Capital gains tax explained How capital gains are taxed
Work out whether you've made a taxable capital gain
Capital gains and tax
There are four steps to working out whether you have made a taxable gain or loss:
- Step 1 Start with the final value. This is usually the sale proceeds or the market value if you give the item away.
- Step 2 Deduct the initial value. This is usually the price you paid or the market value when you were given the item. For anything you have owned since before 31 March 1982, it is the market value on that date.
- Step 3 Deduct any allowable expenses. These include the costs of buying and selling (for example, dealing costs, stamp duty and advertising). They also include the cost of improving the asset, provided the improvement is reflected in the item’s value.
- Step 4 If the answer is a loss, you can get tax relief by setting it against gains on other assets either this year or in future.
Now add together all your gains for the year, deduct any losses and your annual tax-free allowance. For 2011-12 the allowance is £10,600.
For sales and gifts that you make, whatever remains is taxed at either 18% or 28% depending on your tax band. The HMRC website has more information on rates and allowances. To check whether you have a taxable gain or loss, use the Which? capital gains tax calculator.
| Example capital gains tax calculation for 2011-12 | |
|---|---|
| Calculation | Amount |
| Capital gain | £20,000 |
| Losses | £1,400 |
| Annual allowance | £10,600 |
| Taxable gain = £20,000 - £1,400 - £10,600 | £8,000 taxable gain |
| CGT rate | 18% tax rate |
| Capital gains tax payable - £8,500 x 18% | £1,440 payable |
Tax relief for losses
You get tax relief for genuine losses when you sell or give away your possessions. First, you deduct losses from any gains you make in the same year.You have to deduct all these losses even if this takes you below your tax-free allowance.
If you still have some losses left, you can carry them forward. But if you still have some gains remaining, you next deduct any losses brought forward from previous years, but only so much as is needed to reduce your gains to the level of your tax-free allowance.
| Example calculation of losses for 2011-12 | |
|---|---|
| Calculation | Amount |
| Gain from selling second home | £50,000 |
| Loss on shares | £10,000 |
| Net gains for year are £50,000 - £10,000 | £40,000 net gains |
| Losses carried forward from previous years | £65,000 |
| Deduct tax free allowance from the net gain | £40,000 - £10,600 = £29,400 |
| Tax free losses left (£65,000 - £29,400) | £35,600 left to carry forward |
| Capital gains tax to pay | £0 |
To claim relief for and carry forward unused losses, complete the Capital Gains Summary pages that go with the full tax return – use those pages even if you otherwise complete the short return. You can order the Capital Gains Summary pages from the HMRC Orderline.
- Writing a will? Take a look at our expert guide
- Read our expert guide to inheritance tax
- For any tax problems, call our experts on the Which? Money Helpline
