Capital Gains Tax

Capital gains on disposals of assets may be subject to UK tax. CGT is charged on net gains, ie total chargeable gains realised during a tax year after deducting total allowable losses realised in the year.

Companies are subject to corporation tax on chargeable gains calculated according to modified CGT rules.

CGT can only arise on the disposal of an asset. Normally this means sale, but it could also mean gift or compensation for loss or damage to an asset.

• The value on which the gain (or loss) is based is normally the consideration received. However, on a gift or on certain sales, the open market value is used instead.
• No CGT is payable on death. The beneficiaries of a deceased person’s estate are treated as if they had acquired the assets of the deceased at their market value on death.

Certain costs are allowable in computing chargeable gains:

• The acquisition cost or market value on 31 March 1982 (if the asset was acquired before that date).
• Costs of acquiring and disposing of the asset.
• Expenditure on enhancing the asset’s value.
• Indexation allowance (see below).

Losses brought forward from previous tax years can offset gains. For individual taxpayers, such losses do not reduce net gains below £7,500, so the annual exemption is not wasted.

The first £7,500 of an individual’s net gains realised during the tax year are free of CGT. The excess is taxed as if it were the top slice of income, at the rates that apply to savings income, namely 10% on the first £1,880, 20% on the next £27,520 and 40% on the balance.

Husbands and wives are subject to CGT separately, each with their own annual exemption and tax rates; transfers between spouses are not liable to CGT.

The indexation allowance can reduce the chargeable gain for assets acquired before 1 April 1998, but cannot increase a loss or turn a gain into a loss. The acquisition cost and enhancement expenditure (before April 1998) are revalued in line with indexation factors derived from increases in the RPI (retail prices index) between the date of expenditure and the earlier of the date of disposal and April 1998.

The indexation allowance is calculated by multiplying the allowable expenditure by the indexation factor for the month in which the expenditure was incurred or for March 1982 if later.

Shares and securities disposed of after 5 April 1998 are identified with acquisitions in the following order:

• Same day acquisitions.
• Acquisitions within the following 30 days (thereby rendering ‘bed and breakfasting’ ineffective).
• Previous acquisitions after 5 April 1998, taking the most recent acquisition first.
• Any share in the ’pool’ at 5 April 1998.
• Any shares held on 5 April 1982.
• Any shares acquired before 6 April 1965.