Learning Outcomes
After studying this article, you will be able to identify who is subject to Capital Gains Tax (CGT), what assets are chargeable, and how gains are calculated for CGT purposes. You will understand the main reliefs and exemptions that can reduce liability, and recognise the anti-avoidance provisions relevant to CGT. This knowledge will enable you to answer SQE1-style questions on the basis of charge for CGT.
SQE1 Syllabus
For SQE1, you are required to understand the basis on which Capital Gains Tax is charged in England and Wales. Focus your revision on:
- Identifying chargeable persons and entities for CGT purposes
- Recognising what constitutes a chargeable asset
- Calculating chargeable gains, including allowable deductions
- Applying main CGT reliefs and exemptions
- Understanding anti-avoidance rules relevant to CGT
- Applying these principles to practical scenarios and SQE1-style questions
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- Who is liable to pay Capital Gains Tax in the UK?
- Which of the following is a chargeable asset for CGT purposes? a) UK government gilts b) Shares in a private company c) Cash held in a bank account d) Personal car
- What is the annual exempt amount for individuals in the 2023/24 tax year?
- Name one relief that can defer or reduce a CGT liability on the disposal of a business asset.
- True or false? Companies pay Capital Gains Tax on their chargeable gains.
Introduction
Capital Gains Tax (CGT) is a tax on the profit made when certain assets are disposed of by individuals and other chargeable persons. For SQE1, you must be able to identify who is subject to CGT, what assets are within scope, how to calculate a chargeable gain, and how reliefs and anti-avoidance rules operate. This article covers the essential principles and practical applications of the CGT basis of charge.
Chargeable Persons
CGT applies to individuals, partners in partnerships, and personal representatives of deceased persons. Trustees may also be liable. Companies do not pay CGT; instead, they pay Corporation Tax on their chargeable gains.
Key Term: chargeable person
An individual or entity (such as a sole trader, partner, trustee, or personal representative) who may be liable to pay Capital Gains Tax.
Residency and domicile status affect liability. UK residents are generally taxed on worldwide gains, while non-residents may be liable for CGT only on UK land and property.
Chargeable Assets
A chargeable asset is any form of property, except those specifically exempted. Common examples include:
- Land and buildings (other than a main residence, if relief applies)
- Shares and securities
- Business assets (such as goodwill)
- Personal possessions worth more than £6,000 (excluding cars)
- Certain contractual rights
Some assets are exempt, such as cash, cars for personal use, UK government gilts, qualifying corporate bonds, and gifts to charity.
Key Term: chargeable asset
Any property or right that is not specifically exempt and on which a gain may be subject to Capital Gains Tax when disposed of.
Disposal Events
CGT is triggered by a disposal of a chargeable asset. Disposal includes selling, gifting, exchanging, or otherwise transferring ownership. The gain is calculated at the time of disposal.
Key Term: disposal
Any event where ownership of a chargeable asset is transferred, including sale, gift, exchange, or loss.
Calculation of Chargeable Gains
To calculate a chargeable gain:
- Identify the disposal proceeds (usually the sale price, or market value if not at arm’s length).
- Deduct allowable costs:
- Acquisition cost (what was paid for the asset)
- Incidental costs of acquisition and disposal (e.g. legal fees, agent’s commission)
- Enhancement expenditure (capital improvements)
- The result is the basic gain.
- Apply any available reliefs or exemptions.
- Deduct the annual exempt amount (for individuals, £12,300 in 2023/24).
- The remaining amount is the chargeable gain subject to CGT.
Key Term: allowable cost
An expense that can be deducted from disposal proceeds when calculating a chargeable gain, such as acquisition cost, improvement costs, and certain fees.
Worked Example 1.1
Question: Anna sells a painting for £40,000. She bought it for £20,000 and paid £1,000 in auction fees to buy and £2,000 to sell. She spent £3,000 restoring it. What is her chargeable gain before reliefs and exemptions?
