11-Capital Gains Tax - Individuals

Chargeable Gains for Individuals
The scope of capital gains tax
You should pay CGT on:
1. The sale or gift of the whole or part of an asset.
For example, out of a 10-acre plot of freehold land, 5 acres is sold.

Capital gains tax will be paid on the disposal of the 5-acre part.
2. The loss or destruction of an asset.
For example, a painting costing £5,000 was destroyed in a fire.

This destruction will be considered to be a capital disposal.
The disposal proceeds will be Nil and therefore a capital loss of (£5,000) will be realised on
destruction.
3. Compensation in connection with an asset.
For example, a painting costing £5,000 was destroyed completely in a fire.

The painting was insured and insurance proceeds of £10,000 were received because of the loss of
the painting.
Capital gains tax should be paid on (£10,000-£5,000) = £5,000.
Chargeable assets
All assets are chargeable unless specifically exempted.
This list is provided in Topic: Assets which are exempt.
Chargeable person
An individual who is resident in the UK is a chargeable person and is therefore subject to UK CGT
on their worldwide assets.
Note the differences between companies and individuals
1. Companies pay corporation tax on their capital gains whereas individuals pay capital gains tax.
2. Companies have an indexation allowance up to December 2017 which allows for the adjustment
of the cost of an asset for inflation, whereas individuals have an annual exemption.
3. Companies can use rollover and holdover relief with respect to their chargeable gains whereas
individuals have a much wider array of reliefs available to them.
4. Companies can be part of 75% gains groups whereas individuals cannot.
5. Loss relief is dealt with differently between both companies and individuals.
Assets which are exempt

Exempt assets include:
 Motor cars suitable for private use

 Animals (wasting chattels that do not qualify for capital allowances)
 Debtors
 Cash
 Chattels bought and sold for less than £6,000
 Corporate bonds
 Government securities
 Trading stock
 Shares in individual savings accounts ISA
 Shares in a VCT
 Foreign currency for private use (Cash)
 Works of art given for national use
 Damages for personal injury
 Life insurance policies (Cash)
 National Savings and Investment certificates
In the exam, if you think that an asset is exempt just state this.
The basic principles of computing gains and losses

The treatment of capital gains
The capital gain is calculated as follows:
Disposal proceeds X
Less: Incidental cost of disposal (X)
Less: Allowable cost (X)
Capital Gain (Chargeable gain) / (Capital loss) X / (X)

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
Ms. M 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.
Ms. M sold the land on 31 December 2018 for £40,000.
She incurred estate agency fees of £500 and legal costs of £200 on the sale.
Calculate Ms. M'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 it’s 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:

Disposal proceeds £10,000
Incidental cost to disposal (legal cost) (£1,000)
Acquisition cost (£5,000)
Capital gain (Chargeable gain) £4,000
Capital gains tax are calculated as follows:
Capital Gains (Chargeable gain) X
Less: Annual exempt amount (11,700)
Taxable Gains X
CGT × 10%, 20% or 18%, 28% X

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 £11,700 for 2018/19.
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 28%.
Rate 10%
This rate is used for capital gains that qualify for entrepreneur's 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.
Illustration 1
Mr. P sold a capital asset and this resulted in a taxable gain of £40,000.
Mr. P has taxable income of £20,000. (Basic rate band: £34,500)
Required:
Calculate Mr. P's capital gain tax.
Solution
Taxable gain 40,000
Basic rate band remaining (£34,500 - £20,000) = £14,500
Capital gains tax (£14,500 * 10%) = £1,450
(£40,000 - £14,500) * 20% = £5,100
Total capital gains tax payable = 1,450 + 5,100 = £6,550
Illustration 2
Mr. P sold a residential property and this resulted in a chargeable gain of £40,000.
Mr. P has taxable income of £20,000. (Basic rate band: £34,500)
Required:
Calculate Mr. P's capital gain tax.
Solution:
Chargeable gain 40,000
Annual exempt amount (11,700)
Taxable gain 28,300
Basic rate band remaining (£34,500 - £20,000) = £14,500
Capital gains tax (£14,500 * 18%) = £2,610
(£28,300 - £14,500) * 28% = £3,864
Total capital gains tax payable = 2,610 + 3,864 = £6,474
Illustration 3
Ms. K has a trading profit of £35,600 in 2018/19. (Basic rate band: £34,500)
Additionally, she sold a capital asset giving a rise to a taxable gain of £15,000.
What is her capital gains tax payable for 2018/19?
Note A taxable gain is after the deduction of the annual exempt amount.
Solution:
Trading income £35,600
Personal allowance (£11,850)
Taxable income £23,750
Basic rate band left £34,500 - £23,750 = £10,750
Capital gains tax £10,750 * 10% = £1,075
(£15,000 - £10,750) * 20% = £850
Total capital gains tax payable 1,075 + 850 = £1,925
Illustration 4
What if Ms. K had capital gain (Chargeable gain) of £15,000?
Solution
Basic rate band left = (£34,500 - £24,100) = £10,400
Chargeable gain £15,000

Less:
A/E (£11,700)
Taxable gain £3,300
CGT £3,300 * 10% = £330
The rate used is 10% because the taxable gain of £3,300 fell entirely into the remaining basic rate
band of £10,400 that remained.
The treatment of capital losses
Capital losses
1. Current year capital losses are set against current year capital gains in the same tax year.
2. The set off is made to the maximum possible extent and cannot be restricted to avoid wasting the
annual exemption.
3. If there are insufficient gains to set off the capital losses in the year they arise, the unrelieved
capital losses may be carried forward.
4. The capital losses brought forward only reduce the capital gains to the level of annual exemption
and therefore do not waste the annual exemption.
5. Any unrelieved capital losses brought forward are carried forward to the next year to be set off
against capital gains.
Illustration:
Fiona and Mr. J made capital gains and capital losses for the years 2017/18 and 2018/19 as set out
below:
Fiona Mr. J
2017/18
Capital gains 15,000 7,000
Capital losses 10,000 10,000
2018/19
Capital gains 17,000 13,900
Capital losses 5,200 2,000
Calculate the taxable gains for Fiona and Mr. J for both 2017/18 and 2018/19 and the amount of
any losses carried forward at the end of 2018/19.
Solution:
Fiona 17/18 18/19
Capital gains £15,000 £17,000
Capital losses (£10,000) (£5,200)
Net capital gains/loss £5,000 £11,800
Annual exemption (£5,000) (£11,700)
Taxable gain Nil £100
Mr. J 17/18 18/19
Capital gains £7,000 13,900

Capital losses (£10,000) (2,000)
Net capital gains/loss (£3,000) will be carried forward against c. gains £11,900
of 18/19
Annual exemption Wasted (£11,700)
Capital gain £200
Capital losses brought forward from (£200)

17/18
Taxable Gain - Nil Nil Nil
Explanation:
Mr. J had a loss of 3,000 in 17/18 which was carried forward to 18/19.
After saving the annual exemption in 18/19, 200 of the loss brought forward was used, therefore
2,800 is carried forward to 19/20.
Note that the current year losses must be set off to a maximum without any restriction and thus
wastage of the annual exemption.
However, capital losses brought forward will be set of partially to save the annual exemption.
Transfers between husband and wife or civil partners
Don't pay CGT if:
You transfer the assets to your husband or wife or civil partner.
 If a husband transfers an asset to his wife, she would be treated as though she acquired the asset
on the same date and at the same cost as husband did.
Illustration:
On 01/05/2006 a man acquires a piece of land for £10,000.
On 01/05/2018 he transfers it to his wife when the market value of the land is £80,000.
 Will a capital gain be assessable on the husband?

Solution:
The wife would be treated as though she acquired the asset on 01/05/2006 for £10,000.
Therefore, this transfer would have been made at no gain/no loss and no capital gain would be
assessable.
Illustration:
What if this man made the same transfer to his daughter?
Will a capital gain be assessable on the daughter?
Solution:
A capital gain would arise on the father:
Sale proceeds (deemed to be market value) £80,000

Cost (£10,000)
Capital gain £70,000

Annual exemption (£11,700)
Note: As the father made a gift to the daughter and no sale proceeds were actually received, the
market value of the land will be considered to be the value that the asset is sold for.
Why is this treatment beneficial?
This treatment is beneficial if one spouse does not have any capital gains and is a basic rate
taxpayer.
 It would be wise to transfer the chargeable asset to this spouse so that they can fully utilize their
annual exemption and pay capital gains tax at the lower rate of 10% since their basic band is not
fully being used (unless it is a residential property, then the lower rate is 18%).
 IF the asset stays with the spouse who is a higher rate payer and already has capital gains, then an
annual exemption allowance would be wasted and capital gains tax would be paid at 20% (unless
it is a residential property, then the higher rate is 28%).
Illustration:
Mr. G owned a piece of land bought on 01/06/2010 for £40,000.
For the tax year 18/19, he has taxable income of £50,000 and already has net capital gains of
£20,000.
He wants to sell this piece of land for sale proceeds of £65,000.
Mr. G’s wife is a housewife and does not have any income or capital gains of her own.
He thinks that it is wise to transfer the asset to his wife and let her sell it.
What amount of tax will Mr. G save if he does this?
Solution:
Without transferring the asset to his wife:
Net capital gains £20,000

Gain on land (W1) £25,000
Net capital gains £45,000
Taxable gains £33,300
Capital gains tax payable at 20% = £6,660

The CGT payable specifically on the land is = 20% * £25,000 = £5,000
W1:
Cost (£40,000)
Net capital gain £25,000
Why is CGT payable at 20% and not 10%?
This is because he has used his entire basic rate band up with his taxable income. (Explained in
Topic: The treatment of capital gains)
Transferred the asset to wife and she sold it:
Cost (£40,000)
Net capital gain £25,000

Capital gains tax is payable at 10% because this taxable gain falls entirely into the basic rate band
= £13,300 * 10% = £1,330
Savings:
CGT paid by husband on the piece of land: £5,000
CGT paid by wife on the land: £1,330

Saving: £3,670
Allowable expenditure on a part disposal
Allowable cost for part disposal

A part disposal
If an individual owns a chargeable asset that he has only disposed a part of, a capital gain will
arise.
For example, if an individual owns a large piece of land and decides to only dispose of a part of it,
this is known as a part disposal.
Or, if an individual owns 5 antique vases, bought as a set, then disposing of only 2 from the set is
considered to be a part disposal of the whole set.
A cost from the entire asset cost must be given to the part of the asset being disposed of.
This is known as the allowable cost.

