Capital gains tax - Basis of charge

Learning Outcomes

This article outlines the basis of charge for Capital Gains Tax (CGT), including:

• Scope of CGT (individuals, partners, trustees, personal representatives) and the distinction from Corporation Tax
• Chargeable assets and key exemptions (cash, cars for personal use, gilts, qualifying corporate bonds, gifts to charity)
• The market value rule for non‑arm’s‑length disposals and connected persons; no gain/no loss transfers between spouses and civil partners
• Calculation of chargeable gains, including enhancement expenditure, incidental costs, part disposals, and share disposals using the statutory identification rules (same-day, 30‑day, and Section 104 pooling)
• Main reliefs and exemptions (Principal Private Residence Relief, Business Asset Disposal Relief, roll‑over relief, hold‑over relief, incorporation relief), with conditions and common restrictions
• The annual exempt amount and correct CGT rates, including residential property rates and the post‑disposal UK property reporting regime
• Anti‑avoidance provisions (connected persons and market value, bed and breakfasting/share matching, general anti‑abuse) and their effect on computations
• Special rules for chattels and wasting assets, negligible value claims, and non‑resident CGT on UK land and property‑rich shares

SQE1 Syllabus

For SQE1, you are required to understand the basis of charge for Capital Gains Tax (CGT), with a focus on the following syllabus points:

• Identifying chargeable persons and entities for CGT purposes, and when CGT does not apply (companies pay Corporation Tax).
• Recognising what constitutes a chargeable asset and key exemptions.
• Calculating chargeable gains, including allowable deductions, part disposals, and share identification rules.
• Applying main CGT reliefs and exemptions (PPR, BADR, roll‑over, hold‑over, incorporation relief).
• Understanding anti‑avoidance rules relevant to CGT (connected persons, market value substitution, share matching/30‑day rules).
• Applying correct CGT rates and annual exempt amounts and completing UK residential property CGT 60‑day reporting.
• Using these principles in 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.

1. Who is liable to pay Capital Gains Tax in the UK?
2. 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
3. What is the annual exempt amount for individuals in the 2023/24 tax year?
4. Name one relief that can defer or reduce a CGT liability on the disposal of a business asset.
5. 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, including often‑tested areas such as connected persons, the market value rule, share identification, chattel exemptions, Principal Private Residence Relief (PPR), Business Asset Disposal Relief (BADR), and non‑resident CGT.

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.

CGT is an individual‑level tax. Companies do not pay CGT; instead, they pay Corporation Tax on their chargeable gains.

Chargeable Persons

CGT applies to individuals, partners in partnerships, and personal representatives (PRs) of deceased persons. Trustees may also be liable on trust asset disposals. Members of LLPs are taxed similarly to partners on their shares of partnership gains.

Residency and domicile status affect liability. UK residents are generally taxed on worldwide gains (subject to any remittance basis claim by non‑domiciled individuals). Non‑residents may be liable for CGT on disposals of UK land and property. In addition, since 2019, non‑residents can be charged CGT on disposals of interests in “property‑rich” entities (broadly, where at least 75% of the entity’s gross asset value derives from UK land). PRs and trustees apply CGT rules with specific rates and annual exemptions.

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 (including unit trusts and many loan notes)
• Business assets (such as goodwill)
• Personal possessions worth more than £6,000 (excluding cars for personal use)
• Certain contractual rights

Some assets are exempt, such as cash, cars for personal use, UK government gilts, qualifying corporate bonds (QCBs), and gifts to charity (no CGT is charged on outright gifts to UK‑registered charities; the donor may claim relief on deemed market value if required for other rules). Wasting assets (with a predictable useful life not exceeding 50 years) are generally exempt unless used for business purposes and eligible capital allowances have been claimed. Chattels (tangible moveable property) have special rules: if the disposal proceeds do not exceed £6,000, any gain is exempt; if proceeds exceed £6,000 and the cost was less than £6,000, a cap applies to the gain (see Worked Example 1.4).

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 market value rule applies where consideration is not at arm’s length or where the parties are connected; gains are computed using market value instead of the actual amount received. Compensation for damage or compulsory purchase may be treated as a disposal; insurance proceeds can be a disposal of the asset or a separate right if the asset is not repaired.

Transfers between spouses and civil partners are generally “no gain/no loss,” so the recipient steps into the transferor’s base cost. This rule applies while they are living together; special provisions apply on separation.

