Capital gains tax - Calculation and collection of tax

Learning Outcomes

After reading this article, you will be able to identify when Capital Gains Tax (CGT) arises, determine which assets and disposals are chargeable, calculate a capital gain including allowable deductions and reliefs, apply the correct tax rates, and explain the procedures for reporting and paying CGT. You will also be able to spot key anti-avoidance rules and apply them to SQE1-style scenarios.

SQE1 Syllabus

For SQE1, you are required to understand the calculation and collection of Capital Gains Tax from a practical standpoint. Focus your revision on:

• Identifying chargeable assets and disposals for CGT purposes
• Calculating a capital gain, including allowable expenditure and reliefs
• Applying the annual exempt amount and relevant CGT rates
• Understanding main reliefs (e.g. business asset disposal relief, rollover relief, hold-over relief)
• Recognising anti-avoidance provisions relevant to CGT
• Knowing the reporting and payment requirements for CGT, including deadlines

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following is a chargeable disposal for CGT purposes?
   1. Sale of a main residence
   2. Gift of shares to a friend
   3. Sale of a private car
   4. Transfer of assets into an ISA

2. What is the correct formula for calculating a basic gain on disposal of a chargeable asset?

3. Which relief allows a gain to be deferred when business assets are replaced?

4. By when must a UK resident report and pay CGT on the sale of a UK residential property with a tax liability?

Introduction

Capital Gains Tax (CGT) is a tax on the profit made when certain assets are disposed of. For SQE1, you must be able to identify when CGT arises, calculate the gain, apply reliefs and exemptions, determine the correct tax rate, and explain how and when the tax must be reported and paid.

Chargeable Assets and Disposals

CGT applies only to the disposal of a chargeable asset by a chargeable person.

Key Term: chargeable asset
Most forms of property, including land, buildings, shares, business assets, and valuable personal possessions (over £6,000), except for exempt items such as cars, UK government gilts, and assets held in ISAs or pensions.

Key Term: disposal
Any event where ownership of a chargeable asset changes, including sales, gifts, exchanges, or compensation for loss or destruction.

Chargeable Disposals

CGT is triggered by a disposal, not just a sale. Gifts (other than to a spouse/civil partner or charity), swaps, and certain insurance payouts are all disposals for CGT purposes.

Exemptions

Certain disposals are exempt from CGT, including:

• Sale of a private car
• Disposal of a main residence (if principal private residence relief applies)
• Gifts to a spouse or civil partner
• Assets held in ISAs or pension funds

Calculating the Gain

The gain is the difference between the proceeds received on disposal and the total allowable costs.

Key Term: capital gains tax (CGT)
A tax on the profit (gain) made from the disposal of a chargeable asset by a chargeable person.

Key Term: basic gain (BG)
The gain before reliefs and exemptions: disposal proceeds minus acquisition cost and allowable expenditure.

Key Term: chargeable gain (CG)
The amount of gain subject to CGT after deducting reliefs and exemptions.

Step 1: Identify the Disposal Value

Usually, this is the sale price. If the disposal is a gift (other than to a spouse/civil partner or charity), market value is used.

Step 2: Deduct Acquisition Cost and Allowable Expenditure

Allowable expenditure includes:

• Original purchase price
• Incidental costs of acquisition (e.g. legal fees, stamp duty)
• Enhancement expenditure (e.g. improvements, not repairs)
• Incidental costs of disposal (e.g. estate agent, auction fees)

Worked Example 1.1

Question: Sarah bought a painting for £8,000, spent £1,000 on restoration, and paid £500 legal fees. She sells it for £15,000, incurring £1,200 auction fees. What is her basic gain?

Answer: Acquisition cost: £8,000 + £500 = £8,500. Allowable expenditure: £1,000 (restoration) + £1,200 (auction) = £2,200. Total deductions: £8,500 + £2,200 = £10,700. Basic gain: £15,000 - £10,700 = £4,300.

Step 3: Apply Reliefs and Exemptions

Annual Exempt Amount

Each individual has an annual exempt amount (£6,000 for 2023/24). This is deducted from total gains after reliefs.

Principal Private Residence Relief

A gain on the disposal of a main home is usually exempt if the property has been the only or main residence throughout ownership.

Business Asset Disposal Relief

Key Term: business asset disposal relief
A relief allowing qualifying business disposals to be taxed at 10% up to a lifetime limit, subject to conditions.

This relief applies to disposals of all or part of a business, shares in a personal trading company, or assets used in a business, provided qualifying conditions are met (e.g. minimum shareholding, employment, and holding period).

