Capital gains tax fundamentals

1 Persons, assets and disposals

In this TX lecture: Connected-person disposals and CGT computations involving pension contributions or Gift Aid are not examined in FTX. Use the FTX notes for the retargeted Elliot example.

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2 Individuals and Companies

Individuals are subject to Capital Gains Tax (CGT) on their chargeable gains arising in the tax year.

The chargeable gains of a company however, are included on the company’s Corporation Tax computation along with its taxable income and the company’s overall taxable total profits are then subjected to Corporation Tax, as you will see later in these course notes.

A chargeable gain or allowable loss arises on a:

• chargeable disposal of a

• chargeable asset by a

• chargeable person.

The basic calculation of the chargeable gain is a simple one, deducting the allowable costs of an asset from its proceeds when it is sold. A company (NOT an individual) may then further reduce any gain for the effects of inflation by the deduction of an 'Indexation Allowance' - a relief for the effects of inflation.

2.1 Chargeable Disposal

A chargeable disposal will usually occur on the sale of whole or part of an asset, but can arise when an asset is gifted, lost or destroyed. There is no chargeable disposal on gifts to charities, or upon the death of the taxpayer, when assets will pass free of CGT to the beneficiaries at their market (probate) value.

2.2 Chargeable Assets

All assets are chargeable unless specifically exempt.

Exempt assets include:

• Motor vehicles suitable for private use

• National Savings Certificates and premium bonds

• Foreign currency for private use

• Decorations awarded for bravery

• Damages for personal injury

• Life insurance policies

• Works of art given for national use

• Gilt edged securities (Government Securities such as Exchequer Stock)

• Qualifying Corporate Bonds (Corporate loan stock)

• Certain chattels (see later)

• Investments held in an ISA

• Stock, debtors and cash of a business

The FTX individual computations assume a chargeable individual; detailed residence rules are excluded. Sale, gift, loss or destruction can be a disposal. Revenue trading receipts are not capital gains. Check exemptions before computing a gain.

3 Gain computation and market value

3.1 CGT computation

A chargeable (or capital) gain or allowable (capital) loss of an individual is computed for each individual asset disposed of in the tax year as follows:

The disposal consideration is usually the proceeds received on the sale of the asset.

However, market value must be substituted for actual proceeds where:

• Use market value for a gift or other disposal not at arm’s length. Detailed connected-person rules are excluded from FTX.

The selling expenses or incidental costs of disposal (e.g. auctioneer’s fees, estate agent fees and legal costs) may be deducted from the consideration to give net proceeds.

For quoted-share valuation, use the midpoint method explained in chapter 12.

The following types of allowable expenditure may be deducted from net proceeds:

• The acquisition cost of the asset:

  • generally the purchase cost.

  • if the asset was inherited, the probate value (i.e. the market value at the date of the death).

  • if the asset was received as a gift, the market value at the date of the gift.

• Capital expenditure on enhancing the value of the asset e.g. extensions, associated architect’s fees etc.

Incidental costs of acquisition may include legal fees, surveyor’s fees, stamp duty.

A capital loss will arise if the total allowable costs exceed the net proceeds.

4 Annual exemption and capital losses

Once the gain or loss on each individual asset sold has been calculated, then it is necessary to calculate the net chargeable gains arising in the tax year; i.e. chargeable gains less allowable losses as follows:

4.1 Annual Exempt Amount (AEA)

1. Every individual (not a company) has an exempt amount for each tax year. For 2025/26 it is £3,000.

2. If the annual exempt amount is not used it is wasted.

5 Losses

In this TX lecture: Transfers between spouses or civil partners and related CGT planning are not examined in FTX.

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1. Where capital losses arise they are set against capital gains in the same tax year.

2. The current year losses set off is made to the maximum possible extent; it cannot be restricted to avoid wasting the Annual Exempt Amount (AEA).

3. If there are insufficient gains to set off against the capital losses in the year they arise, the unrelieved capital losses will be carried forward to offset against future capital gains.

4. If net gains do arise then the AEA is then deducted from any net chargeable gains of the tax year, but if the AEA is larger than the chargeable gains the remaining AEA is lost. The capital losses brought forward are then deducted after the AEA and therefore will not waste the AEA.

5. Any capital losses brought forward that are unused are carried forward.

6 CGT rates and payment

6.1 Rates and payment of CGT

The rate of CGT depends on the basic rate band remaining after an individual’s taxable income.

Apply 18% to taxable gains fitting in the remaining £37,700 basic-rate band and 24% to the excess. FTX does not set CGT questions needing pension/Gift Aid band extensions.

Once there is no basic rate band remaining, the rate increases to 24% on the excess.

In exam questions, income tax should be calculated first, and capital gains tax calculated separately afterwards (if the question requires it).

Payment of capital gains tax

Payment of CGT is generally due in full by 31 January following the end of the tax year (i.e. 31 January 2027 for the tax year 2025/26).

For UK residential property, the CGT is due within 60 days of completion; the payment-on-account calculation is not examined in FTX.

7 Capital-gains return completion

• Enter asset descriptions, dates of acquisition/disposal, gross proceeds, allowable costs, gains/losses and relief claims in the capital-gains supplement. Reconcile to the separate CGT calculation.

• Label workings clearly and record claim amounts/conditions. Carry total gains, losses and taxable gains into the appropriate summary; do not put disposal proceeds in an income column.

• Submit with the personal return by its paper/online deadline. UK residential-property reporting/payment within 60 days is a separate timing obligation; the payment-on-account calculation is outside FTX.