Part disposals (e.g., selling part of land) are within scope. The acquisition cost must be apportioned using the statutory fraction based on market values of the part disposed and the part retained 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 or the market value rule applies).
• Deduct allowable costs:
  • Acquisition cost (what was paid for the asset), rebasing applies in certain cases (e.g., 31 March 1982 deemed base value for older acquisitions)
  • Incidental costs of acquisition and disposal (e.g., legal fees, stamp duty, agent’s commission, valuation fees)
  • Enhancement expenditure (capital improvements that increase value and are reflected in the state of the asset at disposal)
• The result is the basic gain.
• Apply any available reliefs or exemptions (e.g., PPR, BADR, roll‑over, hold‑over).
• Deduct the annual exempt amount (AEA).
• Apply the correct CGT rate(s).

Enhancement expenditure excludes routine repairs and maintenance. Finance costs (interest) are not allowable for CGT computations. Revenue‑type expenses belong in income tax computations and are not allowable against gains.

Share disposals use statutory identification rules:

• Shares acquired on the same day are matched first against disposals on that day.
• Shares acquired within the following 30 days are matched next (“30‑day rule”).
• The remainder is matched against the holder’s Section 104 pool (the average cost of all other shares of that class in that holding).

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

Part disposals

Where only part of an asset is disposed of, apportion the original cost by the formula:

• Allowable cost attributable to the part disposed = Total original cost × A/(A + B),
• where A is the disposal proceeds (or market value of the part disposed if not at arm’s length) and B is the market value of the part retained at the time of disposal.

Share identification (overview)

Disposals of shares follow the matching sequence (same day, 30‑day, Section 104 pool). This prevents short‑term wash trades and is an anti‑avoidance measure that operates as part of the statutory computation (see Anti‑Avoidance Provisions).

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 conditions are met. PPR covers periods of actual occupation and certain deemed occupation (e.g., up to 9 months final period, and specified periods of absence in limited cases). The relief may be restricted if the property was not always the main residence, part of the property is used exclusively for business, the grounds exceed what is reasonable (typically over 0.5 hectare unless required for the enjoyment of the residence), or if the property was let. Since April 2020, letting relief is generally limited to periods where the owner shared occupation with the tenant.

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 Entrepreneurs’ Relief, BADR taxes qualifying gains at 10% up to a £1 million lifetime limit. For disposals of shares, the individual must usually:

• Hold at least 5% of ordinary share capital and voting rights (with entitlement conditions),
• Be an officer or employee of the company (or holding company), and
• Dispose of shares in a trading company or the holding company of a trading group. The qualifying period is at least two years immediately prior to disposal. For disposals of a sole trade or partnership business, the two‑year ownership and trading requirements apply similarly.

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 (usually one year before to three years after the disposal), CGT can be deferred by rolling the gain into the base cost of the new asset. The relief is limited by the amount reinvested and any non‑business use.

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.

Gift hold‑over relief applies to gifts of qualifying business assets (or chargeable transfers for IHT, such as gifts into certain trusts), allowing the gain to be held over so the donee assumes the donor’s base cost. Incorporation relief (when a sole trade is transferred to a company in exchange solely for shares) can also defer gains into the base cost of the shares.

Annual Exempt Amount

Individuals have an annual exempt amount. It was reduced from £12,300 (2022/23) to £6,000 for 2023/24, and to £3,000 for 2024/25. Trustees generally have a lower exemption (commonly one‑half of the individual amount, shared among trusts created by the same settlor). Personal representatives typically have the same annual exemption as individuals.

Key Term: annual exempt amount
The amount of capital gain an individual can realise in a tax year without incurring CGT.

CGT rates and reporting

For individuals, gains above the annual exemption are taxed at:

• 10% (basic rate) and 20% (higher/additional rate) for most assets.
• Residential property disposals are charged at 18% (basic rate) and, from 6 April 2024, 24% (higher/additional rate). Gains qualifying for BADR are taxed at 10% up to the lifetime limit.

Trustees generally pay at 20% (and at the residential property rate for residential gains).

UK residential property disposals by UK residents must be reported and CGT paid within 60 days of completion via the UK property return (this is in addition to self‑assessment, if applicable). Non‑resident individuals must file UK property disposal returns for UK land disposals within the same time limits.

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 and certain business connections) are deemed to occur at market value, regardless of the actual price. The market value substitution prevents manipulation of consideration.
• Bed and breakfasting/share matching rules: The 30‑day rule matches shares repurchased within 30 days of disposal to that disposal, preventing immediate crystallisation of losses followed by quick repurchase. The statutory share identification sequence (same day, 30 days, then Section 104 pool) is central to computations.
• Transactions in securities: Prevents converting income into capital gains to obtain a tax advantage in certain securities arrangements (relevant crossover with income tax).
• Transfer of assets abroad/general anti‑abuse: Targets arrangements designed to avoid UK tax by exploiting offshore structures; the UK’s General Anti‑Abuse Rule (GAAR) applies to abusive arrangements.

