CAT / FIA FTX Syllabus D. Capital Gains Tax - The treatment of capital gains - Notes ^{1 / 5}

The capital gain is calculated as follows:

Incidental costs of disposal may be:

1. Valuation fees

2. Estate agency fee

3. Legal costs

4. Advertising costs

Allowable costs include:

• Original cost of acquisition

• Incidental costs of acquisition

  Similar to incidental costs of disposal

• Capital expenditure incurred in enhancing the asset

  Enhancement expenditure is capital expenditure which enhances the value of the asset.

  Excluding:

  - Cost of repairs
  - Cost of insurance
  - Any expenditure met by public funds (e.g. council grants)

Illustration

Mia bought a piece of land as an investment for £30,000.

The legal costs of purchase were £300.

She spent £1,200 draining the land.

Mia sold the land on 31 December 2024 for £40,000.

She incurred estate agency fees of £500 and legal costs of £200 on the sale.

Calculate Mia's gain on sale.

• Solution:

  Proceeds of sale £40,000
  Less costs of disposal £(500 + 200) = (£700)
  Less costs of acquisition £(30,300)
  Less enhancement expenditure £(1,200)

  Gain £7,800

Illustration

A chargeable asset was disposed of for £10,000.

On disposal, £1,000 of legal cost was incurred. 

The asset originally cost £5,000.

Which of these costs will be classified as incidental cost to disposal?

Which of these costs will be classified as acquisition cost?

Solution

• The legal cost of £1,000 is classified as the incidental cost to disposal. 

  This is because it has been incurred because of the disposal.

  Incidental cost to disposal can also include advertising cost and agency fees.

• The original cost of the asset of £5,000 is classified as the acquisition cost.

  This is because it is the amount spent to acquire the asset originally.

Capital gain calculation:

Capital gains tax are calculated as follows:

Annual exempt amount

This is an amount of capital gain that will not be subject to capital gains tax. 

It is similar to the personal allowance that individuals get. 

The amount is £3,000 for 2024/25.

If this amount is not used in a particular tax year, then it is wasted.

The rates of capital gains tax are:

• Rate 10%

  After considering a person's taxable income, any remaining amount falling within the basic rate band is charged at 10%

• Rate 20%

  Once the entire basic rate band has been used, then a rate of 20% is applied.

• For a residential property only

  The same treatment applies as explained above, except that the 10% rate is replaced with 18% and the 20% rate is replaced with 24%.

• Rate 10%

  This rate is used for capital gains that qualify for entrepreneur's relief/business asset disposal relief. 

  There are conditions that need to be met in order to be able to use this rate. 

  They are discussed in Topic: Entrepreneur's relief/Business asset disposal relief..

Illustration 1

Peter sold a capital asset and this resulted in a taxable gain of £40,000. 

Peter has taxable income of £20,000. (Basic rate band: £37,700)

Required:
Calculate Peter's capital gain tax.

Solution

Illustration 2

Peter sold a residential property and this resulted in a chargeable gain of £40,000. 

Peter has taxable income of £20,000. (Basic rate band: £37,700)

Required:
Calculate Peter's capital gain tax.

Solution:

Illustration 3

Katherine has a trading profit of £35,600 in 2024/25. (Basic rate band: £37,700)

Additionally, she sold a capital asset giving rise to a taxable gain of £15,000.

• What is her capital gains tax payable for 2024/25?

  Note A taxable gain is after the deduction of the annual exempt amount.

Solution:

Illustration 4

What if Katherine had capital gain (Chargeable gain) of £15,000?

• Solution

  Basic rate band left = (£37,700 - £23,030) = £14,670

  Chargeable gain £15,000
  Less:
  A/E (£3,000)
  Taxable gain £12,000

  CGT £12,000 * 10% = £1,200

  The rate used is 10% because the taxable gain of £12,000 fell entirely into the remaining basic rate band of £14,670 that remained.

When is capital gains tax payable?

Capital gains tax is payable on the 31 January following the tax year.

For 24/25, it is payable on 31/1/26.

Payment on account when a residential property is disposed:

When a residential property is disposed of, a payment on account of CGT must be made within 60 days of the disposal for this gain.

• Calculation of payment on account:

  Residential property capital gain

  (Current year capital losses before sale of residential property)

  (Brought forward capital losses)

  (Annual exemption)

  = Taxable gain for residential property 

  Tax on this taxable gain will be paid at 18% or 24% (Depending on whether the individual is a basic or higher rate taxpayer for the year).

• Calculation of final capital gains tax payable on 31/1/26:

  CGT Liability 

  (POA)

  = x (payable) / (x) (refund from HMRC)

  This POA on the disposal of a residential property has nothing to do with the payments on account that are made for income tax.

Illustration

Anaya is a higher rate taxpayer for 2024/25.

She has the following chargeable gains/loses for the year:

Solution

POA:

Residential capital gain £90,000
Less current year capital loss (£5,000)
Less brought forward capital loss (£0)
Less annual exemption (£3,000)
Taxable gain = £82,000 x 24% (Higher rate taxpayer)

= £19,680 is the POA to be made on 30/10/2024 (60 days from the sale)

On 31/1/26 (Final payment)
Residential property gain £90,000
Less current year losses (£20,000) 
Less annual exemption (£3,000)
Taxable gain £67,000
CGT at 24% = £16,080

Gain on disposal of shares £28,400
At 20% = £5,680
Total CGT payable = £16,080 + £5,680 = £21,760
Less POA (£19,680)
CGT payable on 31/1/26 = £2,080

Note that the capital losses and annual exemption are given to the residential property gain first as that gain pays tax at 24%, whereas the other gain pays tax at 20%