How to calculate your CGT

Investment sales often mean paying capital gains tax – which means investors must familiarise themselves with the finer details

May 19, 2022

by Leonora Walters

When working out a gain you can subtract acquisition and disposal costs such as trading charges

You can offset CGT you owe against your annual allowance and losses

You have to report gains on UK residential property sold after October 2021 within 60 days

If you have used up your annual individual savings account (Isa) and pensions allowances, but still have money to invest, you may hold funds and shares in a general investment account. But this does not provide shelter from tax, so if the securities held within it have grown in value, you may have to pay capital gains tax (CGT) when you sell them. And if you own property other than your main home and this has grown in value when you sell it, it may also be subject to the tax. So when you sell such assets you need to work out if you owe any CGT, and report it and pay it.

Funds and shares

To work out if you owe CGT when you sell securities such as funds or shares, first check if the investment has made a gain since you bought it. If you added to the fund or direct share holding on more than one occasion, meaning that you purchased units at different prices, your acquisition cost is the average purchase price of all the purchases you made.

So, for example, if you brought HSBC (HSBA) shares in three tranches as follows, the average cost per share is £2 per share:

1,000 shares for £1 per share

1,000 shares for £2 per share

1,000 shares for £3 per share

"Most investment platforms provide cost information which allows you to calculate the potential gain when you sell the holding," explains Anthony Whatling, partner, private client tax services at Smith & Williamson. "In the example above, your investment platform statement may say something like: 'HSBC 3,000 shares, cost £6,000, value £10,000.' So if you sold the whole holding you would have a gain of £4,000, and if you sold half the holding the taxable gain would be £2,000."

Investment platforms provide statements that show what you paid for each purchase of a security, enabling you to work out the average. And some platforms provide the average purchase price on their end-of-year statements if you bought the same share or fund at various times throughout a year, so that you do not have to make this calculation.

You can then deduct some costs associated with the purchase and sale from the gain. These include trading charges and stamp duty.

"And if an asset can only be purchased via an intermediary, for example shares issued at an initial public offering, you could also include the intermediary’s fees," adds Jason Mountford, financial planner at Irwin Mitchell.

But you cannot subtract other types of costs from your gain such as funds' ongoing charges and platform fees.

If you sell the accumulation units of a fund, which reinvest any income paid back into the fund, the costs of purchase can also include any accumulated income – as you did not take the dividend but did pay tax on it. Your investment platform should show this amount in the cost information it provides and give you a summary at the end of the tax year, which you can then use on your tax return.

"For example, if you buy a fund for £10,000 and receive £2,000 of 'notional income' during the time you own it in the accumulation unit, and then sell it for £20,000, you'll only have a capital gain of £8,000," explains Laura Suter, head of personal finance at AJ Bell. "That is, the £20,000 sale price minus the £10,000 initial investment and the £2,000 income."

You then offset the gain against any losses in the current tax year. If your annual CGT allowance covers the rest of the gain you offset it against this. If it does not and you have losses from previous tax years which have not been offset against gains, you can use them to decrease the value of your gain to the value of the annual CGT allowance, which is currently £12,300.

Offsetting gains against losses

Robert makes gains of £15,000 from the sale of an investment property and £25,000 worth of losses from the sale of FTSE 100 shares in the 2021/22 tax year. The losses made in the same year are automatically offset against the gains, and unused losses are carried forward. So Robert has a £10,000 loss to carry forward to 2022/23.

In the 2022/23 tax year, Robert makes gains of £15,000. The losses brought forward are only used to the extent that they reduce the chargeable gains to the £12,300 annual exempt amount. So: gains of £15,000 minus brought forward losses of £2,700 = £12,300. The remaining gains are then offset again the annual CGT allowance so that Robert does not owe any such tax.

"The remaining losses of £7,300 (£10,000 less the £2,700) are carried forward to be offset against the next gains arising over and above the annual exempt amount," adds Paul Webster, private client tax director at Kreston Reeves. "If, for example in 2021/22 the loss was £10,000 and the gains £15,000, the loss would be offset in full, leaving £5,000 to be covered by the annual exempt amount. If the gains are not fully extinguished but the loss is, that is where the annual CGT allowance kicks in."

Source: Kreston Reeves

Losses can be carried forward indefinitely but you must report them so make sure that you keep a record. You can claim for your loss by including it on your tax return. Or, if you've never made a gain and are not registered for self assessment, you can write to HM Revenue & Customs (HMRC). But you must report the losses within four years after the end of the tax year in which you disposed of the asset.

If your gains exceed the value of any losses and your annual CGT allowance, you pay tax on them. So "before you sell, work out how much gain you have," says Suter. "Then you can only sell up to the value of your annual CGT allowance and any losses, and perhaps transfer some of your holding in the asset to your spouse/civil partner (a move that does not incur CGT) so that they can also sell it and offset it against their annual CGT allowance. You could also sell down the asset over multiple years, always remaining within the limits of your allowances."

