How To Calculate Capital Gains Tax
When working out a capital gains tax (CGT) liability for this tax year, advisers need to bear in mind two factors:
CGT factor 1 – The date
- If the transaction completed between April 6, 2010 and June 22, 2010 inclusive – CGT is charged at a flat rate
- If the transaction completed on June 23, 2010 or later – CGT is charged at a variable rate
CGT Factor 2 – Tax rates
- Flat rate – CGT is applied at 18% regardless of the taxpayer’s income tax banding and entrepreneur’s relief can reduce qualifying gains by 4/9 up to a lifetime limit of £2 million
- Variable rate – CGT is charged at 18% or 28% depending on the taxpayer’s total taxable income, while entrepreneur’s relief for qualifying gains is included at 10% subject to a lifetime limit of £5 million
Setting the date of the transaction is crucial to the computation and can have a significant effect on the tax paid.
Remember, a capital gains tax transaction completes when transfer of ownership becomes unconditional.
For example, when disposing of a building that is not the date contracts are exchanged but the date ownership changes hands.
How to select the right CGT rate
After computing the gain and apportioning the share pro rata ownership, the next step is to select the correct tax rates to apply for any gains made on or after June 23, 2010.
This is a five step process:
- Work out the taxable income by deducting by deducting any allowances and reliefs from the gross pay, starting with the personal allowance for income tax.
- Check to see if the remaining taxable income is more or less than £37,400 , which is the threshold for basic rate income tax for 2010-11
- If the gain is less than £37,400, deduct the amount from £37,400 and then:
- If the gain is more than £37,400, deduct £37,400 from the gain.
- Now allocate the slices of gain in this order:
- Allocate the remaining basic rate band first against gains that qualify for entrepreneur’s relief that are charged at 10%.
- Allocate any remaining basic rate band against other gains, these are charged at 18%.
- Any remaining gains are charged to tax at 28%
Mr A’s income after allowances and reliefs is £32,000. His capital gains are £7,500 and £4,000 of these gains qualify for entrepreneur’s relief.
- Deduct Mr A’s income from £37,400 as it is lower than the basic tax banding threshold:
£37,400 – £32,000 = £5,400
- Allocate the £4,000 gains qualifying for entrepreneur’s relief at 10%:
£5,400 – £4,000 = £1,400 of the basic tax banding remains
- Allocate £1,400 of the gain to the remaining basic rate tax banding and charge to tax at 18%
£7,500 – £5,400 = £2,100 of gain remains that is charged to tax at 28%