you paid. If you created the asset yourself, this will be the capital expenditure you incurred in creating the asset.
In certain circumstances, you may be treated as having acquired an asset for an amount other than the actual amount (if any) that you paid for it. For example, if you
- acquired the asset from your husband or wife while living together, you are treated as having acquired it for the amount that your partner had originally paid for it together with his or her allowable costs and indexation allowance
- acquired at different times shares of the same class or units in the same unit trust; or
- acquired shares by exercising an employee share option after 9 April 2003 and paid income tax on the difference between what you paid for the shares and their market value when you exercised the option. In that case, you are treated as having acquired the shares for the amount you paid for the shares together with anything you paid for the share option and the amount on which you paid income tax when you exercised the option. If you exercised your option before 10 April 2003 different rules apply; or
- acquired the asset -from a connected person (other than your husband or wife), or -under a bargain that was not made at arms length, or -in return for something that cannot be valued,
then you are treated as having acquired the asset for its market value at the time you acquired it
If you:
- inherited the asset, you are treated as having acquired it for its market value at the date of death (or, exceptionally, at the date on which the personal representatives of the deceased acquired it); or
- became absolutely entitled to the asset after it had been held in a trust, you are treated as having acquired it for its market value at the date on which you became absolutely entitled to it; or
- held the asset at 31 March 1982, the acquisition price may be adjusted under the rebasing rules; or
- obtained a roll-over relief on the disposal of an earlier asset, the allowable acquisition cost of the replacement asset may be reduced.
If you have disposed of shares that you acquired in exchange for other shares when a company was taken over or reorganised its share capital, special rules may apply to determine the acquisition cost of the shares.
What are incidental costs of acquisition and disposal?
These are incidental costs that you incurred for the purpose of acquiring or disposing of the asset, such as
- fees, commission or remuneration paid for professional advice
- the costs of transferring the asset
- stamp duty
- the costs of advertising to find a buyer or seller
- the costs of any valuations needed to work out your chargeable gain (but not the costs of resolving any disagreement with the Inland Revenue about your valuations).
If you use a valuation to work out your chargeable gain, you can ask the Inland Revenue to check the valuation for you (see article 11 Post transaction valuation checks for CGT).
What are enhancement costs?
These are costs which
- you incurred for the purpose of enhancing the value of the asset, and
- are still reflected in the state or nature of the asset at the date of its disposal.
You may not claim the cost of normal maintenance and repairs.
How should I treat Value Added Tax (VAT)?
If you paid VAT when you acquired or enhanced an asset or when you incurred incidental costs of acquisition and disposal, you should normally count the VAT you paid as part of your allowable costs.
However, if you are a trader and can treat the VAT you paid as deductible input tax or if it is available for set-off in your VAT account, then the allowable costs should be your expenditure apart from VAT.
If VAT is charged when you dispose of an asset, you should work out the gain by reference to the proceeds excluding the VAT.
What allowable costs can I deduct when I dispose of part of an asset?
If you dispose of part of your interest in an asset
- allowable costs which relate wholly to the part you have disposed of are deductible in full
- allowable costs which relate wholly to the part you have retained are not deductible
- a proportion of allowable costs which relate both to the part you have disposed of and the part you have retained is deductible.
The deductible proportion is calculated using the following sum:
Disposal proceeds + Value of part retained
What allowable costs can I deduct when I dispose of shares or units in a unit trust?
Generally this will be the amount that you paid for the shares, securities or units. However, special rules apply if you dispose of all or part of a holding of:
- shares or securities of the same class in the same company, or
- units of the same class in the same unit trust
that you built up through two or more acquisitions made on different dates.
You need to follow the share identification rules see below. These rules tell you which shares or units you are held to have disposed of. You then use the allowable costs relating to those shares.
The share identification rules
If the share identification rules apply (see above) you must follow them. You may not choose for yourself which shares or units in your holding you have disposed of.
The rules tell you:
- which shares, securities or units you are treated as having disposed of, and
- what acquisition cost you can deduct when calculating your chargeable gain.
You are treated as having disposed of shares or units in the following order.
- firstly, any you acquired on the date of the disposal
- then any you acquired within the 30 days immediately following the date of the disposal
- then any you acquired after 5 April 1998, taking the most recent acquisitions first
- then any you acquired between 6 April 1982 and 5 April 1998
- then any you acquired between 6 April 1965 and 5 April 1982
- then any you acquired before 6 April 1965.
Shares or units you acquired on or after 6 April 1982 and on or before 5 April 1998 will be pooled. If, under the rules described above, you are treated as making a disposal from the pool, the allowable acquisition cost will be the average acquisition cost of the pool.
