Capital gains tax - Calculation and collection of tax

Learning Outcomes

This article explains how to approach Capital Gains Tax (CGT) questions in the SQE1 exam, focusing on both technical rules and computational technique. It explains when CGT arises, how to distinguish chargeable from exempt assets and disposals, and how to compute the basic gain by identifying the correct disposal value, allowable costs, and part-disposal apportionments. It explains how to move from basic gain to chargeable gain by applying the annual exempt amount, setting off losses, and using key reliefs, including principal private residence relief, business asset disposal relief, rollover relief, hold-over relief, and incorporation relief. It explains how to apply share identification and pooling rules to shares and cryptoassets, and how to select and blend the correct CGT rates for individuals, trustees, and personal representatives. It explains how anti-avoidance provisions, such as connected-person and 30‑day matching rules, can alter the computation or restrict losses. Finally, it explains the reporting and payment regimes, including self-assessment, the 60‑day UK property reporting rules, and HMRC real‑time CGT services.

SQE1 Syllabus

For SQE1, you are required to understand the calculation and collection of Capital Gains Tax from a practical standpoint, with a focus on the following syllabus points:

• 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 (including residential property rates)
• Understanding main reliefs (e.g. business asset disposal relief, rollover relief, hold-over relief, principal private residence relief)
• Recognising anti-avoidance provisions relevant to CGT (including share matching rules and connected persons)
• Knowing the reporting and payment requirements for CGT, including deadlines (self-assessment and the 60‑day UK property regime)

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.

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, allowable losses, and the annual exempt amount.

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 and securities, business assets, and valuable personal possessions (tangible moveable property outside specific exemptions). Exempt items include private motor cars, UK government gilts, qualifying corporate bonds (QCBs), and assets held in ISAs or registered pension schemes.

Key Term: disposal
Any event where ownership of a chargeable asset changes, including sales, gifts, exchanges, part disposals, or compensation for loss or destruction. Certain events are “deemed disposals” (e.g. some insurance payouts, appropriations to trading stock).

Chargeable assets include both tangible and intangible property. Cryptoassets are generally treated as chargeable assets; gains are computed in the same way as for shares (subject to share matching rules).

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. A disposal can be of the whole asset or only part of it. For part disposals, the acquisition cost must be apportioned using the statutory formula so that only an appropriate part of the base cost is deducted.

For a part disposal, the allowable cost attributed to the part disposed of is: Allowable cost × (Disposal proceeds of the part) / (Disposal proceeds of the part + Market value of the part retained)

Where assets are lost or destroyed and compensation is received, there is a disposal. Where insurance proceeds are wholly reinvested in a replacement asset within the rollover window, deferral may be available (see Rollover Relief).

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 (generally no gain/no loss transfers)
• Assets held in ISAs or pension funds
• UK government gilts and qualifying corporate bonds (QCBs)
• Wasting chattels (tangible moveable property with predictable life ≤ 50 years, including plant and machinery), and chattels where the disposal proceeds do not exceed the statutory limit for chattels

Key Term: chattel exemption
Special rules for tangible moveable property (“chattels”), including exemption for wasting assets and a relief where disposal proceeds (or acquisition cost) do not exceed the statutory limit. For non-wasting chattels sold for more than the limit, a marginal relief may cap the gain.

Calculating the Gain

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

Key Term: annual exempt amount (AEA)
A fixed annual CGT exemption for individuals (and a lower, apportioned amount for most trusts). The AEA is deducted from net gains after deducting allowable losses and applying reliefs. The AEA is set by statute for each tax year. It was £6,000 for 2023/24 and is £3,000 for 2024/25 (subject to future changes).

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. The market value rule also applies to transactions with connected persons.

Key Term: connected person
Includes relatives (e.g. parents, children, siblings), spouses and civil partners, and companies controlled by the individual or connected persons. Transactions with connected persons are deemed to take place at market value.

