COURSE: ACCA – TAXATION (TX)

Lecture Topic: Capital Gains Tax (CGT) - Basics

1. Definition

When an individual disposes of an asset and a capital gain arises, that individual is liable to pay capital gains tax in respect
of that gain.

Chargeable gains (capital gains) arise on chargeable disposals of chargeable assets by chargeable persons.

1.1 Chargeable disposals

An asset may be regarded as disposed of when its ownership changes. Therefore, for individuals, the term chargeable
disposal covers the following:

o the sale of the whole or part of an asset

o the gift of an asset or part of an asset
o the loss or destruction of an asset

Note though that the transfer of assets on death is an exempt disposal.

1.2 Chargeable assets

All forms of property are chargeable assets unless they are specifically designated as exempt. The following are exempt
assets:

o Motor vehicles suitable for private use

o National Savings and Investments certificates and premium bonds
o Foreign currency for private use
o Decorations for bravery where awarded, not purchased
o Damages for personal or professional injury
o Gilt-edged securities (treasury stock)
o Qualifying corporate bonds (QCBs)
o Certain chattels
o Debts (except debts on a security)
o Investments held in individual savings accounts

If an asset is an exempt asset any gain is not taxable and any loss is not allowable.

1.3 Chargeable persons

The following are chargeable persons:

o Individuals
o Companies

Note: Companies do not pay capital gains tax.

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2. Computing the gain or loss
A separate gain (or loss) is calculated for each asset disposed of as follows.
£
Disposal consideration 100,000
Less: Incidental costs of disposal (400)
Net proceeds 99,600
Less: Allowable costs (29,500)
Chargeable gain 70,100

2.1 Disposal consideration

Usually the disposal consideration used in the computation is the amount of sales proceeds received for the asset.

However, market value is substituted for actual proceeds where:

o The disposal is not an arm’s length transaction

o The disposal is made for a consideration which cannot be valued
o The disposal is by way of a gift

2.2 Incidental costs of disposal

These are any ancillary costs incurred when disposing of the asset, e.g.

o Costs of professional services (e.g. valuers, brokers, lawyers, auctioneers, etc.)

o Advertising costs to find a buyer
o Conveyance or transfer costs.

2.3 Allowable costs

Allowable costs include the following items:

o The original acquisition cost of the asset.

o Incidental acquisition costs (which are ancillary costs incurred when buying the asset).
o Capital expenditure incurred on enhancing the asset.

Enhancement expenditure is capital expenditure which enhances the value of the asset and is reflected in the state or nature
of the asset at the time of disposal. This includes expenditure incurred in establishing, preserving or defending title to the
asset.

3. Annual Exemption
o Every individual is entitled to an annual exemption for each tax year. For 2022-23 it is £12,300.

o The annual exemption is deducted from the total chargeable gains figure (for all assets disposed of) to get the
taxable gain.

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 o The annual exemption is deducted after the deduction of other reliefs.

o If the annual exemption is not utilized in any particular tax year, then it is lost.
4. Computation of CGT

o The rates of capital gains tax are linked to the level of a person’s taxable income and the basic rate tax band.

An individual’s taxable gain is applied to any unused basic rate tax band remaining (after his taxable income has been
applied to said rate band) in order to determine the rate of CGT.

o Taxable gains are taxed at the rate of 10% where they fall within the basic rate tax band of £37,700, and at the rate of
20% where they exceed this threshold.

o However, gains arising from the disposal of residential property are taxed at 18% where they fall within the basic
rate tax band, and at the rate of 28% where they exceed the basic rate limit.

o Where a person has both residential property gains and other gains, then the annual exemption (as well as any capital
losses) should initially be deducted from the residential property gains. This approach will save tax at either 18% or
28%, compared to either 10% or 20% if used against the other gains.

o The basic rate band is extended by gross personal pension contributions and gross gift aid donations.

5. Capital losses
o Capital losses arising in a tax year are deducted from chargeable gains arising in the same tax year. The set off must be
to the maximum possible extent.

Any loss which cannot be set off against gains of the same tax year is carried forward to set against future gains.

o The annual exemption is deducted after the set off of current year capital losses, but before setting off any brought
forward capital losses.

6. Part Disposals
The disposal of part of a chargeable asset is regarded as a chargeable disposal for capital gains tax purposes.

The problem with part disposals is identifying how much of the allowable costs of the asset to deduct in the capital gain
computation. This is done as follows:

Allowable Cost(s) of the part disposed of = Allowable Cost(s) × A

Of Entire Asset A + B

Where

A = Disposal proceeds (value) of the part disposed of

B =Market value of the remainder at the time of the disposal.