Example
You have bought and sold on the open market ordinary shares in the same company as follows
1,000 shares acquired on 1 May 1998 at £5 per share
1,000 shares acquired on 1 September 1998 at £6 per share
1,000 shares acquired on 1 December 1998 at £5.50 per share
1,500 shares sold on 1 June 2001 at £8 per share
There were no acquisitions on the date of the disposal, or in the subsequent 30 days. So, you match the disposal with shares you acquired after 5 April 1998, taking the most recent acquisitions first. It follows that the allowable acquisition cost of the 1,500 shares sold on 1 June 2001 is:
1,000 @ £5.50 per share = £5,500
+
500 at £6 per share = £3,000
Total = £8,500
Example
You have bought and sold on the Stock Exchange ordinary shares in the same company as follows
1,000 shares acquired on 15 June 1996 at £2 per share
1,000 shares acquired on 1 May 1998 at £5 per share
1,000 shares sold on 5 April 1999 at £7 per share
1,000 shares acquired on 7 April 1999 at £7.05 per share
1,500 shares sold 1 September 2002 at £10 per share.
Disposal on 5 April 1999
There were no acquisitions on the date of the disposal. So, you match the disposal with shares you acquired within the 30 days following the disposal. It follows that the allowable acquisition cost of the 1,000 shares sold on 5 April 1999 is 1,000 @ £7.05 per share = £7,050.
Disposal on 1 September 2002
There were no acquisitions on the date of the disposal, or in the subsequent 30 days. So, you match the disposal with:
shares you acquired after 5 April 1998, taking the most recent acquisitions first (but not the shares you acquired on 7 April 1999; you have already disposed of them),
the shares you acquired between 6 April 1982 and 5 April 1998.
It follows that the allowable acquisition cost of the 1,500 shares sold on 1 September 2002 is:
1,000 @ £5 per share = £5,000
+
500 at £2 per share = £1,000
£6,000
What about share transactions between husband and wife?
If you have a number of shares of the same class in the same company and you dispose of some of them to your husband or wife, the share identification rules (see above) tell you which shares you are held to have disposed of.
You may have a number of shares of the same class in the same company, and have acquired some or all of them from your husband or wife. When you come to dispose of some of them, the dates that matter for the share identification rules are the dates that you acquired them, not the time when your husband or wife did.
However, you may take into account the period when your husband or wife held the shares in working out how much taper relief you are entitled to (see What is the qualifying holding period for assets I acquired from my husband or wife?).
What is a wasting asset?
A wasting asset is one that had a predictable life of 50 years or less when you first acquired it. All plant and machinery is treated as a wasting asset. If you have disposed of a wasting asset, the allowable costs may be reduced to take account of the remaining predictable life of the asset.
What are the rebasing rules?
If you dispose of an asset that you have held since 31 March 1982, the rebasing rules ensure that only any increase in value after that date is taken into account when working out your chargeable gain.
You may be able to choose to disregard completely the actual acquisition costs of all assets you held at 31 March 1982 when you calculate your gains and losses. The answer to the next question explains when you are able to do this. Unless you make that choice, you have to calculate each gain or loss on assets you held on 31 March 1982, using both their market value at that time and their original acquisition cost and
- if both calculations show a gain, the smaller of the gains is the chargeable gain
- if both calculations show a loss, the smaller of the losses is the allowable loss
- if one calculation shows a gain and the other shows a loss, there is neither a chargeable gain nor an allowable loss.
How can I avoid having to retain records of the cost of assets I acquired before 31 March 1982?
You may be able to choose not to make the comparisons referred to in the previous question. Instead, you work out the gains or losses on all assets you held on 31 March 1982 using their market value at that time without taking any account of the actual acquisition costs.
If you wish to calculate your gains and losses on all the assets you held at 31 March 1982 using only their market value at that time, you should tell your Tax Office that you wish to do this. You have to let your Tax Office know by the second 31 January after the end of the tax year in which you first dispose of such an asset.
For example, if you first dispose of an asset you held on 31 March 1982 in June 2002 (in the tax year 2002-2003) you should tell your Tax Office by 31 January 2005 that you choose this treatment for all the assets that you held on 31 March 1982.
Once you make this choice you may not change your mind.
What is indexation allowance?
This is an allowance which reduces gains for the effects of inflation. It only applies to assets you acquired before April 1998. See article 12 Indexation allowance for more details of how to work out indexation allowance.
Indexation cannot create or increase a loss. If indexation would turn a gain into a loss, the result is capped at zero that is, there is no gain or loss.
What do I do next?
You have now worked out the chargeable gain or loss on each of your disposals, after deducting allowable costs and indexation allowance, and applying reliefs other than taper relief (Article 4 - Reliefs).
If you made a chargeable gain on all of your disposals and the total of your chargeable gains is less than the annual exempt amount, then you do not have to pay any CGT, see Article 9 Working out the amount chargeable to CGT.
If you
- did not make any loss, and
- do not have any loss carried forward from an earlier year, and
- you have chargeable gains in excess of the annual exempt amount you should look at article 6 ( - Taper relief) to see whether taper relief will reduce your chargeable gains.
If you made a loss on some of your disposals, or if you have a loss brought forward from an earlier year, you should look at article 5. You may be able to deduct the loss from your chargeable gains or carry the losses forward to use in a later year.
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