This allowable cost is then deducted from the proceeds received for the part disposal, to arrive at
a capital gain.
How much cost can you deduct from the disposal proceeds?
= Original purchase cost * [A / (A+B)]
Where:
 A – Disposal proceeds received

B – Market value of the remainder of the asset (Given in question)
Illustration:
Mr. P buys a house for £26,000 in October, 1996.
He has never lived in the house as his main residence.
He sells the garden for £100,000 in August 2018, incurring selling costs of £1,000.
The value of the remaining house in August 2018 is £160,000.
What capital gain will arise on this sale?

Solution:
Allowable cost for part sold:
 Original purchase cost = £26,000
Proceeds received (A) = £100,000
Market value for the remainder of the house (B) = £160,000
 Original purchase cost * [A / (A+B)]
£26,000 * [£100,000 / (£100,000 + £160,000)] = £10,000
 Notice that only £10,000 is considered to be the allowable cost.
This is because, this is the amount of cost that relates only to the part of the asset being disposed
of.
The other £16,000 is known as the base cost.

It relates to cost that will be used to calculate the capital gain when the remainder of the asset is
disposed of.
Chargeable gain on sale:
Incidental cost to sell (£1,000)
Net proceeds £99,000
Allowable cost (£10,000)
Less annual exemption (£11,700)
Illustration
The base cost of remaining house is: Original purchase cost – Allowable costs used.
£26,000 - £10,000 = £16,000
If the remainder of the house was disposed of for £120,000 after one year, what taxable gain
would arise then?
Less annual exemption (£11,700)

Insurance proceeds received for a damaged/lost/destroyed asset.
Damaged/lost/destroyed chargeable asset
When a chargeable asset is destroyed/lost/damaged and the value of the asset has become
negligible (very small value), then a person can make a negligible value claim.
The asset will be treated as though it has been disposed of at it’s current, negligible value, therefore
the person can realise a capital loss. The asset does not actually have to be disposed of, it is just a
way of realising a loss. When the asset is sold in the future, the negligible value will be used as
its cost.
Illustration:
A painting was acquired for £10,000 and damaged in a fire.
It now is worth a negligible amount.
How will it be treated for capital gains tax?
Solution:
Disposal proceeds £ Nil
Capital loss (£10,000)
 This capital loss will be relieved against current year capital gains, and if it cannot be relieved
fully, it will be carried forward to be relieved against future capital gains.
 Note the painting could be valued at any amount and this same treatment would apply.
For example, if the painting was valued at £100,000 at the time it was damaged, then the capital
loss realised would be:
Disposal proceeds £ Nil

Insurance proceeds received for damaged/lost/destroyed chargeable asset
You have to pay CGT on the insurance proceeds.
The disposal proceeds are the amount of money received from the insurance company.
Capital gains calculation:
Proceeds received from insurance company X

Cost of asset lost/destroyed (X)
Chargeable gain X
The disposal is treated as though it occurred in the tax year that the insurance proceeds are received.
Illustration:
Holly owned a vase which was destroyed on 06/04/2018, she had paid £28,000 for it on
01/05/2008.
The market value when it was destroyed was £80,000 however she only received £68,000 of
insurance proceeds.
What will the capital gains treatment be if she does not decide to reinvest the proceeds?
Solution:
For the tax year 18/19
Insurance proceeds £68,000
Note the insurance proceeds received are £68,000, this will be used in the computation.
It does not matter that the market value at the time of disposal was £80,000 - the actual insurance
proceeds received will be used.
Insurance Rollover Relief (IRR)
You get IRR if the insurance proceeds received are reinvested into another replacement asset
within 12 months of the proceeds being received.
 However, if only some of the proceeds are reinvested, then the proceeds which are not reinvested
will be taxable immediately.
For example:
Insurance proceeds received £1,000
Asset costing £900 was destroyed
Reinvestment in a new asset £950
The capital gain that resulted was £100 (£1,000 - £900)
The £50 of insurance proceeds not reinvested (£1,000 - £950) will be taxable immediately.
The remaining £50 of capital gain will be deferred to be taxed at a later date.
This is known as the gain rolled over
 How is this £50 of capital gain deferred to be taxed at a later date?
It is deducted from the cost of the replacement asset.
£950 - £50 = £900
This £900 is known as the base cost of the replacement asset.

This base cost will be used as the cost of the replacement asset when it is disposed.
Illustration:
What if Holly used the insurance proceeds to buy a replacement vase for £59,000 on 01/03/2019?
What capital gain will be realisable in this case?

Solution:
Proceeds received £68,000
IRR (40,000 - 9,000) balancing figure £31,000
Capital gain realisable now (w1) £9,000

Working 1:
Proceeds reinvested within 12 months of receipt (£59,000)
Capital gain realisable now (w1) (proceeds not reinvested) £9,000
Base cost of replacement vase:
Cost to acquire the new vase – Capital gain rolled over = Base cost of replacement vase
Capital gain rolled over:

Total capital gain £40,000
Gain realised immediately (£9,000)
Capital gain rolled over £31,000
Cost of new vase £59,000
IRR (£31,000)
Base cost of vase £28,000
What if Holly disposes of the new vase after 10 years for £100,000?
Base cost (£28,000)

Insurance proceeds used in restoration
If an individual receives insurance due to the damage of an asset and spends the insurance proceeds
on restoring the asset plus an additional amount, the base cost of the asset will be treated as:
 Cost £X
(Insurance proceeds received) (£X)
+ Additional amount spent £X
Base Cost £X
Illustration
On 15/01/2019, a timepiece owned by Mr. K fell and was badly damaged.
The timepiece had been purchased for £99,000. Mr. K received insurance proceeds of £54,000 and
he additionally spent a total of £45,000 on restoring the timepiece to working condition again.
What is the base cost of the timepiece after restoring it?
 Solution
Cost £99,000
Proceeds (£54,000)
Additional spent £45,000
Base cost £90,000
Gains and losses on the disposal of movable and immovable property

Chattels and wasting assets
Exempt chattels and wasting assets.

Chattels
A chattel is a piece of tangible, movable property (something that you can touch and move).
Your personal possessions will normally be chattels.
For example, items of household furniture, paintings, cars, items of plant and machinery fixed to
a building.
Some chattels are exempt and some are chargeable to capital gains tax.
A wasting chattel is exempt from capital gains tax.
A wasting chattel is one with a life of 50 years or less.
For example, racehorses, boats.
Exception to the exemption of wasting chattels:
Plant and machinery (with a life of less than 50 years) on which capital allowances have been
claimed are treated as non wasting chattels.
A capital gain needs to be calculated on their disposal, but a capital loss will not be allowable on
their disposal.
 It is possible that they are exempt under the non-wasting chattel exemption (being bought and sold
for less than or equal to £6,000).
Non wasting chattel capital gains calculation:
Cost Proceeds Treatment
<=£6,000 <=£6,000 Exempt
<=£6,000 >£6,000 Normal calculation but the gain is restricted to 5/3*(Gross proceeds-£6,000)
>£6,000 <£6,000 Deemed gross proceeds = £6,000
>£6,000 >£6,000 Normal calculation
Illustration:
Maria sold the following assets in December:
1. An antique table which had cost £3,000 and was sold for £5,000
2. A painting which had cost £2,000 and was sold for £10,000
3. An antique vase which had cost £8,000 and was sold for £3,000
4. A set of china which had cost £7,000 and was sold for £8,000.
Solution:
1. The table is exempt as it was bought and sold for less than £6,000
2. The painting:
Proceeds £10,000
Cost (£2,000)
Maximum gain assessable = 5/3*(£10,000-£6,000) = £6,667
3. The vase:
Deemed proceeds £6,000
Cost (£8,000)
The proceeds are deemed to be £6,000 as it was bought for more than £6,000 and sold for less than
£6,000.
4. The china:
Proceeds £8,000
Cost (£7,000)
This is the normal calculation as the set of china had been bought and sold for more than £6,000.
Reliefs & Exemptions
Principal private residence relief
What is it?
Simply, don't pay any tax if you sell your house.
 But you will have to if you didn't live there all the time or used it for business purposes.
How much capital gain is exempt with PPR Relief?
 FULL exemption
If you occupied the property throughout the entire period of ownership.
 Partial exemption
If you stay, there only for part of the period.
This is calculated as:
Capital gain * Period of occupation/Period of ownership
There are however periods of absence which are deemed to be full occupation
1. Last 18 months - if the property was the individual’s main residence at some point in time.
For example, an individual purchased a house on 31/03/2002, he lived in it for 2 months and then
travelled the world, living in hotels until he sold it on 31/03/2019.
The last 18 months of ownership of the house, from 01/10/2017-31/03/2019 will be considered to
be occupied by the individual, even though he did not live there at the time.
2. Any periods during which the individual was required by his employment to live abroad.
The person must come back to live in the house after this period in order for this time to be
considered to be deemed occupation.
For example, an individual purchased a house in London on 31/03/2002, he lived in it for 2