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. Particular practical points include:

• UK residential property returns: UK‑resident individuals must report and pay any CGT due within 60 days of completion. Missing this deadline can incur penalties and interest.
• Spouses and civil partners: No gain/no loss transfers allow efficient planning. The recipient steps into the transferor’s base cost, preserving history for future computations.
• Charitable gifts: Outright gifts to UK charities are generally exempt from CGT (and may bring income tax relief for the donor); market value rules may be relevant for associated computations.
• Chattels: The £6,000 rule can exempt gains on personal possessions; be careful with sets and pairs and the capped gain formula where cost was below £6,000.
• Negligible value claims: Where shares or other assets become of negligible value, a claim can crystallise a capital loss, which can be set against gains.

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.

Worked Example 1.4

Question: David sells an antique vase (a chattel) for £9,000. He bought it years ago for £2,000. What is the maximum chargeable gain given the chattel rules?

Answer:
For chattels where disposal proceeds exceed £6,000 and the original cost was less than £6,000, the gain is capped at 5/3 of the excess over £6,000. Excess = £9,000 − £6,000 = £3,000. Cap = (5/3) × £3,000 = £5,000. The actual gain (£9,000 − £2,000 = £7,000) is restricted to £5,000.

Worked Example 1.5

Question: Priya sells 2,000 shares on 15 June. She had previously bought 1,000 shares on 10 June and holds a Section 104 pool of 5,000 shares at an average cost of £4 per share. How are the 2,000 shares matched?

Answer:
First match the same‑day acquisitions (none on 15 June), then match acquisitions within the next 30 days (1,000 shares bought on 10 June; these are matched first to the disposal). The remaining 1,000 shares are matched to the Section 104 pool at the average cost (£4 per share).

Worked Example 1.6

Question: Nisha sells her former home, which she owned for 10 years. She lived in it for 7 years, then let it for 3 years and did not share occupation. How does PPR apply?

Answer:
PPR exempts periods of actual occupation plus the final 9 months. Nisha’s exempt period is 7 years of occupation plus 9 months at the end. The remaining let‑only period without shared occupation does not qualify for letting relief under current rules, so the gain attributable to that period may be chargeable, subject to time‑apportionment.

Worked Example 1.7

Question: Omar is non‑resident and sells UK commercial property. Is CGT payable in the UK?

Answer:
Yes. Non‑residents are within UK CGT for disposals of UK land (commercial and residential). Omar must complete a UK property disposal return and pay CGT within 60 days of completion, applying the usual computational rules and appropriate non‑resident rates.

Worked Example 1.8

Question: A sole trader sells a warehouse and reinvests the entire proceeds in a new qualifying warehouse within 12 months. Can the gain be deferred?

Answer:
Roll‑over relief can defer the gain by reducing the base cost of the new warehouse, provided the old and new assets are qualifying business assets and the reinvestment time window is met (typically one year before to three years after). The deferred gain reduces the new asset’s base cost for future CGT.

Key Point Checklist

This article has covered the following key knowledge points:

• CGT applies to individuals, partners, trustees, and personal representatives; companies are charged to Corporation Tax, not CGT.
• Chargeable assets include property, shares, and certain personal possessions; exemptions include cash, cars for personal use, gilts, QCBs, and charitable gifts.
• Disposals include sales, gifts, exchanges, part disposals, and certain compensation; the market value rule applies for connected persons and non‑arm’s‑length transactions.
• Gains are calculated by deducting allowable costs (acquisition, incidental, enhancement) and applying reliefs, the annual exemption, and then correct rates.
• Share disposals use statutory identification rules (same day, 30‑day, Section 104 pool).
• Main reliefs include Principal Private Residence Relief, Business Asset Disposal Relief, roll‑over relief, hold‑over relief, and incorporation relief, each with specific conditions and restrictions.
• The annual exempt amount is £6,000 for 2023/24 and £3,000 for 2024/25 for individuals (trustees have lower/shared amounts); property CGT returns must be filed within 60 days of completion.
• Anti‑avoidance rules include connected persons/market value substitution and share matching rules, preventing bed and breakfasting.
• Practical points: spouse/civil partner transfers are no gain/no loss; chattel rules can exempt or cap gains; non‑residents are within scope for UK land and property‑rich shares.

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