Step 2: Deduct Acquisition Cost and Allowable Expenditure

Allowable expenditure includes:

• Original purchase price (or market value at acquisition if acquired other than by a bargain at arm’s length)
• Incidental costs of acquisition (e.g. legal fees, stamp duty land tax)
• Enhancement expenditure (capital improvements reflected in the state of the asset at disposal, not routine repairs)
• Incidental costs of disposal (e.g. estate agent, auction fees, legal costs)
• For part disposals, apportion the base cost using the statutory formula (see above)

Capital enhancement must be reflected in the asset at disposal. Routine repairs and maintenance are revenue expenses deductible for income tax or against rental income, not for CGT.

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

Key Term: principal private residence relief (PPR)
Relief that can fully or partly exempt gains on disposal of an individual’s only or main residence for periods of qualifying occupation. Subject to rules on final period exemption and restrictions for letting.

Annual Exempt Amount

Each individual has an annual exempt amount (AEA). Deduct the AEA from the total net gains after setting off allowable losses and applying reliefs. The AEA was £6,000 for 2023/24 and is £3,000 for 2024/25. Trusts usually have a lower, apportioned AEA.

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. Where the property has not always been the main residence (e.g. periods of absence or letting) the gain is time-apportioned. The final period of ownership generally qualifies for PPR even if not occupied (currently nine months). Lettings relief is available only in limited cases where the owner shares occupation with the tenant.

Where a married couple or civil partners live together, only one property can qualify for PPR between them at any one time. Elections can be made on multi-residence cases to nominate a main residence within statutory time limits.

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 by a sole trader or partner, and to disposals of shares in a personal trading company. Key conditions include:

• For business disposals: the business must have been owned for at least two years up to the date of disposal
• For shares: the company must be a trading company (or holding company of a trading group); the shareholder must hold at least 5% of ordinary share capital and voting rights and be beneficially entitled to at least 5% of profits available for distribution and assets on a winding up or 5% of disposal proceeds; and be an officer or employee of the company; all throughout at least the two years up to disposal
• Assets used by the business but owned personally may qualify if disposed of in association with a qualifying disposal of shares or partnership interest and conditions on use and reduction of interest are met

Lifetime limit for BADR is £1 million of qualifying gains.

Hold-Over Relief

Key Term: hold-over relief (HOR)
Relief allowing a gain to be deferred when a qualifying business asset is gifted (or certain chargeable transfers are made), so the recipient takes over the donor's base cost reduced by the held-over gain.

Gifts of qualifying business assets, shares in a personal trading company, or gifts that are chargeable transfers for inheritance tax (e.g. gifts to most trusts) may qualify. The donor and donee must jointly claim hold-over relief. The recipient’s base cost is reduced by the deferred gain, crystallising on a future disposal.

Key Term: business asset
An asset used in a trade, profession, or vocation, or shares in a trading company (subject to statutory definitions for each relief).

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 and buildings used for trading purposes, fixed plant and machinery, and certain other assets used in the trade. For individuals and companies similar principles apply, though companies claim indexation up to December 2017 for corporation tax purposes; individuals do not.

Where all proceeds are reinvested in a replacement QBA within the window (generally one year before to three years after), the gain is deducted from the base cost of the replacement. Partial reinvestment leads to partial deferral. Acquisitions of depreciating assets attract a form of “rollover by holdover” with different mechanics.

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 (for BADR purposes).

Incorporation relief (brief overview)

When a sole trader transfers a business with all assets (except cash) to a company wholly or mainly in exchange for shares, the gain on the assets transferred can be rolled into the base cost of the shares. This defers the CGT until the shares are disposed of.

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.

Worked Example 1.3

Question: Priya bought a house in June 2016 for £300,000, lived in it as her only residence until June 2020, then let it to tenants until sale in June 2024 for £500,000. Ignore costs. What portion of the £200,000 gain is exempt under PPR?

Answer:
Ownership: 8 years (June 2016–June 2024). Qualifying occupation: 4 years (June 2016–June 2020) plus the final 9 months deemed occupation (Sept 2023–June 2024) = 4 years 9 months. Exempt fraction ≈ 4.75/8 = 59.375%. Exempt gain ≈ £200,000 × 59.375% = £118,750. The balance (£81,250) is a chargeable gain (subject to AEA and any lettings relief if Priya shared occupation with tenants, which she did not).

