Example 1: CGT computation
Sammy Small sold the
following assets in the tax year 2013/14 making capital gains of £12,000;
£10,500 and £22,000.
He also sold one asset
realising a capital loss of £15,500.
Sammy’s net capital gain =
[£12,000 + £10,500 + £22,000] - £15,500 = £29,000
Net capital gain
chargeable to CGT: £29,000 - £10,900 = £18,100
Example 2: Wastage of annual exempt amount
Mary Tall sold two assets
in the tax year 2013/14, making a capital gain of £10,900 on one asset and a
capital loss of £10,000 on the other asset.
This produces a net
capital gain of £900 which is reduced to nil (and hence no CGT charge) when the
£10,900 annual exempt amount is deducted.
However, £10,000 (ie
£10,900 less £900) of the annual exempt amount has been wasted.
Example 3: Deferring a capital loss
Mary (in Example 2) could
have avoided this situation if she had deferred making the capital loss to the
next tax year 2014/15.
In this case she would
still have had no CGT liability for 2013/14 (ie £10,900 less £10,900) and, in
addition, would have a capital loss of £10,000 to use in the tax year 2014/15
and/or later tax years.
Capital losses brought forward
Where capital losses are brought forward from one or more prior tax
years such losses may be offset against any net capital gains as appropriate so
as to avoid losing any annual exempt amount.
Example 4: Effective capital loss utilisation
Tom White made capital
losses of £3,000 and £4,000 in the tax years 2011/12 and 2012/13 respectively.
Tom thus had £7,000 of capital losses to carry forward.
In the tax year 2013/14,
he made a capital gain of £13,900 and a capital loss of £2,000.
Net capital gain 2013/14:
[£13,900 - £2,000] - £1,000 - £10,900 = £nil
Net capital gain
chargeable to CGT = £nil
Note only £1,000 of the
capital loss of £7,000 was used. This then left £10,900 subject to CGT before
deduction of the £10,900 annual exempt amount, reducing net capital gain to
nil.
Thus, £6,000 of the £7,000
capital losses brought forward remain available to be carried forward.
Thus, whereas capital losses of a tax year must be offset against capital gains for that tax year, capital losses brought forward may be used in such a manner so as to maximise use of the annual exempt amount.
Other uses for capital losses
As indicated above, capital losses are used primarily to reduce the amount of capital gains subject to CGT.
However a capital loss, which arises on a disposal of shares in certain trading companies or in respect of which enterprise investment scheme income tax relief was attributable, may be offset against income (not capital gains) of the tax year in which the capital loss is incurred and/or the preceding tax year.
Practical Tip :
Before making a disposal of an asset, check whether it may be more CGT efficient to perhaps defer disposal to the following or later tax year.