Answer: Disposal proceeds: £40,000
Less acquisition cost: £20,000
Less auction fees: £1,000 + £2,000 = £3,000
Less restoration: £3,000
Total deductions: £26,000
Chargeable gain: £40,000 - £26,000 = £14,000
Main Reliefs and Exemptions
Several reliefs can reduce or defer CGT liability. Key reliefs for SQE1 include:
Principal Private Residence Relief (PPR)
No CGT is due on gains from the sale of a person’s only or main home, provided certain conditions are met. The relief may be restricted if the property was not always the main residence or was let out.
Key Term: principal private residence relief
An exemption from CGT on gains from the disposal of a person’s only or main home, subject to qualifying conditions.
Business Asset Disposal Relief (BADR)
Formerly known as Entrepreneurs’ Relief, BADR allows qualifying business disposals to be taxed at a reduced CGT rate of 10%, up to a lifetime limit. To qualify, the individual must have owned the business or shares for at least two years and meet other conditions.
Key Term: business asset disposal relief
A relief that reduces CGT to 10% on qualifying disposals of business assets, subject to conditions and a lifetime cap.
Roll-over Relief
If a business asset is sold and the proceeds are reinvested in another qualifying business asset within a set period, CGT can be deferred until the new asset is disposed of.
Key Term: roll-over relief
A relief allowing deferral of CGT when proceeds from a business asset disposal are reinvested in another qualifying business asset.Key Term: hold-over relief
A relief allowing deferral of CGT when certain business assets are gifted, so the recipient takes over the original base cost.
Annual Exempt Amount
Individuals have an annual exempt amount (£12,300 for 2023/24). Gains up to this amount are not taxed. Trustees have a lower exemption.
Key Term: annual exempt amount
The amount of capital gain an individual can realise in a tax year without incurring CGT.
Anti-Avoidance Provisions
Anti-avoidance rules prevent taxpayers from artificially reducing or deferring CGT. Important provisions include:
- Connected persons rules: Disposals between connected persons (e.g. family members) are deemed to occur at market value, regardless of the actual price.
- Bed and breakfasting rules: Prevents creating artificial losses by selling and repurchasing shares within 30 days.
- Transactions in securities: Prevents converting income into capital gains to obtain a tax advantage.
- Transfer of assets abroad: Targets arrangements to avoid UK CGT by transferring assets to non-residents.
Key Term: connected person
For CGT, a person related by blood, marriage, civil partnership, or certain business relationships, triggering special tax rules.
Worked Example 1.2
Question: Ben sells shares worth £50,000 to his sister for £10,000. What value is used for CGT purposes?
Answer: The disposal is between connected persons, so the sale is deemed to occur at market value (£50,000) for CGT, not the actual price received.
Application in Practice
CGT is relevant in many legal contexts, including property sales, business disposals, gifts, and estate planning. Legal professionals must identify when CGT arises, calculate gains, and advise on reliefs and anti-avoidance rules.
Worked Example 1.3
Question: Claire gifts farmland used in her business to her daughter. Can CGT be deferred?
Answer: Hold-over relief may be available if the land is a qualifying business asset. The gain is deferred, and the daughter acquires the land at Claire’s original base cost.
Key Point Checklist
This article has covered the following key knowledge points:
- CGT applies to individuals, partners, trustees, and personal representatives, not companies.
- Chargeable assets include property, shares, and certain personal possessions; some assets are exempt.
- A disposal triggers CGT; gains are calculated by deducting allowable costs from disposal proceeds.
- Main reliefs include Principal Private Residence Relief, Business Asset Disposal Relief, Roll-over Relief, and the annual exempt amount.
- Anti-avoidance rules apply to connected persons and certain transactions to prevent tax avoidance.
- Legal professionals must identify CGT triggers, apply reliefs, and calculate gains accurately for SQE1.
Key Terms and Concepts
- chargeable person
- chargeable asset
- disposal
- allowable cost
- principal private residence relief
- business asset disposal relief
- roll-over relief
- hold-over relief
- annual exempt amount
- connected person
