The following articles have been extracted under a licence from HM Revenue & Customs 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.
This article shows you how to work out the tapered chargeable gains on your assets.
You have already worked out the chargeable gain for each asset, that is: the disposal proceeds less allowable costs, indexation and other reliefs. You have also worked out your allowable losses. If the total chargeable gains less total allowable losses are equal to or less than the annual exempt amount, you do not have to pay any CGT and you do not have to work out taper relief, see article 9 – Working out the amount chargeable to CGT.
If the chargeable gains after losses are more than the annual exempt amount, you need to work out any taper relief that is due. What you do next depends on whether you have any allowable losses.
How do I work out taper relief if I do not have any allowable losses?
If you do not have any allowable losses, you simply reduce the amount of each chargeable gain you have made in the tax year by the relevant taper reduction (see the table at the start of article 6).
Example
You acquired an asset on 1 June 1999 for £15,000. You sell it on 1 July 2005 for £25,000. It was a non-business asset throughout the period when you owned it.
You have no allowable losses.
Your chargeable gain before taper relief is £10,000 (disposal proceeds £25,000 less allowable costs £15,000).
You held the asset for six years and 30 days, so the number of whole years in the qualifying holding period is six.
Therefore, the amount of the chargeable gain that remains chargeable is £8,000 (£10,000 x 80%).
Example
You acquired an asset on 10 July 1985 for £10,000. You sell it on 8 September 2002 for £100,000. Throughout the period from 6 April 1998 until you disposed of it, it was a business asset.
You have no allowable losses.
Your chargeable gain before taper relief is £82,930 (disposal proceeds £100,000 less allowable costs £10,000 and indexation allowance to April 1998 £7,070).
You held the asset for four years and 155 days from 6 April 1998, so the number of whole years in the qualifying holding period is four (there is no bonus year for business assets disposed of on or after 6 April 2000).
Therefore, the amount of the chargeable gain that remains chargeable is £20,732 (£82,930 x 25%).
Sometimes, the effect of taper relief is to reduce your tapered chargeable gains below the level of the annual exempt amount. In that case, there will be no CGT to pay.
What if I have allowable losses?
The general rules for allowing losses arising in the tax year and losses brought forward from earlier years are explained in article 5.
You only have to work out taper relief if the chargeable gains after losses are more than the annual exempt amount.
In order to maximise your entitlement to taper relief, you attribute the allowable losses to each chargeable gain in the following order:
- firstly, any gains which do not qualify for taper relief (gains arising on non-business assets where the qualifying holding period is less than three years; gains arising on business assets where you do not have one year or more in the qualifying holding period);
- then the gain qualifying for the lowest taper reduction;
- then the gain qualifying for the next lowest taper reduction
and so on. You then work out taper relief on the remaining chargeable gains after losses.
Example
In 2004-2005 you dispose of two assets. You have no allowable losses brought forward.
Asset 1: You make an allowable loss of £1,000.
Asset 2: You make a chargeable gain before taper relief of £20,000. The qualifying holding period is six years and it was a non-business asset throughout.
You deduct your allowable loss from your chargeable gain before taper relief as follows:
Chargeable gain £20,000
Less allowable loss £ 1,000
Chargeable gain after losses £19,000
After taper relief, the amount of the chargeable gain after losses that remains chargeable is £15,200 (£19,000 x 80%).
Example
In 2005-2006 you dispose of four assets. You have allowable losses brought forward of £3,000. Assume the annual exempt amount is £7,900.
Asset 1: You make an allowable loss of £8,000.
Asset 2: You make a chargeable gain before taper relief of £10,500. The number of whole years in the qualifying holding period is eight and it is a nonbusiness asset throughout.
Asset 3: You make a chargeable gain before taper relief of £3,300. There are two whole years in the qualifying holding period and it is a non-business asset throughout.
Asset 4: You make a chargeable gain before taper relief of £8,800. There are seven whole years in the qualifying holding period and it is a business asset throughout.
You attribute £3,300 of the allowable losses to the gain on Asset 3 because that gain does not qualify for taper relief. You then attribute the remaining £7,700 of the losses to the gain on Asset 2 because that gain qualifies for the lowest taper
reduction.
The amount of each gain that remains chargeable after taper relief is therefore
Asset 2: Chargeable gain before taper relief £10,500 less allowable losses £ 7,700 chargeable gain after losses £ 2,800 x 70% £ 1,960
Asset 3: Chargeable gain before taper relief £ 3,300 less allowable losses £ 3,300 chargeable gain after losses nil.
Asset 4: Chargeable gain before taper relief £ 8,800 less allowable losses nil chargeable gain after losses £ 8,800 x 25% £ 2,200 Tapered chargeable gains for 2005-2006 £ 4,160.
As your tapered chargeable gains are below the annual exempt amount, you will not have to pay any CGT.
What if my asset had been partly a business asset and partly a non-business asset?
If you apportioned a chargeable gain into a gain on a business asset and a gain on a non-business asset, you should treat each apportioned gain as a separate gain when deciding against which of your gains to apply losses.
Example
You disposed of an asset with a chargeable gain of £10,000. You also have an allowable loss of £2,000.
There are eight whole years in the qualifying holding period. It was a business asset for exactly one quarter of the time that you owned it and a non-business asset for three quarters of the time. The apportioned chargeable gains are:
- Chargeable gain on a business asset: £2,500. After taper relief 25% of the gain will be charged to tax
- Chargeable gain on a non-business asset: £7,500. After taper relief 70% of the gain will be charged to tax.
You apply the whole of the loss to the chargeable gain on the non-business asset as you get less taper relief on it.
So your tapered chargeable gains are:
Business asset: £2,500 x 25% = £625
Non-business asset £7,500 less £2,000 = £5,500 x 70% = £3,850
Tapered chargeable gains = £4,475
What do I do next?
You have now worked out the tapered chargeable gains.
You should now go to article 9 – Working out the amount chargeable to CGT to work out the amount chargeable to CGT.
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