months and then moved to Barbados for employment for 4 years, he then returned to live in the
house until he sold it on 31/03/2019.
For capital gains tax purposes the 4 years during which the individual lived abroad will be
considered to be deemed occupation by the individual.
This is because the reason for living abroad was employment purposes and he moved back to the
house when he returned.
3. Any period up to four years during which the individual is required to live elsewhere in the UK
due to employment.
For example, an individual purchased a house in London on 31/03/2002, he lived in it for 2

months and then moved to Newcastle for employment for 4 years, he then returned to live in the
house until he sold it on 31/03/2019.
For capital gains tax purposes the 4 years during which the individual lived elsewhere in the UK
will be considered to be deemed occupation by the individual.
This is because the reason for living elsewhere in the UK was employment purposes and it was for
4 years only, and he moved back to the house when he returned.
4. Up to three years for any reason.
For example, an individual purchased a house on 31/03/2002, he lived in it for 2 months and then
travelled the world until 31/03/2005, he then moved back to the house and lived in it until he sold
it on 31/03/2019.
For capital gains tax purposes the 3 years during which the individual was travelling will be
considered to be deemed occupation by the individual.
This is because the reason up to 3 years for any reason is allowable and he lived in the house when
he returned.
For points 2 and 3, where an individual is not living in their main residence due to work, if they
do not return to their house to live in it after because of another work engagement immediately
after the first one, this will still be considered deemed occupation.
Illustration
On 30 September 2018, Mr. J sold a house for £400,000.
The house had been purchased on 1 October 1998 for £167,500.
Mr. J occupied the house as her main residence from the date of purchase until 31 March 2002.
The house was then unoccupied between 1 April 2002 and 31 December 2005 due to Mr. J moving
to Chicago for work.
From 1 January 2006 until 31 December 2012, Mr. J again occupied the house as her main
residence.
The house was then unoccupied until it was sold on 30 September 2018.
What capital gain arises on this sale?
Solution
Principal private residence exemption £183,093 (232,500 x 189/240).
The total period of ownership of the house is 240 months (189 + 51), of which 189 months qualify
for exemption as follows because the unoccupied period from 1 January 2013 to 31 March 2017
is not a period of deemed occupation because it was not followed by a period of actual occupation.
Disposal proceeds 400,000
Acquisition cost (167,500)
232,500
PPR Exemption (183,093)
Capital gain 49,407
Exempt months Chargeable months
1 October 1998 to 31 March 2002 (occupied) 42
1 April 2002 to 31 December 2005 (working overseas) 45
1 January 2006 to 31 December 2012 (occupied) 84
1 January 2013 to 31 March 2017 (unoccupied) 51
1 April 2017 to 30 September 2018 (final 18 months) 18
189 51
Illustration:
Dolly bought a house on 1 April 1989 for £10,000.
She lived in it for 3 months.
Then she worked abroad for 24 months.
She came back and lived in the house for another 174 months. Then she lived and worked
elsewhere in UK for 48 months. Dolly never returned to the house and it was sold 108 months later
in December 2018 for £150,000.
Calculate the chargeable gain arising.

Solution:
The total period of ownership of the house is 357 months, out of which 219 months qualify for the
PPR exemption.
The 4 years of working elsewhere in the UK cannot be classified as deemed occupation because
she never returned to the house to live in it after that.
The exemption is 219/357 * £140,000 = £85,882
Less cost (10,000)
Capital Gain 140,000
Less PPR relief (W1) (85,882)
Chargeable Gain 54,118
(W1) Actual & Deemed Occupation (months) Absent (months)
(actual) 3
(working overseas) 24
(actual) 174
4 years work in UK 48
Living elsewhere 108 - 18 = 90
Last 18 months 18
219 138
Business use
Where part of a residence is used exclusively for business purposes throughout the period of
ownership, the gain in relation to that part is not covered by relief.
Illustration
On 30 September 2018, Henry sold a house for £155,000.
The house had been purchased on 1 October 2009 for £100,000.
Throughout the period of ownership, the house was occupied by Henry as his main residence, but
one of the house’s five rooms was always used as Henry's office premises.
What capital gain arises on this disposal?
Solution
The principal private residence exemption is restricted to £44,000 (55,000 x 4/5).
This is because 1 out of 5 rooms of the house has always been used only for business purposes.
The capital gain arising on the sale is £11,000
Acquisition cost (100,000)
PPR exemption (44,000)
Capital gain 11,000
Letting relief
If an individual life in a property as their main residence and lets all or part of the residence for
residential purposes;
on the disposal of this property, in addition to claiming PPR relief, the letting relief is also available
to reduce the capital gain.
This relief is the lower of:
 PPR relief given

 £40,000
 Gain attributable to letting
Illustration:
Candy bought a house on 1 April 1989 for
£30,000 and occupied as follows:
1/4/1989 – 31/3/1991 lived in it
1/4/1991 – 30/9/1996 travels the world and lets the house
1/10/1996 – 31/3/2006 lived in it
1/4/2006 – 31/3/2019 Moved out of the house to live with her children
and the property was empty.
Candy sold the house on 31 March 2019 for £250,000.

Solution:
Less cost (30,000)
Capital Gain 220,000
Less PPR relief (W1) (117,333)
102,667
Less Letting relief (W2) (18,333)
Chargeable Gain 84,334
(W1) Actual & Deemed Occupation (months) Absent (months)
1/4/1989 – 31/3/1991 (actual) 24
1/4/1991 – 30/9/1996 (Any reason) 36 30 (house let)
1/10/1996– 31/3/2006 (actual) 114
1/4/2006 – 31/3/2019 (empty and last 18 months) 18 138
192 168 360

PPR relief 192/360=× 220,000 = 117,333
(W2)
(i) PPR relief figure £117,333
(ii) £40,000
(iii) Gain in the let period not covered by PPR relief 30/360× 220,000 = 18,333
Gains and losses on the disposal of shares and securities
If you give away shares as a gift

You will have to pay Capital gains tax on it
Step by step approach:
1. Step 1
Value the shares using:
(Lower quoted price + Higher quoted price)/2
Note: the share valuation rules are different for IHT so be careful not to confuse them.
2. Step 2
Calculated Disposal proceeds
= Number of shares given * value per share (step 1)
Illustration:
Megha gifted 1,000 shares in N plc when they were quoted at 400-408 pence per share, with
marked bargains on that day of 398p, 402p, and 407p.
 Calculate the value to be used for capital gains disposal proceeds.

Solution:
1. Step 1 - Value the shares

(400+408)/2 = 404
Note: the marked bargains are not relevant for CGT life gifts but they would be relevant for IHT
2. Step 2 - Calculated Disposal proceeds
= Number of shares given * value per share (step 1)
= 1,000 shares *£4.04 = £4,040
Identification rules for individuals
Share matching rules
The problem
When shares are disposed of, a problem arises in finding their allowable cost, if the shares were
acquired over a long period of time.
The solution
To make this simpler, HMRC uses a set of rules to determine the acquisition date and cost of the
shares being disposed of.
These rules are called the matching rules.
Disposals of shares are matched with acquisitions in the following order:
1. Shares acquired on the same day of disposal.

2. Shares acquired in the next 30 days following the disposal (FIFO).
3. Shares from the share pool.
This would be much easier to understand if we did an example!
Illustration:
Mr. B owns shares in L plc.
He acquired 1,500 shares in the company on 31/05/2016 for £20,000, and 500 shares on
30/06/2017 for £10,000.
On 07/03/2019 Mr. B bought a further 200 shares in L plc. for £4,000.
Mr. B sold 1,000 shares in L. plc for £25,000 on 28/02/2019.

