How to calculate capital gains tax?
Capital gains tax is levied on the resulting profit from the disposal of chargeable assets that have appreciated in value.
The capital gains tax regime is applicable to the self-employed, partnerships, trusts and individuals. Other business structures are generally charged under corporation tax, not capital gains.
It is for these affected taxpayers to correctly identify, calculate and declare their taxable gain to HMRC. And predictably of course, to make the payment within the required timeframes.
The rules on capital gains are not always straightforward, and become further complicated where multiple assets are disposed of across multiple tax years.
We look at how taxpayers can make the initial assessment of whether a liability to capital gains has arisen, what the eventual level of liability is, and where tax planning can help to make optimum use of the plethora of reliefs potentially available to reduce the end tax bill.
How to calculate capital gains tax?
The starting point is to ascertain the level of taxable gain.
You are only liable to capital gains tax when you dispose of certain classes of asset at a profit.
The assets which come under the regime are:
- Property that is not your primary residence (for which a specific capital gains tax relief is available)
- Shares (not ISAs)
- Personal possessions up to £6,000 (not personal cars)
- Business assets (e.g. land, fixtures, fittings, registered trademarks, corporate reputation – among others)
You first need to identify if you have in fact made profit on the disposal. Put simply, this is a matter of deducting the price at which you sold the asset (or if given away, the market value at the time of gift) from the price you paid for it.
Apply this calculation across the tax year to every relevant transaction to find your total gains on disposals over the period.
If at this stage you arrive at a negative figure, this equates to a loss. In which case, it may be possible with professional advice to offset the loss against future capital gains liability.
A positive figure denotes the level of profit (i.e. gain), in respect of which you need to calculate the value of your tax liability.
Mitigating the gain
You may be permitted to reduce the level of taxable gain by deducting as follows:
You are permitted to deduct from the gain arising certain allowable costs, depending on the nature of the asset in question. For property, for example, you will be able to deduct from the gain certain costs of acquisition and disposal, such as:
- Stamp duty
- Solicitor fees
- Estate agent fees
- Costs involved in advertising the property for sale
You can also deduct costs that increase the capital value of the asset, such as costs incurred in increasing the property’s value (improvements, not maintenance or general upkeep costs).
Capital losses can also be deducted in arriving at your taxable gain, both current year losses or brought forward losses from previous years.
From the total gain calculated across the year, each individual is also allowed to deduct the ‘capital gains tax allowance’ – an annual capital gains tax-free sum. This is deducted after allowable costs and current year losses, but before any brought-forward losses.
The annual allowance for 2017/18 is:
- For individuals, self employed, partnerships: £11,300
- For trusts: £5,650
- For trusts with vulnerable beneficiaries: £11,300
- For businesses: Nil
It is only above the relevant level that capital gains tax becomes payable.
The figure you are then left with is the chargeable gain, to which you must apply the correct capital gains tax rate.
Applying the correct capital gains tax rate
UK capital gains tax is charged at various rates. The relevant chargeable asset that has been disposed and the income tax position of the owner will together determine the relevant rate of capital gains tax.
For the year 2017/18, the following capital gains tax rates apply:
|Individuals||Capital gains tax rate 2017-18|
|Basic rate taxpayer – most chargeable assets||10%|
|Basic rate taxpayer – non primary residence||18%|
|Higher rate taxpayer – most chargeable assets||20%|
|Higher rate taxpayer – non primary residence||28%|
|Entrepreneurs relief – lifetime cap of £10million||10%|
|Investors relief – lifetime cap of £10million||10%|
|Trustees||Capital gains tax rate 2017-18|
|Rate for most chargeable assets||20%|
|Rate for non primary residence||28%|
It may be possible with professional advice to leverage your wider tax position to come under a lower tax rate.
For example, your tax planning may involve moving gains or income from one person to another (such as spouse or civil partner) or from one year to another, to benefit from the lower rate or to make full use of your capital gains allowance and that of all other owners of the asset.
A significant element in capital gains tax planning is often the timing of a sale or transfer – perhaps deferring or expediting the disposal of an asset standing at a gain to maximise the benefit of available reliefs giving consideration to your complete tax position and wider circumstances.
The availability and use of these options, and the many other reliefs on offer, will depend on your circumstances and wider tax liabilities, and professional advice will be essential to remain compliant.
Added complexities affecting non doms and non residents
Non doms and non residents should in particular pay heed to UK capital gains tax rules.
The introduction of the ‘non resident capital gains tax’ (NRCGT) for example affects non-residents owning UK residential property.
Under these new rules, any part of a gain on a UK residential property which arose after 6 April 2015 is subject to UK capital gains tax, in line with the calculation above.
Where an asset has been held since before this date, the gain is ‘sliced and diced’, taxing the part of the gain that arose after this date.
For UK resident non-UK domiciled individuals (who are not deemed domiciled), non-UK gains will only be included on the remittance basis.
If the assets are in the UK then they will be taxable as normal.If the individual is now deemed domiciled for tax purposes then he will be taxable regardless of the location of the asset. However, such a person may be able to take account of the rebasing relief that was introduced with effect from 6 April 2017.
How to calculate capital gains tax? Enterprise Tax can help
Once you understand how to calculate capital gains tax, if you have identified a liability, it will be of financial benefit to explore the availability of any exemptions and reliefs to manage your exposure.
But with HMRC posting record income from capital gains tax, it seems taxpayers may not be maximising the benefits of capital gains tax reliefs.
Mitigation should ideally be considered before any asset is disposed of. As specialist tax advisers, we can assist with all aspects of capital gains tax, including liabilities, allowances and exemptions.
We have particular expertise in advising non doms and non residents, who are subject to continued HMRC attention and curbing of beneficial tax arrangements.
The key take-away is to take advice early – to open up more tax planning options to you and help ensure you correctly meet conditions attached to any reliefs you take advantage of.
Our services include:
- Capital gains tax advice
- Capital gains tax on property
- Capital gains tax on shares
- Asset protection
- Non dom tax advice
For more information, please contact one of our chartered tax advisers.