ACCA Applied Skills · Taxation (UK)

The Basic Principles of Computing Gains and Losses in TX-UK

Computing a chargeable gain means taking disposal proceeds, deducting allowable costs to get the gain or loss, then setting off losses and the annual exempt amount. You then apply 18% or 24% for individuals, depending on how much of the basic rate band is left. Companies pay corporation tax instead of CGT.

What this chapter covers

This chapter sets out how capital gains tax (CGT) works for individuals. You learn who is chargeable, what counts as a disposal, which assets are chargeable, and how to compute the gain: proceeds less allowable cost. You then deal with losses, the annual exempt amount, the rates, payment dates, and the special rules for spouses, civil partners and connected persons.

The chapter is the foundation for everything else on chargeable gains. Later chapters add reliefs and special assets such as shares, chattels, private residences and business asset disposal relief. Each of them starts from the basic gain computed here. If this layer is weak, the later layers fail.

It also links to the rest of the paper. The CGT rates depend on your taxable income, so you need the income tax computation to find the unused basic rate band. The same gain can appear in a company question, where it is taxed as part of profits at corporation tax rates. The chapter is tested in objective questions and in written computations.

CGT appears in objective test questions and in the longer constructed response questions, usually as a computation for an individual. The steps are mechanical, so the marks are very reachable if you are accurate. Errors tend to come from rates, the order of loss relief, and the annual exempt amount. Get these right and you bank marks early. You also reuse the same layout in every later chargeable gains topic.

The basic principles of computing gains and losses: topics in the order to study them

1Chargeable Persons, Disposals and Chargeable AssetsYou must know who is taxed, what counts as a disposal and which assets are chargeable before any figures make sense.
2Computing a Chargeable GainThis is the core layout: proceeds less allowable costs. Every other topic builds on it.
3Capital Losses and ReliefLosses reduce gains, and you need the gain computation first to see how current-year and brought-forward losses are used.
4CGT Computation, Annual Exempt Amount and RatesThis pulls the earlier steps into a full computation. You apply the £3,000 annual exempt amount and the 18% and 24% rates.
5CGT Payment Dates and AdministrationOnce you can compute the tax, you learn when it is due and what must be reported.
6Husband and Wife Transfers and Connected PersonsThese are special rules that change the normal computation, so they come last, once the normal rules are secure.

How to prepare The basic principles of computing gains and losses

Work from the rule to the computation, then to timed practice. Keep a single layout and use it every time.

Learn the definitions first: who is chargeable, what a disposal is, and which assets are chargeable. Be able to say why an item is or is not a disposal.
Memorise the gain layout: disposal proceeds, less incidental costs of disposal, less allowable cost including acquisition costs and enhancement expenditure, equals the gain or loss.
Practise loss relief in order. Current-year losses are set against current-year gains in full. Brought-forward losses are used only as far as needed to reduce gains to the annual exempt amount.
Learn the rates and the annual exempt amount from the tax rates and allowances ACCA gives you. Practise finding the unused basic rate band from taxable income, so you know how much of the gain is taxed at 18% and how much at 24%.
Learn the payment and reporting rules, and the no gain/no loss treatment of transfers between spouses and civil partners, plus the market value rule for connected persons.
Finish with mixed objective questions and one or two full written computations under time. Check each answer against the layout and the rates.

Common mistakes in The basic principles of computing gains and losses

Using the brought-forward loss before the annual exempt amount, or the other way round.
Fix: Set current-year losses off first, in full. Deduct brought-forward losses only down to the annual exempt amount.
Applying 24% to all of a gain, or 18% to all of it.
Fix: Work out taxable income, subtract it from £37,700, and tax gains up to that amount at 18% and the rest at 24%.
Treating a spouse transfer as taxed at market value.
Fix: For spouses and civil partners living together, transfer at no gain/no loss, so the receiver takes over the original cost.
Leaving out incidental costs of acquisition or disposal, or deducting revenue repairs.
Fix: Include fees directly tied to buying or selling and capital enhancement spending. Do not include day-to-day repairs or running costs.
Using the wrong amount for a connected person disposal.
Fix: Substitute market value for proceeds when the disposal is to a connected person, and apply the special loss restriction.
Writing only a final tax figure in a written question.
Fix: Show each step in a clear layout: gain, losses, annual exempt amount, taxable gain, then tax at each rate. Marks go to the working.

Last-day revision: The basic principles of computing gains and losses

CGT is charged on chargeable gains made by individuals on chargeable disposals of chargeable assets.
Gain = disposal proceeds less incidental disposal costs less allowable cost (including enhancement expenditure).
The annual exempt amount is £3,000.
CGT rates for individuals are 18% and 24%. The lower rate applies to gains within the unused basic rate band, which is £37,700 less taxable income.
Current-year losses must be set off against current-year gains in full, even if this wastes the annual exempt amount.
Brought-forward losses are used only to reduce gains to the annual exempt amount, so none of it is wasted.
Losses are not carried back, and the annual exempt amount cannot be carried forward.
Transfers between spouses and civil partners living together are on a no gain/no loss basis.
Disposals to connected persons are deemed to be at market value. Losses on such disposals can be set only against gains on other disposals to the same person.
Business asset disposal relief is taxed at 14%, with a lifetime limit of £1,000,000.
Companies do not pay CGT. Their gains are included in profits for corporation tax.
Check the exact payment and filing dates in your study text, and learn them as a pair.

The basic principles of computing gains and losses practice questions

The basic principles of computing gains and losses in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

The basic principles of computing gains and losses: frequently asked questions

What is the annual exempt amount for CGT?

It is £3,000 in the tax rates and allowances ACCA provides for this exam. You deduct it from net gains after current-year and brought-forward losses. Any unused amount is lost.

What CGT rates apply to individuals in TX-UK?

The lower rate is 18% and the higher rate is 24%. The lower rate applies to gains that fall within the unused part of the £37,700 basic rate band. The higher rate applies to the rest.

Do capital losses reduce income?

In general, no. Capital losses are set against chargeable gains, not against income. Unused losses are carried forward to be set against future gains.

Is the TX-UK CGT chapter tested in objective questions or written questions?

Both. Expect objective questions on the definitions, simple gain figures and losses, and written computations for individuals in the constructed response section. Practise both formats.