Calculate Mr. B’s capital gain on the disposal of the shares in February 2019.
Solution:
We need to dispose of 1,000 shares.
Let us apply our matching rules to see which shares we are disposing of.
FIRST MATCH – same SECOND MATCH – 30 days following THIRD MATCH –
day acquisition disposal acquisition share pool
None. 07/03/2019 – 200 shares for £4,000. 800 shares needed from
share pool.
Share pool:
Description Number Cost
31/03/2016 purchase 1,500 20,000
30/06/2017 purchase 500 £10,000
Total 2,000 shares £30,000
Disposal from share pool (800 shares) (800/2000) * £30,000 = (£12,000)
Remaining in share pool 1,200 shares £18,000
Specially note how the cost of the shares from the share pool is calculated.
(No. of shares to be disposed from pool/Total shares in pool) * Total cost in pool = Average cost
that we apply to our disposal
Calculating capital gain:
Acquisition cost:
07/03/19 (£4,000)
Share pool (£12,000)
You also might want to try to draw a timeline to ensure that you do not miss any acquisition dates!
Bonus issues, rights issues, takeovers and reorganisations
Bonus Issues
This is an issue of shares to existing shareholders in proportion to the number of shares owned.
 For example, if you owned 500 shares and a 1:5 bonus issue was declared, you would receive
(500/5) *1 = 100 bonus shares.
 These shares are deemed to be acquired at the same date and at the same cost as the original shares
to which they relate.
They have no cost of their own.
Therefore, in your share pool, a bonus issue will only result in an increase in the number of shares,
and no increase in the cost of shares
Illustration:
Mina purchased shares in C Co.
The details of her purchases are below:
 May 2018 Purchased 3000 shares for £3,000
Jan 2019 Purchased 1500 shares for £2,000
March 2019 Bonus issue of 1:3 declared by the company
How many shares will Mina receive under the bonus issue?
What is the cost of these shares?
Solution
 Total shares in company = 4,500
New shares received = (4,500/3) * 1 = 1,500
The bonus shares will have a cost of £0

A rights issue
occurs where a company offers its existing shareholders the right to buy extra shares.
Rights issues are similar to bonus issues in that the number of shares offered to each shareholder
is generally in proportion to his or her existing shareholder.
 The only difference is that a price is paid for these shares.
The price for the shares is normally lower than current market value, in order for the existing
shareholders to be attracted to taking up the issue.
Illustration:
Mr. J is an employee in Jill Ltd.
He had the following transactions in the company’s shares:
 Jul 2018 Purchased 6,000 shares for £15,000
Sep 2018 Purchased 900 shares for £2,700
Dec 2018 Took up 1:5 rights issue for £2.00 per share
What will the rights issue cost Mr. J if he decides to subscribe to the issue fully?
Solution:
 Total shares in company = 6,900
New shares received = (6,900/5) * 1 = 1,380 shares

 The rights shares will have a cost of £2.00 * 1,380 shares = £2,760
Bonus issues and rights issue and disposal
 Note carefully that these bonus issues and rights issue will follow the same matching rules for
shares when they are disposed.
 The bonus issues will be included in the share pool at no cost and the rights issue shares will be
included in the share pool at their respective cost.
 Nothing changes with the matching rules.
Takeovers/Reorganisations
Takeovers or company reorganisations normally occur when a company is facing financial

difficulty.
They attempt to change the structure and ownership of a company by having another company
take over the individual company.
This will result in the identity and management changed of the individual company, in the hope of
better decisions being made for the company in the future, resulting in a longer life for the
company.
Takeovers/Reorganisations can either be for a share for share exchange, or a takeover can be for a
cash exchange.
We will deal with both of these situations separately via the use of illustrations.
Takeovers (share for share exchange)
 If a takeover is for a share for share exchange, then no capital gains tax arises immediately.
 The market value of the new holding provided will be used to apportion our initial holding cost.
 Then when we ultimately dispose of this new holding, we will use the original holding cost, and
this will result in a capital gain assessable.
Illustration:
Ms. J owned 2000 shares in A plc.
Which cost her £2,000 in 2010, and A plc was being taken over by B plc in 2019.
Ms. J was offered by B. plc 1,500 ordinary shares with a market value of £3,000 and 500 preference
shares with a market value of £1,000.
Ms. J takes up the offer.
Will capital gains tax arise immediately?
If not, when Ms. J sells these new ordinary shares and new preference shares, what cost would be
attributed to each?
Solution:
There will be no immediate charge to CGT as this is a ‘paper for paper’ exchange - there is no
cash involved. The original cost of the A Plc shares will just need to be apportioned between the
new ordinary and preference B Plc shares.
Total market value of new holding: £3,000 + £1,000 = £4,000
 Total cost of original holding: £2,000
Cost attributed to ordinary shares:
Market value of ordinary shares/Total market value of new holding * original cost
 = £3,000/£4,000 * £2,000 = £1,500
Cost attributed to preference shares:
Market value of preference shares/Total market value of new holding * original cost
= £1,000/£4,000 * £2,000 = £500
Ms. J needs to use this “attributed costs” as the acquisition cost when she decides to sell the shares
in B. plc.
(She cannot use the market value of the shares when they were given to her).
Takeovers (share for cash exchange)
 If a takeover is for a share for cash exchange, capital gains tax will arise immediately for the
proportion of cash given compared to the total market value of the new holding.
 The market value of the new holding provided will be used to apportion our initial holding cost to
be used.
Illustration:
Ms. J owned 2000 shares in A plc.
Which cost her £2,000 in 2010, and A plc which being taken over by B plc in 2019.
Ms. J was offered by B. plc 1,500 ordinary shares with a market value of £3,000 and cash of
£1,000.
Ms. J takes up the offer.
Will capital gains tax arise immediately?
Solution:
Yes - CGT will arise immediately because there is a cash element to the consideration which
implies that some of the shares have been disposed of.
Total market value of new holding: £3,000 + £1,000 = £4,000
 Total cost of original holding: £2,000
Cost attributed to ordinary shares:
Market value of ordinary shares/Total market value of new holding * original cost
 = £3,000 / £4,000 * £2,000 = £1,500
Cost attributed to cash given:
Market value of preference shares/Total market value of new holding * original
 = £1,000 / £4,000 * £2,000 = £500

 Ms. J needs to use this £500 as the acquisition cost of the shares disposed of for the cash received.
Capital gains:
Acquisition cost (£500)
Capital gain £500
No capital gain will arise on the share element, as described above.
Exemptions available for gilt-edged securities and qualifying corporate bonds

Exemptions
Disposals of gilt edged securities and qualifying corporate bonds are exempt from capital gains
tax.
Entrepreneur's relief
covers the first £10,000,000 of qualifying chargeable gains that a person makes in their lifetime.
 It operates by charging CGT at 10% for the disposals on which it is claimed regardless of an
individual’s taxable income.
Conditions to get the relief:
1. The asset must have been owned for at least one year prior to the disposal.
2. The election for the relief must be made by the anniversary of the 31/01 following the tax year of
the disposal.
Therefore, if the tax year of disposal is 18/19, then the election must be made by 31/01/21.
(It is not the 31/01 immediately after the tax year, it is the one following the tax year of the
disposal.)
3. It must be a disposal of a qualifying asset.
Qualifying assets include:
1. The disposal of a whole business run by a sole trader or by partners in a partnership.
The assets must have been used in the trade to qualify for the relief.
Also, the entire business must be disposed of, if a single trading asset is disposed of it, it will not
qualify for the relief.
2. Individual business assets of the individual’s or partnership’s trading business that has now
ceased.
Note the disposal of assets must take place within three years of cessation of trade.
The difference here is that the entire business is not being sold, it is being shut down.
Therefore, no trading activity will continue and this is why the assets can be disposed of within 3
years of cessation
3. The disposal of shares in a trading company, where the individual has 5% shareholding and is also
an employee of the company, for 12 months prior to the disposal.
Entrepreneurs’ relief will be available on the entire disposal, regardless of whether the trading
company owns assets for investment or not.
Illustration
On 14 October 2018, a shareholder of Numbers Ltd, an unquoted trading company, sold his entire
shareholding in the company.
He had been the advertising director of Numbers Ltd since the company’s incorporation on 1
December 2017.
He had 40% shares in the company since its 1 December 2017.
Will this disposal qualify for entrepreneurs’ relief?
Solution
This disposal will not qualify for entrepreneurs’ relief because:
 The shares were owned for less than one year.
Illustration:
Sunder disposed of his business to an unconnected person. The business he had the following asset
values:
Goodwill £150,000
Freehold office £200,000
Inventory stock £20,000
Debtors £30,000
Investment property £100,000
Cash £50,000
Which of the assets will qualify for entrepreneur’s relief on disposal of the entire business?
Solution:
The investment property does not qualify for entrepreneur's relief as only assets that are used in
the trade can qualify.
An investment property is just held for investment, not used in the trade.
Asset Market Values Capital gains tax treatment
Goodwill £150,000 Entrepreneurs’ relief available. Taxed at 10%
Freehold office £200,000 Entrepreneurs’ relief available. Taxed at 10%
Inventory stock £20,000 Exempt
Debtors £30,000 Exempt
Cash £50,000 Exempt
Investment property £100,000 Taxed normally at 10% or 20%.
Illustration:
In March 2019, Sunder also disposed of a 20% shareholding in C Ltd.
He had been an employee of C Ltd. since June 2017, when he acquired the shares.
The gain arising on disposal was £200,000.
Will this gain be eligible for entrepreneurs’ relief?
Solution:
Yes, it will be.
This is because he has owned the shares and worked in the company for more than one year.
Illustration
On 30 October 2018, Bhumi sold a business that she had run as a sole trader since 1 February 2011
to an unconnected person. The disposal resulted in the following chargeable gains:
Goodwill 150,000
Freehold office building 400,000
Freehold warehouse 180,000
730,000
The warehouse had never been used by Bhumi for business purposes.
Bhumi has taxable income of £6,000 for the tax year 2018–19.
She has unused capital losses of £30,000 brought forward from the tax year 2017–18.
What is Bhumi's capital gains tax liability for the year?
Solution
Gains qualifying for entrepreneurs’ relief £
Goodwill 150,000
Freehold office building 400,000
550,000
Other gains
Freehold warehouse 180,000
Capital losses brought forward (30,000)
150,000
Annual exempt amount (11,700)
138,300
Capital gains tax: 55,000

550,000 at 10%
138,300 at 20% 27,660
Tax liability 82,660

Explanation
 The capital losses and the annual exemption is set against the gains that do not qualify for
entrepreneur’s relief.
This is because it saves more tax to set the losses and exemptions against gains that are taxed at a
higher rate of 20%.
 £28,500 (34,500 – 6,000) of Bhumi's basic rate tax band is unused, but this remaining band limit
is first set against the gains qualifying for entrepreneurs’ relief of £550,000 even though this has
no effect on the 10% tax rate.
If there is any basic rate band remaining, then it will be used for gains that do not qualify for
entrepreneurs’ relief.
Things to note:
 a) Gains that qualify for entrepreneurs’ relief will take priority in using up the basic rate band limit
first. Therefore, it is likely that other capital gains will normally fall into the higher band and pay
CGT at 20%.
 b) The annual exemption and relief for losses is not automatically given to the gains which qualify
for entrepreneur’s relief.
Therefore 2 separate calculations should be made and gains which do not qualify should be given
the annual exemption and losses carried forward first, in order to save CGT at a higher rate.
Rollover relief
Rollover relief (The replacement of business assets)
If you sell your warehouse and buy a new one, you can decrease the Capital gain by deducting the
new warehouse's purchase costs.
Conditions:
1. The new and old assets must be used for business purpose.
2. You have to replace the asset 12 months prior to the sale or 36 months post the sale.
3. No Rollover relief is available if the amount not reinvested exceeds the chargeable gain. (See
below)
Qualifying assets:
 Land and buildings.