Hold-Over Relief

Key Term: hold-over relief (HOR)
Relief allowing a gain to be deferred when a qualifying business asset is gifted, so the recipient takes over the donor's base cost.

Key Term: business asset
An asset used in a trade, profession, or vocation, or shares in a trading company.

Rollover Relief

Key Term: rollover relief (ROR)
Relief allowing a gain on disposal of a qualifying business asset to be deferred if the proceeds are reinvested in another qualifying business asset within a set period.

Key Term: qualifying business asset (QBA)
Land, buildings, fixed plant and machinery used in a trade, or shares in a trading company.

Key Term: qualifying business disposal (QBD)
Disposal of a business, shares in a personal trading company, or business assets, meeting the conditions for business asset disposal relief.

Worked Example 1.2

Question: Tom sells a business asset for £100,000, making a gain of £30,000. He reinvests the full proceeds in a new qualifying asset. What is the immediate CGT liability?

Answer: If rollover relief applies, the £30,000 gain is deferred and deducted from the base cost of the new asset. No immediate CGT is due.

Applying the Correct CGT Rate

CGT rates depend on the taxpayer's income and the type of asset.

• Basic rate taxpayers: 10% (most assets), 18% (residential property)
• Higher/additional rate taxpayers: 20% (most assets), 28% (residential property)
• Business asset disposal relief: 10% (up to the lifetime limit)

Gains are added to taxable income to determine which rate(s) apply.

Worked Example 1.3

Question: Jane has £35,000 taxable income. She sells a second home, making a chargeable gain of £40,000 after reliefs and exemptions. What CGT rates apply?

Answer: Basic rate band limit: £50,270. Amount of gain taxed at 18%: £50,270 - £35,000 = £15,270. Remaining gain (£40,000 - £15,270 = £24,730) taxed at 28%. Calculate CGT: £15,270 × 18% = £2,748.60; £24,730 × 28% = £6,924.40; total CGT = £9,673.

Anti-Avoidance Provisions

Key Term: general anti-avoidance rule (GAAR)
A statutory rule allowing HMRC to counteract arrangements whose main purpose is to obtain a tax advantage.

Other anti-avoidance rules include:

• Bed and breakfasting: Prevents selling and repurchasing shares within 30 days to create artificial gains or losses.
• Transactions in securities: Prevents arrangements designed to convert income into capital gains.
• Transfer of assets abroad: Prevents avoidance by transferring assets to non-UK residents.

Exam Warning

For SQE1, be alert to scenarios where a taxpayer sells and repurchases shares within 30 days, or gifts assets to connected persons or offshore entities. These may trigger anti-avoidance rules.

Reporting and Payment of CGT

CGT is collected through self-assessment or, for UK residential property, via a separate 60-day reporting system.

Self-Assessment

Most gains are reported on the annual self-assessment tax return, due by 31 January following the tax year. Taxpayers must keep records of all relevant transactions.

60-Day Reporting for UK Residential Property

Key Term: 60-day CGT reporting
UK residents disposing of UK residential property with a CGT liability must report the gain and pay the tax within 60 days of completion.

Real-Time CGT Service

Taxpayers can use HMRC's real-time CGT service to report and pay gains at any time during the tax year.

Worked Example 1.4

Question: Alex sells a UK rental property on 1 March 2024, making a taxable gain. By when must he report and pay the CGT?

Answer: He must report the disposal and pay any CGT due within 60 days of completion, i.e. by 30 April 2024, using the online property CGT service.

Key Point Checklist

This article has covered the following key knowledge points:

• CGT applies to chargeable gains on disposal of chargeable assets by chargeable persons
• The basic gain is disposal proceeds minus acquisition cost and allowable expenditure
• Reliefs and exemptions (annual exempt amount, business asset disposal relief, rollover relief, hold-over relief) can reduce or defer CGT
• CGT rates depend on the taxpayer's income and the type of asset
• Anti-avoidance rules (including GAAR and bed and breakfasting) may apply to certain transactions
• CGT must be reported and paid via self-assessment or, for UK residential property, within 60 days of completion

Key Terms and Concepts

• chargeable asset
• disposal
• capital gains tax (CGT)
• basic gain (BG)
• chargeable gain (CG)
• business asset disposal relief
• hold-over relief (HOR)
• business asset
• rollover relief (ROR)
• qualifying business asset (QBA)
• qualifying business disposal (QBD)
• general anti-avoidance rule (GAAR)
• 60-day CGT reporting