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), 24% (residential property) — from 6 April 2024
• Business asset disposal relief: 10% (up to the lifetime limit)

Gains are added to taxable income to determine which rate(s) apply; gains are treated as the “top slice” after taxable income. The AEA reduces the portion taxed. Allowable losses of the year are set against gains of the year first; unused losses are carried forward and set against future gains before the AEA.

Worked Example 1.4

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 24% (post‑6 April 2024). Calculate CGT: £15,270 × 18% = £2,748.60; £24,730 × 24% = £5,935.20; total CGT = £8,683.80.

Share Identification and Pooling

Gains on shares and certain securities are computed using statutory matching rules:

• Same‑day rule: shares disposed of are first matched with acquisitions made on the same day
• 30‑day rule: next, with acquisitions in the following 30 days (prevents “bed and breakfasting”)
• Section 104 holding: any remaining disposal is matched with the pooled holding (an average cost pool of all earlier acquisitions of the same class in the same company)

Key Term: section 104 pool
A single “pool” of shares of the same class in the same company acquired over time (excluding shares matched under same‑day and 30‑day rules), with a running total of shares and total cost to compute an average cost per share.

Worked Example 1.5

Question: Alex holds 1,000 ABC plc shares in a s.104 pool with a pooled cost of £10,000 (£10/share). On 10 May he sells 600 shares at £14 each. He makes no other acquisitions around that date. What is his gain?

Answer:
No same‑day or 30‑day acquisitions. The 600 disposals are matched with the s.104 pool. Average cost per share £10. Proceeds: 600 × £14 = £8,400; cost: 600 × £10 = £6,000; gain = £2,400. The pool reduces to 400 shares with a remaining pooled cost of £4,000.

Losses

Allowable capital losses must be set against gains of the same tax year before applying the AEA. Unused losses are carried forward and must be set against the first available future gains before the AEA. Losses should normally be claimed within the relevant time limit (e.g. four years from the end of the tax year of disposal). Negligible value claims may crystallise a loss where shares or assets have become of negligible value.

Worked Example 1.6

Question: In 2024/25 Ahmed has a £12,000 gain on shares and a £9,000 loss on a unit trust. The AEA is £3,000. What is his chargeable gain?

Answer:
Net current year gain: £12,000 − £9,000 = £3,000. Deduct AEA of £3,000: chargeable gain £0. No CGT is payable; the AEA is fully used and cannot be carried forward.

Transfers Between Spouses/Civil Partners

Transfers between spouses or civil partners living together occur on a no gain/no loss basis (the recipient effectively steps into the transferor’s base cost). Since 6 April 2023, divorcing couples have an extended window for no gain/no loss transfers in certain circumstances. Future disposals by the recipient may attract PPR or other reliefs depending on their circumstances.

Worked Example 1.7

Question: Maya gifts 500 shares to her spouse Arjun (market value £6,000; Maya’s base cost £2,000). Arjun later sells for £7,500. What base cost does Arjun use?

Answer:
The gift is no gain/no loss. Arjun inherits Maya’s £2,000 base cost. On sale: proceeds £7,500 less cost £2,000 = £5,500 basic gain (before reliefs/AEA).

Business Asset Reliefs in Practice

Worked Example 1.8

Question: Ben founded a trading company in which he owns 10% ordinary shares. He has been an employee since incorporation. After holding the shares for over two years, he sells them realising a £600,000 gain. Assuming the conditions for BADR are met and he has made no previous BADR claims, what rate applies?

Answer:
The gain qualifies for BADR. The applicable rate is 10% on the qualifying gain, subject to the £1 million lifetime limit. CGT = £600,000 × 10% = £60,000 (before any AEA interaction).

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 in a way that is abusive.