 Fixed plant and machinery.
Step by step approach
1. Step 1 - Get the information

About the OLD asset:
- Disposal proceeds of the OLD asset
- Original purchase costs of the OLD asset
- Any costs relating to the sale or the purchase of the asset (e.g. legal fees)
About the NEW asset:
- Purchase costs of the NEW asset
2. Step 2 - Calculate the Capital gain

Disposal proceeds X
The Original Purchase costs (X)
Legal fees (X)
Chargeable gains X
3. Step 3 - Calculate how much is NOT reinvested

Disposal proceeds - Purchase costs of the NEW asset
How much you get for the OLD asset X

How much you pay for the NEW asset (X)
Amount NOT reinvested X
4. Step 4 - Check whether the amount NOT reinvested (Step 3) exceeds the Chargeable gain
(Step 2)
No Rollover relief is available if the amount NOT reinvested exceeds the chargeable gain.
5. Step 5 - Calculate the new Chargeable gain

Disposal proceed X
The Original Purchase costs (X)
Chargeable gain X
Rollover relief (Balancing figure) (X)
The new Chargeable gain (Step 3) X (proceeds not reinvested)
6. Step 6 - Calculate Base cost

Basically, the Purchase costs of the NEW asset less the Rollover relief
This base cost will be used as the cost of the new office when it is disposed of in the future.
Illustration 1
Mr. P sold a freehold warehouse for £200,000 on 1 January 2019.
The warehouse had been purchased for £150,000.
Mr. P incurred legal fees of £10,000 in connection with the purchase.
On 1 February 2019, he bought another freehold factory for £100,000.
Required:
Calculate the Capital gain.
Step by step answer

- Disposal proceeds of the OLD asset = £200,000
- Original purchase costs of the OLD asset = £150,000
- Any costs relating to the sale or the purchase of the asset (e.g. legal fees) = £10,000
- Purchase costs of the NEW asset = £100,000
2. Step 2 - Calculate the Chargeable gain

Disposal proceed 200,000
The Original Purchase costs (150,000)
Legal fees (10,000)
How much you get for the OLD asset 200,000
How much you pay for the NEW asset (100,000)
Amount NOT reinvested 100,000
(Step 2)
Amount NOT reinvested (Step 3) = £100,000 > Chargeable gain (Step 2) = £40,000
No Rollover relief is available if the amount NOT reinvested exceeds the Chargeable gain.
Therefore, the Chargeable gain will be £40,000.
Illustration 2
Mr. P sold a freehold warehouse for £300,000 on 1 January 2019.
The warehouse had been purchased for £150,000.
On 1 February 2019, he bought a freehold factory for £200,000.
Required:
Calculate the Chargeable gain.
Step by step answer

- Disposal proceeds of the OLD asset = £300,000
- Original purchase costs of the OLD asset = £150,000
- Purchase costs of the NEW asset = £200,000
2. Step 2 - Calculate the Chargeable gain


How much you get for the OLD asset 300,000
How much you pay for the NEW asset (200,000)
Amount NOT reinvested 100,000
(Step 2)
Amount NOT reinvested (Step 3) = £100,000 < Chargeable gain (Step 2) = £150,000
5. Step 5 - Calculate the new Chargeable gain

Rollover relief (balancing figure) 150,000 - 100,000 = (50,000)
The new Chargeable gain (Step 3) 100,000
Illustration 3
Ms. J sold his business office on 30/06/2018 for £350,000.
This office cost him £100,000.
He bought another business office for £250,000 on 31/12/2018.
How much of his capital gain can be rolled over?
What is the base cost of his new business office?
Solution:
Rollover relief (balancing figure) (250,000 - 100,000) (£150,000)
Capital gain now (w1) (proceeds not reinvested) £100,000
W1: Proceeds not reinvested
Old office sale proceeds £350,000
New office costs (£250,000)
Capital gain to be realised now £100,000

Base cost of new business office:
Cost of new office £250,000
Rollover relief (£150,000)
Base cost of new office £100,000
 This base cost will be used as the cost against the disposal of the new office.
Qualifying assets that are not fully used in the business
Assets that are not used in the business entirely will have restrictions for roll over relief on sale.
The amount of gain that cannot be rolled over, and must be realised now is:
% of asset not used in business * Chargeable gain.
Illustration
Ms. J had another property purchased for use in his business.
However, he did not require the entire property for his business and rented out 20% of the
property.
The property cost him £400,000 on 06/06/2016 and he sold it for £800,000 on 06/07/2018.
He bought another property for use in his business on 12/12/2018 for £900,000. He will use 100%
of this property for his business.
 How much of his capital gain can be rolled over?
What is the base cost of his new business office?
Solution:
Rollover relief (400,000 - 80,000) (£320,000)
Capital gain now (W1) £80,000
W1:

All proceeds relating to the business element of the property were reinvested (80%*£800,000)
BUT 20% of the property was not used in business (£80,000 = 20% * £400,000.
Therefore, Rollover relief is restricted to £320,000 (£400,000 - £80,000)
Base cost of new business office:
Cost of office £900,000
Gain to be rolled over (£320,000)
Base cost of new office £580,000
Holdover relief
If the new asset purchased is a depreciating asset (an asset with an expected life of 60 years or less
at the time of acquisition) for example, leasehold land and buildings or fixed plant and machinery
the gain arising on the disposal of the old asset is not rolled over and cannot be deducted from the
cost of the new asset.
Instead, the gain is to be temporarily frozen or “held over” until it becomes chargeable on
the earliest of the 3 following dates:
1. Date on which the new asset is disposed of.

2. Date on which the new asset ceases to be used in the trade.
3. 10th anniversary of acquisition of the new asset.
Illustration:
Mr. C purchased a freehold factory in 2009 for £100,000.
In June 2016 he sold it for £300,000 and purchased a leasehold factory with a 55-year lease for
£350,000 in December 2018.
Mr. C then sold the leasehold factory in October 2019 for £400,000.
What capital gain will be chargeable in the tax year 17/18 and in 18/19?
Solution:
17/18 capital gain:

Gain held over (W1) (£200,000)
Chargeable gain Nil
18/19 Capital gain:


+
Capital gain held over £200,000
Total capital gain £250,000
W1:
Disposal proceeds received £300,000
Disposal proceeds reinvested (£350,000)
Capital gain now Nil
Therefore, the entire gain (£200,000) will be held over as all of the disposal proceeds are
reinvested.
Note:
The £200,000 capital gain held over becomes chargeable in the tax year 2018/19 because the asset
against which it was held over has been sold.
Also note that the gain held over was not deducted from the cost of the new asset, it was held over
in its own right.
No holdover relief for assets that do not qualify.
Holdover relief is available for qualifying business assets (chargeable business assets).
Qualifying business assets are basically assets that are used in the business, not assets held for
investment (chargeable assets).
Therefore, if a gift is made of unquoted shares (a qualifying business asset), holdover relief is
available for the capital gain, however it will not be available for the proportion of assets held by
the business for investment (non-business) purposes.
Illustration
On 5 October 2018, Tina made a gift of her entire holding of 20,000 £1 ordinary shares in Banana
Ltd, a personal company, to her daughter.
The market value of the shares on that date was £200,000.
The shares had been purchased on 1 January 2016 for £140,000.
On 5 October 2018, the market value of Banana Ltd.’s chargeable assets were £150,000, of which
£120,000 was in respect of chargeable business assets.
Tina and her daughter have elected to hold over the gain as a gift of a business asset.
What chargeable gain will arise on this gift?
Solution
Tina’s chargeable gain for 2018–19 is:
Deemed proceeds £200,000

Cost (£140,000)
£60,000
Holdover relief (£48,000) W1
£12,000
WI
Holdover relief is restricted to £48,000 (60,000 x 120,000/150,000), the proportion of chargeable
assets to chargeable business assets.
Trusts
Capital gains tax and trusts
CGT Implications
Any type of gift into a trust will be treated as a sale for market value.
But remember, that any gift into and out of a trust is eligible for gift holdover relief, therefore no
capital gains tax will arise as the capital gain will be held over.
 Recap of gift holdover relief


Jake makes a gift of shares into a trust when they have a market value of £50,000.
They cost £10,000.
Therefore, the capital gain:
Sale proceeds £50,000

Cost (£10,000)
As gift holdover relief applies here, the capital gain will be held over, what will the base cost
of the shares be for the trustee?
Market value £50,000

Less: gain deferred (£40,000)
Base cost £10,000
Therefore, if the trustee decides to sell the shares, they will use a cost of £10,000 when calculating
the capital gain.
Remember that this capital gain will only arise if the shares are sold while they are in the trust,
because gift holdover relief will apply for assets going into or coming out of the trust.
Selling assets while they are in the trust
The trustees can dispose of chargeable assets outside of the trust, however they will only:
1. Get 1/2 of the Annual Exemption (£11,850/2 = £5,925)

2. Be taxed at the higher rate of CGT (20%)
Illustration
For the example used above, the trustees sold the shares for £60,000.
What capital gain will arise?
Solution

Less A/E (£5,925)
CGT £44,075 *20% = £8,815
Illustration
For the example above, the shares passed to the beneficiary when their market value was £75,000.
What will the base cost of the shares be for the beneficiary?
Solution
A gift passing out of a trust will be a sale at market value, however, it is eligible for gift holdover
relief.

