Taxation of Capital Gains

NOTES ON THE USE OF THE CAPITAL GAINS CALCULATOR

Capital gains arise not only when assets are sold for more than the purchase price, but also when valuable items are gifted to friends or family (except for one's spouse) or when insurance compensation is received for damaged or lost items. However capital gains arising through personal gifts of business assets to friends or family can often be deferred by use of "Gifts Relief" until the next transfer of ownership. Insurance compensation for damaged assets are often treated as "partial disposals" of an asset and special rules apply for calculating the capital gain which are beyond the scope of this calculator.

When calculating capital gains, the original acquisition cost of an asset should include not only the purchase price but any incidental costs to the purchase. If any money was spent improving an asset this, too, should be added to the purchase cost. Likewise sales or disposal proceeds may be reduced by incidental costs of disposal such as auctioneer's fees and commissions on sales.

Companies are not subject to Capital Gains Tax but have the capital gains included as part of their profits chargeable to Corporation Tax. The amount of gain chargeable to companies is reduced to account for the increase in the cost of living during the period of ownership of the asset that is sold. This "indexation allowance" ceased, however, at the end of December 2017 so no reduction in gain for any period of ownership after 1st January 2018 can be included. Where money was spent improving assets during the period of ownership, the applicable reduction for capital gain to the improvement element corresponds to the period between the time the improvement was done and either the time at which the asset was sold or 31^st December 2017, whichever is the earlier. If you are estimating the extra tax you might have to pay as Corporation Tax take the taxable Capital gain calculated by this tool and enter it in the Corporation Tax Calculator on this website in the Chargeable Gains field. Any capital losses should be offset against capital gains, or else carried forward to the next Corporation Tax period. Net capital losses are not permitted.

To calculate the reduction in chargeable capital gain due to the increase in cost of living during the period of ownership, or "Indexation Allowance", the Retail Price Index values for the month in which the asset was acquired is compared either with the RPI for the month in which it was sold (if sold before January 2018) or with the RPI for the end of December 2017 (if sold after Indexation Allowance was frozen at the end of 2017). It is the difference between these values that determines the amount of Indexation Allowance available. The earliest month for which the Retail Price Index may be used as the acquisition RPI is March 1982. For all assets acquired before this date use the RPI value for March 1982. Some values of RPI are given in the table below. RPI data is compiled and published by the Office of National Statistics (ONS). Where the reduction in capital gain on an improvement to an asset is being calculated, then the RPIs for the month in which the improvement was done and the month in which the asset was sold are required. Assets which have been improved part way through the period of ownership therefore require two separate RPI calculations, one for the unimproved asset, and the second for the improvement.

Capital gains acquired by sole traders, partners and private individuals are not reduced by the increase in Retail Price Index over the period of ownership. However an annual tax-free allowance is available below which capital gains are not taxed. This exemption was set at £11,000 for the 2013/14 tax year and has slowly risen to £11,700 in 2018/19. The calculator applies this full Capital Gains Exemption in calculations for sole traders, partners and private individuals. If this exempt amount has already been used up on a previous capital gain then this calculator will underestimate the amount of tax due.

Where the assets disposed of by sole traders, partners or individuals are business assets the tax rate may be reduced by "Entrepreneurs Relief". Various qualifying conditions must apply before Entrepreneurs Relief is available. The disposal must be one of the whole business or, at least, of an identifiable part of the business. If a business has ceased trading the disposal must occur within three years of the date trading stopped. Entrepreneurs Relief is not usually available for investments. If Entrepreneurs' Relief is available then capital gains on business assets are subject to a lower rate of Capital Gains Tax which is 10% for recent tax years, compared with the normal rate of Capital Gains Tax which is 18%. (The rate of tax charged on gains on non-business or personal assets depends on the total overall income.) This calculator assumes that sole traders and partners are disposing of assets which qualify for Entrepreneurs' Relief. If this is not the case then the tax obtained with this calculator will not be correct. If Entrepreneurs' Relief does not apply then you should calculate the Capital Gains Tax using the private individual option at the top of the calculator. This calculator assumes that the assets of private individuals do not qualify for Entrepreneurs Relief. There are, however, a few circumstances where individuals can obtain Entrepreneurs Relief on the disposal of shares. In this case you should select the 'unincorporated business' option at the top of the calculator. Assets which have had both private and business use may only partially qualify for Entrepreneurs Relief. The amount of Capital Gain qualifying for relief will then depend on the proportion of private and business use. This calculation is beyond the scope of this calculator.

The Capital Gains Tax rate for sole traders, partners and private individuals on assets that don't qualify for Entrepreneurs' Relief depends on their total income for the tax year. Higher rate Income Tax payers will also pay a higher rate of Capital Gains Tax. Total income includes all trading income, property income, savings income, investment income (dividends) and employment income. (See the Self-Employed Trader calculator on this website for details.) Until the 2016/17 tax year the higher rate was 28% as compared with 18% for basic rate Income Tax payers. In 2016/17 reduced rates came into force where capital gains arise from transactions not involving residential property: higher rate taxpayers are taxed at 20% and basic rate taxpayers at 10%. Gains arising from sales of residential property which are a taxpayer's main residence are exempt from Capital Gains Tax ("Private Residence Relief").

Capital gains on business assets may be deferred to a later year if the proceeds from the disposal of an asset are used to purchase a new business asset. To obtain this "Rollover Relief" the new asset must be purchased within a period starting one year before the disposal of the old asset and three years after the disposal of the old asset. An excess of disposal proceeds over what is paid for the new asset is, however, immediately taxable. The amount, if any, of Rollover Relief available must be correctly ascertained before this calculator can be used.

Gains on the sale of shares are also subject to Capital Gains tax or are chargeable to Corporation Tax. The rules for calculating the gain on the sale of shares can be more complex where shares in a company have been acquired at different times in the past. Sold shares must then be matched with purchased shares according to rules laid down by HMRC. This matching must be correctly carried out before this calculator can be used to estimate Capital Gains or tax on disposal of shares.

Capital gains on the sale of moveable assets or 'chattels' such as furniture or paintings are calculated differently from the method used by this calculator where either the purchase of disposal value is below £6,000. This calculator CANNOT be used to calculate Capital Gains or Capital Gains Tax on chattels purchased or sold for under £6,000.

Capital gains on mechanical devices which wear out over time are not usually chargeable to Capital Gains Tax: cars, even vintage cars which appreciate in value, are never subject to capital gains tax.

Rounding of values in the software algorithms may cause the tax payable to differ by a few pence from alternative computations using the same input figures.

This calculator should not be used to calculate tax for any other tax year than those included in the tax year selection box.

This calculator requires correct input figures in order to generate a correct tax liability

This calculator is only intended to give calculations of Capital Gains or Capital Gains Tax subject to the above conditions and limitations. Four Elms Bookkeeping accepts no liability for the use of output generated by this calculator.