Other anti-avoidance rules include:

• Share matching rules (same‑day and 30‑day rules), which block “bed and breakfasting” (disposing of shares and repurchasing shortly after to crystallise a loss or shift gains)
• Connected persons and market value rules: transactions with connected persons are computed using market value and losses on disposals to most connected persons are generally restricted
• Value shifting and depreciatory transactions: rules to counteract manipulating value between assets or group companies to reduce CGT
• Transactions in securities: can recharacterise returns designed to convert income to capital
• Transfer of assets abroad: can attribute gains to a UK resident in certain transfer structures

Exam Warning

Be alert to scenarios where a taxpayer sells and repurchases shares within 30 days, or gifts assets to connected persons or offshore entities, or where connected parties transact at undervalue. These may trigger anti-avoidance rules, market value substitutions, or loss restrictions.

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. Tax is payable by the same date. Payment-on-account rules do not apply to CGT. Taxpayers must keep records of all relevant transactions (contracts, valuations, costs). Allowable losses must be claimed within the relevant time limit.

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 using HMRC’s online property CGT service. Non‑UK residents generally must report UK property disposals whether or not tax is due.

Within 60 days of completion, the taxpayer must:

• File a UK Property CGT return online (creating a Capital Gains Tax on UK Property account)
• Pay an amount on account of the CGT due on that disposal

If the gain and tax are later recalculated (e.g. because of losses realised later in the year or reliefs), adjustments are made in the self-assessment return; overpayments are refunded or underpayments are settled then. If there is no CGT to pay (e.g. full PPR), a 60‑day return is not required.

Real-Time CGT Service

Taxpayers can use HMRC's real-time CGT service to report and pay certain gains at any time during the tax year, outside the property regime, though many prefer to include gains within self-assessment.

Worked Example 1.9

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.

Additional Practical Points

• Spouses and civil partners can transfer assets on a no gain/no loss basis, useful for utilising both parties’ AEAs and/or basic rate bands before a sale
• For residential property PPR calculations, keep evidence of occupation periods, absences, and any shared occupation with tenants (for lettings relief)
• For shares and cryptoassets, maintain accurate acquisition and disposal records to operate the share matching and pooling rules correctly
• Trustees and personal representatives: trustees are usually charged at 20% (and 24% for residential property from 6 April 2024); PRs pay at similar rates on gains arising during the administration period. Trusts generally have a lower AEA apportioned across same‑settlor trusts

Key Term: principal private residence relief (PPR)
Relief that can fully or partly exempt gains on disposal of an individual’s only or main residence for periods of qualifying occupation, including certain deemed occupation periods and a final period exemption (currently nine months).

Key Term: connected person
A person connected to the taxpayer for CGT purposes (including spouses/civil partners, close family and certain companies). Transactions are treated at market value; loss relief is restricted on most disposals to connected persons.

Key Term: section 104 pool
A pooled holding of shares (or units) of the same class in the same company used to compute an average cost when applying share identification rules.

Key Term: chattel exemption
CGT reliefs applying to tangible moveable property, including exemptions for wasting assets and for certain disposals below the statutory limit.

Key Term: annual exempt amount (AEA)
The annual CGT allowance for individuals (and a lower apportioned amount for most trusts) deducted from net gains after losses and reliefs.

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 (with apportionment for part disposals)
• Reliefs and exemptions (annual exempt amount, principal private residence relief, business asset disposal relief, rollover relief, hold-over relief) can reduce or defer CGT
• Share identification rules (same‑day, 30‑day, and section 104 pooling) govern share/crypto disposals
• CGT rates depend on the taxpayer's income and the type of asset; higher residential property rate is 24% from 6 April 2024
• Anti-avoidance rules (including GAAR, connected persons, 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)
• annual exempt amount (AEA)
• principal private residence relief (PPR)
• business asset disposal relief
• hold-over relief (HOR)
• business asset
• rollover relief (ROR)
• qualifying business asset (QBA)
• qualifying business disposal (QBD)
• section 104 pool
• chattel exemption
• connected person
• general anti-avoidance rule (GAAR)
• 60-day CGT reporting