CIMA F1 Syllabus C. Fundamentals Of Business Taxation - Capital Gains Tax - Notes ^{4 / 4}

How is the capital gain calculated?

Proceeds - cost of the asset

This simply increases the "cost" of the item for inflation and so makes the profit you're taxed on less

Buy an asset for 100 10 years ago

Sell it this year for 150

Indexation allowance for this period is 30%
Capital gains tax is 25%

How much tax is payable?

Answer

Proceeds = 150
Cost = 100
Indexation = (100 x 30%) = 30

So profit is 150 - 130 =20

Tax is 20 x 25% = 5

Note:

1) Indexation can't create or increase a capital loss

2) Any tax deductible costs incurred on acquisition of the asset are also indexed and deducted while calculating the capital gain.

These can be:

1. Carried forward against future CAPITAL gains

2. Used this year to reduce CAPITAL profit

Illustration:

Cow Ltd. sold an office building for £400,000, the unindexed cost of the asset was £420,000. 

There were no other chargeable asset sales in FY22.

In FY23, Cow Ltd. realised a capital gain of £25,000 on the sale of a small piece of land that the company owned.

What is the capital income to be assessed to corporation tax in FY22 and FY23?

Solution:
FY 22 

Disposal proceeds £400,000
Acquisition cost (£420,000)
Capital loss (£20,000)

The capital income to be assessed to corporation tax in FY22 is Nil.

The loss of (£20,000) will be carried forward and set off against future capital gains.

FY 23

Net capital gain  £25,000
Capital loss b/f (£20,000)
Chargeable gain £5,000

This is when you replace the asset sold

• So effectively the profit hasn't been realised yet

• So you don't get taxed in it yet

• The tax has been deferred