Calculating a CGT bill

The rules seem finite and few: CGT is only payable if the overall gain is above the tax-free allowance.

For the 2016 to 2017 financial year to 5 April 2017, the tax-free allowance is £11,100 for an individual and £5,550 for trusts.

John Devine, investment manager for Thesis Asset Management, says: “Once the assets that qualify for CGT are determined, the calculation of the net realised gain is theoretically reasonably straightforward.

“The gain or loss from each asset disposed is added together, any allowable losses are deducted and, if that total exceeds the tax-free allowance, CGT is payable”.

However, calculating CGT has not always been so simple. As referred to in the first article in this guide, for a while the government had to bring in indexation to allow for the ravages of inflation during the 1970s.

This issue has been resolved but even now, there are “many intricacies” that may make the calculation of gains more complicated for a taxpayer to calculate without advice, Joan Foster, partner and chartered tax adviser for RSM UK, explains.

Difficulties can arise in several areas, which include determining what assets qualify for CGT, what losses are eligible and the rate of CGT that applies John Devine

She says: “For example, there are complications around the rules for the sale of chattels - defined as tangible movable property - worth £6,000 or more.

“Another complication is the interaction of reliefs where a taxpayer is selling a house which has been both their principal private residence at some time during ownership and been rented on a commercial basis.

“Taxpayers may also be unsure as to what deductible costs can be included in the calculation with regards to both costs of sale and purchase, in particular, enhancement expenditure incurred to improve a property, which is reflected in the value of the property at the time of sale.”

Determining whether the sale of a business or shares in a business qualify for the favourable 10 per cent rate of CGT could also become a “barrier to individuals being able to calculate easily their own liability to CGT on such disposals”, Ms Foster adds.

Mr Devine points to additional complications. He says: “Difficulties can arise in several areas, which include determining what assets qualify for CGT, what losses are eligible and the rate of CGT that applies.”

Kink test

Moreover, if your clients are doing self-assessment, they will need to make sure they know the price at which the asset was acquired.

Sounds easy enough - except if the asset was bought before 31 March 1982. Assets bought before that date may have been revalued.

According to HMRC, your clients will need to apply a ‘Kink Test’ - make sure you search ‘kink test HMRC’ as other online searches may produce results that are NSFW (not safe for work).

Essentially, assets held at 31 March 1982 were treated as if they had been acquired at their market value on that date, so gains or losses relating to changes in value before that date were not taken into account for capital gains tax purposes.

This approach was modified by the kink test, which allowed people to compare the gain or loss based on the market value of the asset on 31 March 1982, with the gain or loss based on the actual cost before 31 March 1982.

The lower of the gains would qualify for CGT, while the lesser of the losses was allowable.

If one computation resulted in a gain and the other in a loss, the person making the disposal was treated as realising neither a gain nor a loss.

A person could opt out of the kink test by electing under Taxation of Chargeable Gains Act 1992, s 35(5) to have gains or losses computed as if all of their assets held on 31 March 1982 had been acquired at their market value on that date.

According to Mr Devine, “if the acquisition value cannot be determined due to incomplete records, an individual should seek professional advice on how to proceed.”

James Badcock, partner at Collyer Bristow, adds while generally calculating the gain on an asset is not complicated, people should always seek advice.

He says: “Advice will be required to confirm CGT is payable, correct values are uses, costs are correctly taken into account and that all reliefs, allowances and losses are used.”