We understand that calculating capital gains tax can be a daunting task, but we’re here to guide you through the process. Capital gains tax is a tax that is applied to the profit you make when you sell an asset that has increased in value. It is important to note that not all assets are subject to capital gains tax, and there are certain exemptions and reliefs that you may be entitled to. In this article, we will provide you with a comprehensive guide on how to calculate capital gains tax

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What assets are subject to capital gains tax?

The assets that are subject to capital gains tax include but are not limited to:

• Property that is not your main residence
• Shares and investments
• Business assets
• Personal possessions worth over £6,000, such as jewellery or antiques

What assets are exempt from capital gains tax?

Some assets are exempt from capital gains tax, and these include:

• Your main residence
• ISAs and other tax-efficient savings and investments
• Personal possessions worth less than £6,000
• Winnings from betting, lottery, or pools

How to calculate capital gains tax

Calculating capital gains tax can be complex, but we’ll break it down for you step by step.

1. Calculate your total gains

To calculate your total gains, you need to subtract the amount you paid for the asset (also known as the ‘cost basis’) from the amount you sold it for (also known as the ‘proceeds’). The result is your total gain.

• Total gain = Proceeds – Cost basis

2. Add any allowable deductions

You may be entitled to claim certain deductions, which can reduce the amount of capital gains tax you have to pay. Allowable deductions include:

• Fees associated with buying or selling the asset, such as legal fees or estate agent fees
• The cost of any improvements you made to the asset, such as building an extension to a property

To calculate your taxable gain, subtract any allowable deductions from your total gain:

• Taxable gain = Total gain – Allowable deductions

3. Apply the capital gains tax rate

The capital gains tax rate varies depending on your income and the type of asset you sold. Currently, the rates are:

• 10% for basic rate taxpayers
• 20% for higher and additional rate taxpayers

If you sold a residential property that is not your main residence, the capital gains tax rate is higher:

• 18% for basic rate taxpayers
• 28% for higher and additional rate taxpayers

4. Calculate your capital gains tax liability

To calculate your capital gains tax liability, multiply your taxable gain by the capital gains tax rate.

• Capital gains tax liability = Taxable gain x Capital gains tax rate

Example:

Let’s say you sold shares for £50,000, and the cost basis was £30,000. You incurred fees of £1,500 when buying and selling the shares, but did not make any improvements to the asset. You are a basic rate taxpayer, and the shares were not in an ISA.

Step 1: Total gain = £50,000 – £30,000 = £20,000

Step 2: Taxable gain = £20,000 – £1,500 = £18,500

Step 3: Capital gains tax rate = 10%

Step 4: Capital gains tax liability = £18,500 x 10% = £1,850

In this example, your capital gains tax liability would be £1,850.

Conclusion

Calculating capital gains tax can be complex, but by following our guide, you should have a better understanding of how it works. Remember to take advantage of any allowable deductions and exemptions, and seek professional advice where necessary.

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