How to use your CGT annual exemption efficiently
Mixed gains
Our subscribers are lucky enough to jointly own a parcel of land and a small flat in addition to their home. They expect to make gains from the sale of the land and the flat of £80,000 and £300,000 respectively. As they want to use the proceeds from both sales to buy a single new property they want to know, as accurately as possible, how much tax they’ll have to pay on their gains.
Two calculations
They’ll need to work out and declare their share of the gains on their self-assessment returns but before that they must make a provisional calculation for their respective share of the gain relating to the flat, report it to HMRC and pay the tax within 60 days of the sale completion.
Tip. When making the provisional calculation for the flat the annual capital gains tax (CGT) exemption can be taken into account even if the sale occurs later than the sale of the land. The same applies for unused capital losses from earlier years and any for the same year as the gain, but only if they occurred before the date the flat was sold (the date contracts were exchanged).
Overall calculation
After both sales have gone through and a provisional calculation made for the CGT on the flat, our subscribers can move on to calculating their overall CGT bill. This can’t be entirely accurate until after the end of the tax year but they should be able to get close enough to determine how much of the sale proceeds they commit to buying the new property. This is where our subscribers’ ran into problems. They initially used HMRC’s online CGT calculator to help with the number crunching. The trouble is it can’t handle two or more gains if they are different types, e.g. residential property and gains on other assets. Our subscribers started to work out the tax manually but came unstuck when deducting their annual exemptions.
Exemptions and losses
Our subscribers realised that they can use their exemptions to reduce the provisional CGT bill but weren’t sure how to allocate them for the overall calculations. They also weren’t sure if the residential property gain must appear in the calculations first or second and whether the order makes any difference to their tax bills.
Tip. You’re entitled to apply your CGT exemption in whatever order you wish. It can be allocated to one gain or spread across each of them. Our subscribers should allocate their exemptions against the gain on the flat as this will save them the most tax at it’s charged at higher rates. The same applies to capital losses, if they have any.
Tip. It doesn’t matter what order you include gains in your calculation of your overall CGT position even if you have both residential property and other gains taxable at different rates, i.e. 18% and 28% for residential property gains and 10% and 20% for other gain.
As long as our subscribers use HMRC-approved software or its own online service to prepare their self-assessment returns, their annual exemptions will automatically be allocated in the most tax-efficient way, as described above.
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