Capital gains tax examples

Neil: sale of house – working out gain

Neil bought a holiday house in March 1979 for £10,000. Neil already had another home of his own. By 31 March 1982 the value of the holiday house had increased to £25,000.

In July 2023, Neil sold the holiday house for £250,000. He had legal costs of £1,000 on the purchase of the house and £7,000 legal and estate agent costs on the sale. Neil had improved the house by building an extension costing £15,000 in May 2001.

Neil's gain is:		£
Proceeds		250,000
Less:
31 March 1982 value	25,000
Cost of extension	15,000
Legal expenses on purchase	1,000
Legal expenses on sale	7,000
Total deductions		(48,000)
	Chargeable gain	202,000

 

If the extension had been carried out prior to 31 March 1982, then the cost of it would be ignored as it would be reflected in the 31 March 1982 value.

Jenny: part disposal

Jenny sells 1 acre of land for £5,000 which is part of a 5-acre field. The other 4 acres are worth £35,000 at the time she makes the disposal, as they are more likely to have development value in future than the acre just sold.

Jenny paid £10,000 for the whole 5 acres, 15 years ago.

In working out her capital gain on disposal of the 1 acre, she will deduct a cost figure calculated as A x B/C where:

A = £10,000 (entire cost)

B = £5,000 (sale proceeds)

C = £5,000 (sale proceeds) + £35,000 (value of part retained) = £40,000

£10,000 x £5,000/£40,000 = £1,250.

So, without taking anything else into account, Jenny's gain on the 1 acre sale will be her proceeds of £5,000, less a cost of £1,250 = £3,750.

Alternatively, provided Jenny had not made total proceeds on sales of land property of more than £20,000 in the tax year, she could decide to simply deduct the sales proceeds of £5,000 from the cost price, leaving her with a base cost of £5,000 to be used against any future disposals. This is using the relief for small part disposals of land.

However, if Jenny had made no other capital gains in the same tax year, she would not want to use the small part disposals of land rules, as the £3,750 gain would fall within her annual capital gains exempt amount. This would mean she would keep a higher base cost to set against any future disposal of the remaining 4 acres, possibly minimising a future capital gains tax liability.

Hasan: calculation of CGT

Part one

In 2023/24 Hasan’s taxable income, after all allowable deductions and the personal allowance, is £24,500. Hasan is not a Scottish taxpayer.

The upper limit of the income tax basic rate band is £37,700.

In November 2023, Hasan sells an asset, making a gain of £26,200. Hasan has no allowable losses to set against these gains, and the annual exempt amount for 2023/24 is £6,000.

There is £13,200 left in Hasan’s basic rate band (£37,700 - £24,500).

Hasan sets the annual exempt amount against the gain, leaving £20,200 taxable (£26,200 - £6,000).

The first £13,200 of the £13,900 is taxed at 10% and the remaining £7,000 is taxed at 20%. If the asset Hasan sold is a residential property (for example, a property he has never lived in but has rented out), the rates of tax he pays are 18% on the first £13,200 and 28% on the remaining £7,000 of the gain.

Part two

In part two, we consider the position if Hasan is a Scottish taxpayer.

Hasan’s taxable income for 2023/24, after all allowable deductions and the personal allowance, is £24,500.

The higher rate threshold in Scotland for 2023/24 is £31,092. Hasan pays Scottish income tax at the starter rate of 19% on £2,162 of his taxable income, at the basic rate of 20% on £10,956 of his taxable income, and at the intermediate rate of 21% on £11,382 of his taxable income.

In November 2023, Hasan sells an asset, making a gain of £26,200. Hasan has no allowable losses to set against these gains, and the annual exempt amount for 2023/24 is £6,000.

When looking at his gain of £26,200, Hasan must use the UK rates and bands. So, Hasan’s taxable income is £13,200 less than the upper limit of the UK basic rate band (£37,700 - £24,500).

Hasan sets the annual exempt amount against the gain leaving £20,200 taxable (£26,200 - £6,000).

The first £13,200 of the £20,200 gain is taxed at 10% and the remaining £7,000 is taxed at 20%. If the asset Hasan sold is a residential property (for example, a property he has never lived in but has rented out), the rates of tax he pays are 18% on the first £13,200 and 28% on the remaining £7,000 of the gain.

His CGT liability as a Scottish taxpayer is therefore no different than if he were paying tax in any other part of the UK, even though his income tax liability is different (being calculated at the Scottish income tax rates).

Kasia: gift of asset to husband – later sale

Kasia bought a cottage in 1996 for £50,000. In August 2004 when the cottage was worth £90,000 she gave it to her husband, James. In June 2023 James sold the cottage for £140,000.

James’s gain on the property before any other deductions will be £140,000 less the original cost of £50,000, which is a gain of £90,000. It will not be £50,000 (£140,000 - £90,000).

Eileen: loss on sale of shares

Eileen bought some shares in August 2002 for £22,000. In August 2023 she sold them for £5,000.

Eileen has made a loss of £17,000, which she must use against any gains she makes in the same tax year 2023/24. If she has no gains (or not enough gains), she can carry the loss (or balance of any unused loss) forward against any gains she makes in future years.

Harold: sale of family home on separation

Harold and his wife Sandra separated in March 2022.

The family home was purchased in December 2001 and was held in Harold's name only.

Harold moved out of the family home in March 2022 and into a new flat. As Harold has permanently separated from Sandra, he is able to treat the new flat as his main residence for CGT purposes. The family home was sold in September 2022. As this was within nine months of the date Harold moved out of the house, there would have been no taxable capital gain.

If, however, the house instead were to be sold in December 2023, the final nine months of ownership will qualify for relief from capital gains tax and the remaining year (from March 2022 to March 2023) will not qualify for relief. The total period Harold owned the house is 22 years.

If the gain on the sale of the house is £280,000, the amount on which Harold is liable to CGT is:

1/22 x £280,000 = £12,727

The gain of £12,727 will be reduced by Harold's annual exempt amount for 2023/24 (£6,000) and he will pay CGT on the balance, £6,727, at the appropriate rate (either 18%, 28%, or a combination of both).

Suppose that a few years later, Harold sells his flat, having lived in it for the entire period of ownership as his main residence. He is eligible for full private residence relief on any gain, even though his period of ownership overlaps with the final period exemption on the former family home.