Base cost
Less capital gain deferred (£65,000)
Base cost £10,000
This cost will be used when the beneficiary wants to sell the shares.
Recap
1) Gifting into an out of trusts are eligible for gifts holdover relief
2) An asset sold while it is in a trust will give rise to a chargeable gain, the trustees will get 1/2 of
the annual exemption and pay CGT at 20%.
Syllabus A2. Chargeable gainsA2d. Principles of computing gains and losses
Connected Persons
CGT Implications
Who are connected persons for CGT?
Connected persons include:
 Relatives (brothers, sisters, parents, grandparents, children)

 Spouse's Relatives
 Business Associates (partner, partner's spouse, partner's relatives)
Disposals to connected persons
Disposals to connected persons will be assumed to be at market value, regardless of the

consideration that the connected person has paid.
This excludes disposals to spouse/civil partner, as these are exempt for CGT.
 If a capital loss arises on the disposal to a connected person, this capital loss can only be relieved
against a capital gain arising from a disposal to the same connected person.
Illustration
Jane is planning on ceasing her business and passing the assets to her daughter.
Assets:
Trading premises
Cost £100,000
M.V. £200,000
Inventory
Cost £10,000
M.V. £11,000
If Jane gifts the business to her daughter, what capital gain will arise?
Solution
Sale proceeds (M.V.) £200,000
Less cost (£100,000)
Inventory is an exempt asset for capital gains tax.
Note, the daughter is a connected person - therefore the sale is deemed to take place at market
value, even though no consideration has been given.
Successions to trade between connected persons - capital allowances
If the business is being transferred:
 As a going concern
 To a connected person
THEN. An election is available to transfer the assets at their TWDV (instead of market value) and
therefore avoid any balancing charges or balancing allowances.
Illustration
Julie has been trading as a sole trader since 2008 and has always prepared her accounts to 31
December.
She wants to retire on 31/12/2018 and either sell her business to an unconnected person or give
the business to her daughter so that she can continue to run the business.
The values of her plant and machinery at 01/01/2019 are:
Main pool items:
TWDV £24,000
MV £37,000
What are the tax consequences if she sells the business to an unconnected person?
What are the tax consequences if she gives the business to her daughter and she continues to run
it?
Solution
 Selling to an unconnected person:
Sale proceeds (MV) £37,000

Less TWDV (£24,000)
Balancing charge £13,000 (I.T. will be payable on this)
 Giving business to her daughter (connected person):
The assets will be assumed to be transferred at TWDV, therefore no balancing charge will arise
and no income tax will be payable.
Date of disposal
A chargeable disposal occurs on the date of the contract, whether verbal or written. This may not
be the same as the date the asset is transferred to the new owner.
It is important to consider the timing of disposals - for example, have you already used your annual
exemption for the year? Are you a higher rate tax payer this year but expect to be a basic rate
taxpayer next year? In these situations, it may be advisable to delay the disposal if practical to do
so. Does the taxpayer qualify for any reliefs? E.g. entrepreneurs’ relief? If they delay the sale
would they then meet the conditions?
Capital losses in tax year of death
Capital losses can be offset against current or future capital gains without time limit.
However, capital losses realised in the tax year of death, occurs where an individual makes a
disposal of a chargeable asset(s) in the period from 6 April up to the date of death and a net capital
loss is realised.
Net capital losses incurred in the year of death cannot be carried forward in the usual manner, in
these circumstances only; the capital loss may instead be carried back and set off against the
chargeable gains of the previous three years on a LIFO basis.
This may generate a refund of CGT previously paid. The amount carried back to a particular tax
year is restricted to preserve the annual exempt amount.
Illustration
Nemo died on 1 November 2018. Nemo had annual taxable income of around £20,000 since
2015/16.
Before his death he made the following sales of quoted shares with the following results:
1. Chargeable gains of £8,000 and capital losses of £17,100 in 2018/19.

2. Chargeable gains of approximately £14,000 each tax year 2015/16 to 2017/2018.
How much of the capital losses can be relieved and when?
Solution
Date of Nemo death 1 November 2018; Tax year of death = 2018/19
Net capital loss realised in tax year of death is (£9,100) (£17,100-£8,000)
The net capital loss realised in the tax year of death can be carried back for three years on a LIFO
basis.
The amount carried back to a particular tax year is restricted so that the annual exempt amount is
preserved in all tax years. (assume 2018/19 tax rates apply throughout)
17/18 Capital gain £14,000

Less A/E (£11,700)
Less A/E (£11,700)

Less A/E (£11,700)


£6,900 loss used therefore (£9,100 - £6,900) £2.200 Capital loss unrelieved.
Small part disposals of land
Exception to the part disposal rule
Normally, if you are selling a part of an asset, you will use the formula (a/(a+b) *total cost) to find
the allowable cost for your part disposal and then calculate the capital gain.
There is one exception to this part disposal rule and it applies if it is a small part disposal of land.
The main conditions to be met are:
1. The land cannot be a wasting asset

2. Sale proceeds received must not exceed 20% of the market value of the land and the amount of the
disposal must not exceed £20,000
3. Total amount of all disposals of land in the year does not exceed £20,000
CGT Implications of a small part disposal
The sale proceeds are deducted from the original cost of the land, and then that reduced cost will
be used to calculate the capital gain when the remainder of the land is sold.
Illustration
Jake has a 100-acre plot of land valued at £1,000,000.
The original cost of the land was £500,000.
He sold 1 acre for £10,000. This was his only disposal of land in the year.
Solution
The following conditions are satisfied:
1) The land is not a wasting asset
2) The sale proceeds are less than 20% of the market value of the holding and less than £20,000
3) The proceeds from all sales of land in the year are less than £20,000
Therefore, the sale proceeds will be deducted from the original cost of the land.
£500,000
(£10,000)
£490,000 - is the cost that will be used to calculate the capital gain when the remaining land is
sold.
Disposal of wasting assets
What is a wasting asset?
A wasting asset is:
An asset that has a life of 50 years or less. For example,
1. Chattels (These are tangible, movable assets - and you know how to calculate capital gains for
these already)
2. Intangible wasting assets, for example, copyrights and leases.
How to calculate the capital gain arising on an intangible wasting asset?
Sale proceeds
Less (Allowable cost) (W1)
Capital gain
Allowable cost (W1)

(Remaining years after the sale / predictable life of the asset) * (total cost - scrap value)
(for leases you need to use the lease percentage tables rather than the years)
Illustration
On 01/12/2016 Jake bought a copyright for £25,000.
It had a predictable life of 30 years and scrap value of £1,000.
It was sold on 01/12/18 for £38,000.

Solution
Allowable cost;
Jake owned it for 2 years.

Therefore, the remaining number of years = 30 - 2 = 28 years
(28 years / 30 years) * (£25,000 - £1,000) = £22,400

Disposal of short leases

If the intangible asset is a lease, the lease percentage tables will need to be used - these will be
provided in the exam.
Illustration
Jack bought a short lease in March 1997 for £50,000 and he sold it in March 2019 for £30,000
when it had 10 years left to run.
The chargeable gain in disposal will be:

