Basic calculation principles of capital gains tax

Produced by Tolley
Basic calculation principles of capital gains tax

The following Personal Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Basic calculation principles of capital gains tax
  • Standard capital gains tax proforma
  • Allowable deductions from the proceeds
  • Exceptions to the standard proforma
  • Assets held on 31 March 1982
  • How do you find the market value on 31 March 1982?
  • Post-transaction valuation check
  • Part disposals
  • Adjustment to enhancement expenditure for part disposals
  • Transactions involving connected persons
  • More...

A charge to capital gains tax arises when a chargeable person makes a chargeable disposal of a chargeable asset. The disposal may produce a taxable profit (known as a gain) or an allowable loss. These terms are discussed in the Introduction to capital gains tax guidance note.

See Checklist ― calculation of capital gains and losses for issues to consider when reporting client gains and losses.

This guidance note covers the general rules used to calculate whether an individual has made a gain or loss on the chargeable disposal of a chargeable asset. For details of how to calculate gains and losses on disposals made by companies, see the Calculation of corporate capital gains guidance note.

Standard capital gains tax proforma

Changes were introduced in FA 2008 to simplify the way in which gains are calculated for non-corporates (ie individuals and trustees) from 2008/09 onwards. The previous rules are not discussed here.

The standard proforma for calculating the chargeable gain on the disposal of chargeable assets from 6 April 2008 onwards is a basic calculation of the cash profit:

££
Proceeds of saleX
Less: costs of sale(X)
X
Costs of acquisitionX
Plus: enhancement expenditureX
(X)
Chargeable gain or allowable lossX

See Proforma 1 ― standard capital gains tax proforma.

There are some exceptions to this proforma such as:

  1. part disposals

  2. gifts of assets

  3. assets transferred between spouses or civil partners (see the Inter-spouse transfer guidance note)

The first two bullet points are discussed below.

Allowable deductions from the proceeds

Examples of the costs of sale include legal fees, valuation fees, estate agency fees, auction fees and any costs of advertising for sale.

The costs of acquisition include the purchase price or deemed purchase price (unless the asset was acquired before 31 March 1982, see below) and the incidental costs of acquisition (eg legal fees, survey fees, stamp duty land tax). For a discussion of the costs of acquisition where assets have been merged or divided, see CG15230.

Enhancement expenditure is (i) capital expenditure which (ii)

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