What is Capital Gains Tax?
Now we know the basics of Capital Gains Tax, lets consider more advanced elements of the regime:
How are gains established on inherited assets?
When you receive an asset as part of an inheritance you are not liable to Capital Gains Tax. If you decide to dispose of an inherited asset following the inheritance, CGT may become a concern.
For the purposes of establishing the gain on a disposal of an inherited asset, we consider the value of the asset on the date on which it was received. Any increase between the value of the asset at the date of the donors death and the date of disposal is the capital gain.
There is a chance that the asset will decrease in value between the death of the donor and the later disposal. This would be a loss for CGT purposes.
How are gains established on part disposals of assets?
To establish the chargeable gain on the disposal of a part of an asset, we deduct from the sale proceeds the part of the original cost of the asset. The calculation is best illustrated using an example:
Jessica bought 75 acres of land in 2016 for £120,000. In 2024 she sold 10 acres of the land for £30,000. The value of the remaining land was £210,000.
To establish the gain on this part disposal, we first calculate the ‘base cost’ for part disposals:
Now we know the base cost for this part disposal, we simply deduct this from the proceeds of Jessica’s sale to give us a gain for the part disposal of £15,000 (£30,000 proceeds less the £15,000 base cost).
For use against any subsequent sales, Jessica can establish the base cost by deducting the base cost for the part disposal (£15,000) from the original purchase cost (£120,000). The base cost for future sales then is £105,000 (£120,000-£15,000).
The HMRC has a set of rules for smaller part disposals, providing some exemptions for CGT purposes. These rules can be found here.
Calculating gains on non-wasting chattels with proceeds greater than £6,000
As mentioned in video above, HMRC has some interesting rules when calculating gains on tangible, movable assets (chattels). When calculating the gain on a non-wasting chattel, a chattel with an expected useful life of more than 50 years, and the proceeds are greater than £6,000, two calculations are required:
Firstly, we calculate the gain in the usual way: Proceeds less acquisition costs, incidental costs and improvement costs.
Secondly, we calculate the gain using the ‘5/3’ rule (five thirds rule).
HMRC allows an investor to use the lower result of these two to establish the gain on a disposal of such an asset. Note that this is only applicable where the original acquisition cost of the chattel being disposed of was less than £6,000.
To demonstrate how the 5/3 rule is applied, lets work through an example:
Gareth visited an auction, where he bought an antique cupboard for £3,400. The auction house took £300 in fees. 4 years later, Gareth sold the cupboard for £7,000.
Gareth can establish his gain using the standard method and the 5/3 method as the acquisition costs were below £6,000 and the proceeds are in excess of £6,000:
Standard method:
5/3 method:
The 5/3 method for calculating the gain simply takes the proceeds less £6,000, multiplied by 5/3:
Gareth is then able to use the lower of the two amounts, £1,666.67, as the gain to calculate the CGT due.
Capital Gains Tax for Scottish and Welsh taxpayers
The same rules above apply if you are a Scottish or Welsh taxpayer. To understand which rate of CGT is applicable to a gain, you need to consider your income for a given tax year in relation to UK income tax rates.
As the tax rates for Welsh taxpayers are the same as UK taxpayers, this is straightforward. However, Scottish taxpayers pay different rates of income tax, therefore they will need to consider their overall income and apply this to UK income tax rates instead.
The tax rates applicable to UK taxpayers can be found here, Welsh taxpayers can be found here and Scottish taxpayers can be found here.
Once the UK equivalent of income tax rates have been established, and you know if you are a Basic, Higher or Additional rate income taxpayer, you can apply the relevant CGT rate on a gain.
Further reading
In the video above, we outline the importance of establishing your residency status ahead of disposal of assets outside the UK. If you are unsure of your residency status, the government provides guidance which can be found here.
Owners of business assets may be able to gift these without a CGT implication by way of ‘Hold-Over Relief’. These rules work similarly to gifts between spouses, with a few extra quirks. Requirements and eligibility for Hold-Over Relief can be found here.
Get in touch
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No financial decisions should be taken based on the content of this website or associated videos. The guidance contained within this website is subject to the UK regulatory regime and is therefore primarily aimed at viewers in the UK. Always take full individual advice first. Regulations and legislation governing taxation, investments and pensions may change in the future.
The content on this page is accurate as of the 2024-25 tax year.