Proceeds £30,000
Less: Cost £50,000 x (46.695 (10yrs)/89.354 (32 years) £(26,129)
Gain £ 3,871
Negligible Value Claims
Assets falling in value
If an asset is acquired at market value and then later on the market value of the asset is lower than
when acquired, it is said that the asset has fallen in value.
If the asset which has fallen in value is disposed of then a capital loss would be realised.
If it is evident that an asset has fallen in value (e.g. as a result of a company going into liquidation)
then the taxpayer can claim relief for a fall in value of the asset and will be treated as if the asset
has been disposed of for market value.
A capital loss is then treated as being realised even although the taxpayer has not actually disposed
of the asset. This loss can then be offset against total income of the current or previous year - it is
not restricted to being offset against capital gains. You cannot restrict the loss to preserve your
personal allowance.
Illustration
Bob has 5,000 shares in Willis Ltd, an unquoted company based in the UK.
He subscribed for these shares in August 2004, paying £3 per share. On 1 December 2018, Bob
received a letter informing him that the company had gone into liquidation.
As a result, his shares were almost worthless.
The liquidators dealing with the company estimated that on the liquidation of the company, he
would receive no more than 10p per share for his shareholding.
Bob has taxable income of £54,000.
If Bob makes a negligible value claim, what capital loss will he realise and how can he obtain loss
relief for this?
Solution
Bob can make a negligible value claim as at 1 December 2018.
This will give rise to a capital loss of £14,500 (£500 – £15,000) which will be deemed to arise in
the year 2018/19.
By doing so, his taxable income for that year will be reduced to £39,500 (54,000 – 14,500).
As the capital loss is realised on the disposal of unquoted shares, this allows the loss to be relieved
against the taxpayer total income for the year in which the loss arose, and/or against the total
income of the previous year.
This will give Bob income tax relief at 40% saving income tax of £5,800 (40% x 14,500).
The alternative option is the carry the loss forward against capital gains of future years, which will
give him maximum relief at 20%.
Loss on sale of shares of unquoted company
Capital losses
Relief
Capital losses are normally carried forward and used to reduce future chargeable gains.
However, there is another use of the capital losses.
Relief against total income is available if – the loss arises on the disposal of unquoted trading
company shares.
With this claim, the capital loss can be set off against total income of the current year and previous
year, this allows the loss to attract tax relief at the higher rates of 45%.
Illustration
Drey subscribed for 5,000 shares in W Ltd., an unquoted trading company in August 2009 for £3
per share.
On 1 December 2018, the company made major losses and that the shares were now valued at 10p
per share.
He has other income of £45,000.
If he sells the shares at the current market value, how can he claim relief for his capital loss?
Solution
Capital loss
S.P. 5,000 * 0.1 = £500

Cost 5,000 * £3 = (£15,000)
Capital loss £14,500
Claim against total income of the current year
Total income £45,000

Less
Total income £30,500
Exemptions and Reliefs for C.G.T.
EIS Reinvestment Relief
Investing in EIS shares
If an individual dispose of any chargeable asset and reinvests in unquoted shares in a qualifying
Enterprise Investment Scheme it is possible to defer some (or all) of the gain arising on the asset
by claiming EIS Reinvestment Relief.
In order for EIS Reinvestment Relief to be claimed the individual must be resident in the UK when
the gain arises and the reinvestment is made.
The reinvestment must also occur within a qualifying time period, between 12 months before and
up to 36 months after the gain arises.
The reinvestment must be wholly for cash, in new shares in an unquoted trading company, trading
wholly or mainly in the UK.
The amount of gain to defer by way of EIS Reinvestment Relief can be chosen by the taxpayer in
order to utilise losses and the annual exemption, but it cannot exceed the amount invested in
unquoted shares.
The EIS Reinvestment Relief is applied to the gain with any balance not deferred being reduced
by the annual exempt amount.
Any gain deferred is held over until the EIS shares are disposed of when the deferred gain will
again crystallise.
Calculating EIS Reinvestment Relief
Sale Proceeds £x
Less: Cost (£x)
Capital Gain
Less:
EIS Reinvestment Relief (£x)
Chargeable gain
Less:
A/E (£x)
Taxable gain
Note, you should work backwards and make sure that your capital gain uses the capital losses and
annual exempt amount entirely, and then use the remaining capital gain against the EIS relief.
Sale of EIS Shares
Capital gains implications of sale of EIS shares
First gain
The gain that is held over by the EIS Reinvestment Relief will become chargeable once the EIS
shares are sold.
EIS Gain
If investor disposes of the EIS shares after three years = no CGT.
If he sells them within three years = CGT.
If he sells them at a loss within or after three years he gets relief for his capital loss.
The capital loss is realised on the disposal of unquoted shares and can be relieved against total
income of the current and previous tax years.
Note - we have already seen this capital loss relief available on the sale of unquoted shares.
Illustration
Grace sold a vase in November 2018 for £275,000 realising a capital gain of £150,000.
Grace subscribes for qualifying EIS shares in W Ltd, a trading company, the following month at a
cost of £268,000.
She has no other capital transactions in 2018/19 but Grace has £9,300 of capital losses brought
forward at 6 April 2018.
Three years later in 2021/22 Grace sells the EIS shares making a profit of £175,000.
Assume Grace is a higher rate taxpayer.
What are the capital gains tax implications on the purchase and on the sale of the EIS shares?
Solution
Capital gain on purchase of EIS shares

Grace can claim relief for any amount up to £150,000, because she has invested more than this in
EIS shares.
However, to claim this full amount will mean that she does not make full use of her annual exempt
amount for 2018/19.
The EIS relief claim should therefore be £129,400 as follows:

Less:
EIS Reinvestment Relief (£129,000)
£21,000
Less:
£11,700
Less:
A/E (£11,700)
Capital gain £Nil
 Capital gain on sale of EIS Shares

When Grace disposes of the EIS shares in 2021/22, the deferred gain of £129,000 on the vase will
become chargeable to CGT, but can be reduced by the annual exempt amount of 2021/22.
The CGT will be £23,460 (129,000 – 11,700) x 20%, due on 31 January 2023.
The gain on the EIS shares will be exempt from CGT as they are held for at least three years.
SEIS Reinvestment Relief
Investing in SEIS shares
If an individual dispose of any chargeable asset and reinvests in unquoted shares in a qualifying
Seed Enterprise Investment company it is possible to exempt some (or all) of the gain arising on
the asset by claiming SEIS Reinvestment Relief.
 Conditions
To qualify for SEIS reinvestment relief, the individual must be resident in the UK when the gain
arises and the reinvestment is made.
The reinvestment must be made in the same tax year as the disposal against which relief is
claimed.
Any gain exempted under SEIS reinvestment relief will become chargeable if there is a claw back
of SEIS income tax relief. This includes the following events
1) The investor disposes of the shares within 3 years.

2) The investor becomes non-resident within 3 years of the issue of the shares.
3) The company in which the shares were purchased ceases to be a qualifying company.
Maximum SEIS Relief
Lower of:
(1) 50% x the capital gain

(2) 50% x the cost of the shares purchased in the SEIS (upper limit on the cost of the shares is
£100,000)
(3) Some smaller amount
Illustration
Shawna sold a holiday cottage in August 2018 for £75,000 realising a capital gain of £35,000.
Shawna subscribes for qualifying SEIS shares in Victoria Ltd (a trading company), in March 2019
costing £60,000.
She has no other capital transactions in 2018/19 but Shawna has £8,800 of capital losses brought
forward at 6 April 2018.
In 2019/20 Shawna sells the SEIS shares for £70,000.
Assume Shawna is a higher rate taxpayer.
What amount of SEIS relief is available to Shawna?
 Solution
Shawna should claim SEIS reinvestment relief on £14,900 of her capital gain as this ensures that
she gets early relief for her capital loss brought forward and ensures her annual exempt amount is
preserved.

Less:
SEIS Relief (£14,500)
Less:
£11,700
Less:
A/E (£11,700)
Taxable gain £Nil
 Disposal of EIS Shares
Shawna is disposing of all her SEIS shares within 3 years and therefore her income tax relief is
withdrawn and the capital gain of £14,500 on the cottage is now chargeable in 2019/20.
Shawna must also pay CGT on the chargeable gain realised on the disposal of the shares.
The SEIS shares are only exempt from CGT on capital gains if the shares are kept for at least 3
years.
Associated disposals for Entrepreneurs’ Relief
Associated Disposals
Normally, to qualify for E.R. an entire interest in a business or partnership must be disposed of.
Only disposing of one asset cannot qualify for E.R.
However, there is an exception if the asset qualified as an Associated Disposal.

If an individual owns a building personally and it is being used in their sole trader/partnership for
business purposes, and that individual is disposing of his entire interest in the business as well as
the building, the building will qualify as an associated disposal, and both disposals will attract E.R.
Entrepreneurs’ relief is available on the disposal of the building as an associated disposal provided
the following conditions are met:
1. Individual disposes of their interest in a partnership or shares in a personal company.
2. The intention is to no longer participate in the business using the premises.
3. The premises and the shares have been owned for at least one year
Illustration
Jake disposed of his entire interest in a partnership which he owned for 2 years and realised a
capital gain of £100,000.
He also disposed of the building premises which was used by the partnership to conduct its trade,
he owned it for 2 years and realised a capital gain of £50,000.
What amount of capital gains tax will he pay?

Solution
Both of these disposals qualify for E.R. as the following conditions have been met:
1) Individual disposes of their interest in a partnership or shares in a personal company.

2) The intention is to no longer participate in the business using the premises.
3) The premises and the shares have been owned for at least one year.
Therefore,

Total £150,000
Less A/E (£11,700)
CGT £138,300 * 10% = £13,830
Transferring a business to a company
Incorporation Relief
Where an individual transfers their unincorporated business (sole trader business/partnership) to a

company, the individual assets of the business are deemed to have been disposed of at market
value to the company.
Incorporation relief is available to allow the gains arising on incorporation to be deferred until the
shares in the company are disposed of.
Conditions for the relief
All of the following conditions must be satisfied for the relief to be obtained.
When all of these conditions are met, the relief is automatic.
1. The unincorporated business is transferred as a going concern.