Care is needed when dealing with the other items of allowable costs (other than acquisition cost) on a part disposal:

- Where the expenditure applies equally to the whole asset, it is apportioned using the part disposal fraction.

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 - Where the expenditure applies wholly to the part disposed of, all of it is deducted in the part disposal computation.
- Where the expenditure applies wholly to the part retained, none of it is deducted in the part disposal computation.
7. Transfers between spouses
o Spouses and civil partners are taxed as separate individuals. Each has his own annual exemption, and losses of one
spouse or civil partner cannot be set against gains of the other spouse or civil partner.

There are two (2) main rules for transfers between spouses:

1. A disposal from one spouse or civil partner to the other spouse or civil partner, living together, give rise to no gain
no loss, whatever actual price (if any) was charged by the transferor.

2. In addition, the recipient spouse takes over the allowable cost of the transferor spouse (i.e., the spouse who
acquires the asset is treated as though they bought the asset for the same cost as the spouse who originally owned
the asset) for future disposal purposes.

8. The damage, loss or destruction of an asset

o The loss or total destruction of an asset is a chargeable disposal for capital gains purposes.

o In computing the gain or loss, the disposal consideration will be any compensation or insurance monies received. If
no compensation is received, the disposal consideration will be nil.

o The disposal is treated as taking place on the day the compensation or insurance money is received.

8.1 Replacing an asset

If the insurance monies are used to purchase a replacement asset within 12 months, then any gain on the disposal of the
asset that was lost or destroyed can be deferred (similar to rollover relief):

o If all the insurance proceeds are reinvested in the replacement asset, the entire gain will qualify for rollover, which
means that none of the gain will be chargeable.

o If only part of the insurance proceeds is reinvested in the replacement asset, the amount not reinvested will not qualify
for rollover and will therefore remain chargeable to tax.

8.2 Damage to an asset

o If an asset is damaged, then the receipt of any compensation or insurance monies received will normally be treated as a
part disposal.

o If all the proceeds are applied in restoring the asset the taxpayer can elect to disregard the part disposal. The proceeds
will instead be deducted from the cost of the asset to determine the base cost of the asset.

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Questions

1. Andy sold a factory on 15 February 2023 for £320,000. The factory was purchased on 24 January 2013 for £164,000
and was extended at a cost of £37,000 during March 2014. During May 2015, the roof of the factory was replaced at a
cost of £24,000 following a fire.

Andy incurred legal fees of £3,600 in connection with the purchase of the factory, and legal fees of £5,800 in
connection with the disposal.

Calculate the chargeable gain on this disposal.

2. On 31 July 2022, Rory sold a warehouse, and this resulted in a chargeable gain of £27,000. On 29 January 2023, he
sold an antique vase, and this resulted in a chargeable gain of £10,300.

Calculate Rory’s capital gains tax liability for 2022-23, assuming that in that year his taxable income was either:

(a) £10,000 or (b) £20,000 or (c) £40,000

3. For the tax year 2022-23, Denny has taxable income of £30,500. On 31 August 2022, Denny sold a painting, and this
resulted in a chargeable gain of £25,300. Denny contributed £800 (net) into a personal pension plan in 2022-23.

Calculate Denny’s capital gains tax liability for 2022-23.

4. For the tax year 2022-23, Douglas has taxable income of £10,000. On 15 June 2022, he sold an antique vase, and this
resulted in a chargeable gain of £19,000. On 28 August 2022, he sold a residential property, and this resulted in a
chargeable gain of £39,800.

Calculate Douglas’ capital gains tax liability for tax year 2022-23.

5. For each of the situations set out below, show how the capital losses should be set off against the capital gains.

(a) George has chargeable gains for 2022-23 of £14,000 and capital losses in that same year of £6,000.

(b) Bob has gains of £14,000 for 2022-23 and allowable losses brought forward from 2021/22 of £6,000.

6. On 16 February 2023, Joan sold three acres of land for £240,000. She had originally purchased four acres of land on 17
July 2013 for £300,000. The market value of the unsold acre of land as at 16 February 2023 was £120,000.

Calculate the chargeable gain on this disposal.

7. Clive purchased a ten-acre plot of land in May 2014 for £80,000. In January 2023, Clive sold three of the acres for
£36,000 with expenses of sale amounting to £1,000. The market value of the remaining seven acres of land in January
2023 was £90,000.

What is Clive’s chargeable gain on the disposal of the three acres of land in the tax year 2022-23?

8. Mr. Rockford bought an office block on 11 May 2017 for £150,000. He sold it to his wife Sandy on 18 June 2019 for

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£215,000 at which time the market value was £350,000. Sandy sold it on 27 August 2022 for £400,000.

Calculate any gains arising to Mr. Rockford and Sandy.