For assets such as funds and shares, the CGT rate is 10 per cent for basic rate taxpayers, and 20 per cent for higher and additional rate taxpayers. If you already earn over the higher-rate threshold of £50,270, the whole of the taxable chunk of the gain is taxed at 20 per cent. Your taxable income includes sources such as your salary, pensions income and buy-to-let income.

"If you earn less than the higher-rate threshold, you start with your taxable pay, and then add the chunk of the gain that's taxable on top," adds Sarah Coles, senior personal finance analyst at Hargreaves Lansdown. "If the combined total still comes to less than £50,270, you pay 10 per cent on your gains. If the [value of your] gain takes you over the higher rate threshold, you pay 10 per cent on the slice of the gain under the threshold and 20 per cent on slice of the gain over it."

You can report and pay the tax immediately via HMRC's real time capital gains tax service online. To do this you need to create a Government Gateway user ID and password. You need to report your gain by 31 December in the tax year after you made the gain. After you have reported, HMRC sends you a letter or email with a payment reference number and instructions on how to pay.

Alternatively, you can report your gains in a self assessment tax return in the tax year after you have disposed of the assets. Once you have sent your return HMRC will tell you how much CGT you owe, how to pay it and by when to pay.

Same day and 30 day rules

You should avoid repurchasing the same asset you sold within 30 days. If you buy the same shares on the day you sold them, the cost you use for tax purposes is the cost per share based on the shares bought that day, rather than the average cost.

"If you sell 3,000 HSBC shares for £10,000 and then buy 3,000 HSBC shares for £10,000 on the same day, the allowable cost for tax purposes for that sale would be £10,000," explains Whatling.

If you repurchase the same shares you sold within 30 days, the allowable cost for tax purposes is determined by the cost of the new purchase first.

"Taking the example above again, you sell 3,000 HSBC shares for £10,000 on 4 April [having acquired them for £6,000] to crystallise a gain and use up some of your £12,300 CGT allowance before the end of the tax year," says Whatling. "But you then buy 3,000 more HSBC shares on 30 April for £11,000. Although you had originally made a gain of £4,000, because you acquired more shares within 30 days the actual cost for tax purposes is the £11,000 you spent on 30 April.

"So from a CGT perspective you actually make a loss of £1,000 on the 4 April sale. This means that you don't use your CGT allowance and, going forward, the allowable cost against the holding is still £6,000."

So alternative options could be to sell the shares and repurchase them in an Isa or Sipp within 30 days. "There's no restriction on selling and then re-purchasing a share within 30 days – just the tax treatment of it," explains Mountford. "So there are no issues with this in a Sipp or Isa because [within these] there are no tax consequences."

Another option could be to gift the disposal proceeds to your spouse, enabling them to make the repurchase within 30 days. Or you could reinvest in a fund with similar underlying holdings to the one you sold, or shares in a similar company.

Residential property

If you make a profit on the sale of a residential property which is not your main home, for example, a buy-to-let or a holiday home, you may also have to pay CGT.

To calculate your gain, first work out the difference between what you spent on it and the sale price. If you made a profit, you can deduct from it expenses associated with acquiring and selling the property such as stamp duty, estate agents and solicitors' fees, and land registry and conveyancing costs. If you improved or extended the property during the period that you owned it – for example, added alot conversion or garage – you can also add this to your costs. But normal maintenance costs, such as decorating, do not count.

"There is a distinction between restoring and improving a property," says Mountford. "For example, if it is in good condition but deteriorates over time and you make replacements to bring it up to the same standard as it was, you cannot include this in costs. But if you bought, say, an old property, and expanded and upgraded it by adding an extension, you can include this in your costs."

However, this can be a grey area so it could be worth getting professional tax advice when selling a secondary property.

When you have deducted the costs you have the gain, but if you ever lived in the property a portion of gain might be exempt. "You may be able claim relief for the portion of the gain relating to the period when you were living in the property," says Whatling. "So, if for example, if you lived in the property for 10 out of 20 years of ownership, roughly half of the gain would be exempt."

Gain can be offset against your annual CGT allowance, and losses in current or previous tax years.

Any gain remaining is taxed at 18 per cent if this plus your taxable income fall into the UK basic rate tax band, or 28 per cent if the gain plus your taxable income fall into the UK higher or additional rate tax bands. You must report and pay any tax due on UK residential property using a Capital Gains Tax on UK property account, and a Government Gateway user ID and password. You have to do this within 60 days of selling the property if the completion date was on or after 27 October 2021, or 30 days of selling the property if the completion date was between 6 April 2020 and 26 October 2021. If you fail to report and pay the CGT you owe within these timeframes you may have to pay interest and a penalty.