2. All of the assets of the business (other than cash) are transferred to a company.
3. The consideration received for the transfer of the business must be received wholly or partly in the
form of shares in the company.
How to calculate incorporation relief?
If the consideration is fully in shares, then the whole capital gain is deferred by deducting it from
the cost of shares, producing a lower base cost, which will be used to calculate the capital gain
when the shares are disposed of.
If the consideration is only partly in shares, then the following formula is used to calculate the
amount of gain deferred:
Deferred gain = Total capital gain * (M.V. of the shares received/M. V of the total consideration)
This deferred gain is deducted from the cost of the shares, to produce a lower base cost, which will
be used to calculate the capital gain when the shares are disposed of.
Illustration
Jake intends to sell his business to Jake Ltd.
His business is valued at £540,000 and he will receive shares in Jake Ltd in respect of the market
value.
This will result in a chargeable gain of £160,000 in respect of the business premises and £30,000
on goodwill.
He will sell the shares for £600,000 in 6 months.
He is a higher rate tax payer and has uses his annual exempt amount in full.
Should he allow the automatic incorporation relief to apply or should he specially elect for it not
to apply?
Solution
With incorporation relief

He has received the consideration fully in shares with a market value of £540,000 - therefore the
entire gain can be deferred.

Less C. gain (£160,000 + £30,000)
Base cost of shares £350,000
Sale of shares
Less base cost of shares (£350,000)
CGT (£250,000 * 20%) = £50,000 (no ER relief as he has not held the shares for 12 months)
Specially elect for Incorporation relief not to apply

He is disposing of his entire business which he has owned for more than 1 year, therefore
entrepreneurs' relief will apply.
Remember that entrepreneurs' relief will not apply for the disposal of goodwill, as this is a close
company.
CGT for premises £160,000 * 10% = £16,000

CGT for goodwill £30,000 * 20% = £6,000
Total CGT £22,000
Conclusion
He should elect for incorporation relief not to apply as this results in a lower payment of CGT.
Capital gains tax planning

How to plan to minimise the capital gains tax liability?
Gifting or selling assets has 2 results for tax - inheritance tax and capital gains tax, therefore the
choice to gift must be made carefully, in order to avoid both taxes!
Example
An owns 100% of the shares in A Ltd an unquoted trading company.
A Ltd has 100,000 £1 ordinary shares in issue all of which were subscribed for at par by A in 2004,
from which date A has been the managing director of the company.
Share valuations have now been agreed as follows:

20% £10 per share
40% £15 per share
80% £20 per share
100% £25 per share
What are the tax implications of gifting 20,000 of his shares to his daughter?
Inheritance tax implications

For IHT purposes the gift would be a potentially exempt transfer (PET) and have no immediate
tax implications.
If A died within 7 years of the transfer the PET would become chargeable at either nil rate and /
or 40% rate depending upon what other transfers had been made by A prior to this gift.
If A survived for at least 3 years then any IHT computed would be reduced by taper relief.
Any such IHT payable would be payable by the donee, V and should be paid within 6 months of
the end of the month in which the death occurred.
The value of the PET would be the fall in value of the estate of A.
Before the gift 100,000 shares @ £25ps £2,500,000
After the gift 80,000 shares @ £20ps £(2,000,000)
Transfer of value £500,000
Capital gains tax implications

The shares are £1 ordinary shares which were subscribed for at par, so the cost is £1 per share.
The gain that arises would be included in the net gains of the tax year from which the annual
exempt amount would be deducted to derive the taxable gain.
The question then arises as to what tax rate would apply?
Shares in unquoted trading companies are a qualifying business asset for purposes of
entrepreneurs’ relief and as A owns the minimum required 5% shareholding and is an employee
of the company, a claim for entrepreneurs’ relief is available and will result in a 10% tax rate being
applied to the taxable amount of the gain.
There is however another RELIEF that is available where such an asset is gifted!
Yes, gift relief is available to be claimed, jointly by A and V, as shares in an unquoted trading
company are qualifying business assets for gift relief purposes.
This would allow the entire gain to be deferred, such that the donor, A, would not now be
chargeable and the daughter, V would be deemed to acquire the shares at the original cost to the
father of £20,000 instead of a cost of £200,000.
Without gift relief the shares would be deemed acquired by V at their open market value of
£200,000. With gift relief, that cost is reduced by the amount of the deferred gain (£180,000) and
thus a cost to V of £20,000 would then apply.
NOTICE how the value for IHT and CGT are different. For CGT you value the asset that is given
away, e.g. a 20% shareholding. For IHT you look at how much the gift reduces the donor’s estate
by. In this case it reduced it from a 100% holding of shares to an 80% holding of shares.
Conclusion
For those taxpayers with both a capacity and a willingness to make gifts in lifetime and not just on
death, the further guidance that they may request from you is whether to make such gifts in lifetime
or wait and gift the assets upon their death.
It is again a consideration of the capital taxes that is the key issue.
If assets are gifted on death there will be no CGT and the beneficiaries will acquire those assets at
their then value, thus wiping out any accrued gains on those assets.
The assets, however at their then open market value (probate value) will then be included within
the chargeable estate at death, which being in excess of the available nil rate band will be charged
to IHT at a rate of 40%.
Therefore, to avoid IHT it would be better to gift in lifetime as when a PET is made there is no
immediate charge to IHT and the PET will only become chargeable if the donor dies within 7
years.
The further advantages for IHT of gifting in lifetime are that if the taxpayer at least survives for 3
years then taper relief will reduce any IHT payable, plus the value of the PET is “frozen” at the
date of the transfer meaning that an appreciating asset will have a lower value charged to IHT than
if it had been kept until death.
Lifetime gifts will also benefit from annual exemptions.
The problem of course with gifting in lifetime as we have already seen is CGT, as a gift in lifetime
is a chargeable disposal and a gain must be computed using the open market value of the asset.
This, however will only happen if the asset is a chargeable asset so that exempt assets such as cash,
chattels and cars could be gifted without any CGT arising.
If assets are chargeable assets then they may still be gifted if the gains arising each tax year do not
exceed the AEA, for example if the taxpayer gifts an asset valued at £50,000 and it cost £40,000,
there will be a chargeable gain of £10,000 which will be covered by the AEA of the taxpayer.
This will have removed £50,000 of value from the taxpayer’s estate which at death may have been
charged to 40% IHT.
If chargeable assets will give rise to more substantial gains then as we have seen above, if the asset
is a qualifying asset for gift relief then the gain may be deferred by a claim for gift relief.
If the asset was the principal private residence of the taxpayer, then PPR relief would be available
to exempt any gain arising but there could be a potential IHT charge if the Gifts with Reservation
of Benefits rules apply (see later Topic).
You should keep all of these things in mind for written sections in the exam!
Capital gains in the exam
Tips for the exam
 Make sure you identify any exempt disposals so that you do not waste time performing
unnecessary calculations.
 An unincorporated business is not treated as a separate entity for CGT purposes. Therefore, when
a business is disposed of you should deal with each asset separately.
 Do not forget to deduct the annual exempt amount if it is available.
 When dealing with shares it is important to look carefully at the dates to see if same day or 30-day
matching is applicable.
 It is important to establish how much of a person’s basic rate tax band is available. Remember that
a taxable income figure is after the personal allowance has been deducted.

11-Capital Gains Tax - Individuals

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Chargeable Gains for Individuals

The scope of capital gains tax

You should pay CGT on:

1. The sale or gift of the whole or part of an asset.

For example, out of a 10-acre plot of freehold land, 5 acres is sold.

For example, a painting costing £5,000 was destroyed in a fire.

For example, a painting costing £5,000 was destroyed completely in a fire.

Capital gains tax should be paid on (£10,000-£5,000) = £5,000.

All assets are chargeable unless specifically exempted.

This list is provided in Topic: Assets which are exempt.

Note the differences between companies and individuals

Assets which are exempt

 Motor cars suitable for private use

The basic principles of computing gains and losses

The capital gain is calculated as follows:

Less: Incidental cost of disposal (X)

Less: Allowable cost (X)

Capital Gain (Chargeable gain) / (Capital loss) X / (X)

Allowable costs include:

 Original cost of acquisition

 Capital expenditure incurred in enhancing the asset

Ms. M 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.

Ms. M sold the land on 31 December 2018 for £40,000.

Calculate Ms. M's gain on sale.

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

On it’s 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?

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.

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

Capital gain calculation:

Incidental cost to disposal (legal cost) (£1,000)

Acquisition cost (£5,000)

Capital gain (Chargeable gain) £4,000

Capital gains tax are calculated as follows:

Capital Gains (Chargeable gain) X

Less: Annual exempt amount (11,700)

CGT × 10%, 20% or 18%, 28% X

It is similar to the personal allowance that individuals get.

The amount is £11,700 for 2018/19.

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

The rates of capital gains tax are:

For a residential property only

They are discussed in Topic: Entrepreneur's relief.

Taxable gain 40,000

Basic rate band remaining (£34,500 - £20,000) = £14,500

Capital gains tax (£14,500 * 10%) = £1,450

(£40,000 - £14,500) * 20% = £5,100

Total capital gains tax payable = 1,450 + 5,100 = £6,550

Chargeable gain 40,000

Annual exempt amount (11,700)

Taxable gain 28,300

Basic rate band remaining (£34,500 - £20,000) = £14,500

Capital gains tax (£14,500 * 18%) = £2,610

(£28,300 - £14,500) * 28% = £3,864

Total capital gains tax payable = 2,610 + 3,864 = £6,474

Trading income £35,600

Personal allowance (£11,850)

Taxable income £23,750

Basic rate band left £34,500 - £23,750 = £10,750