You made capital gains from the sale of two assets and losses from the sale of another. The gains are taxable at different tax rates. Can you use the losses to reduce the higher rate tax or how should they be allocated?
Tax rates
In relatively recent times the rates of capital gains tax (CGT) have changed more than for any other tax. Currently there are two pairs of main rates: 18% and 28% for gains made on the sale or transfer of residential property, and 10% and 20% (the lower rate applicable only for basic rate taxpayers) for other assets. There’s also a 10% rate (the business asset disposal relief (BADR) rate) for gains of up to £1 million from the sale of businesses. There is, of course, no rate of tax for capital losses, but their worth is affected by the gains to which they are applied.
Example 1. In 2019/20 Bill made a gain of £50,000 from the sale of a buy-to-let property. He is a higher rate income taxpayer for that year. He has £20,000 of capital losses brought forward from earlier years. The losses reduce the taxable amount of Bill’s gain which reduces the CGT payable on the property gain by £5,600 (£20,000 x 28%).
Example 2. In 2019/20 Ben made similar gains as Bill but from the sale of shares, and has similar losses brought forward. Ben is a basic rate taxpayer. His losses reduce his CGT liability by £2,000 (£20,000 x 10%).
Tip. Where in the same tax year you make gains which are taxable at different rates and you have losses in the same year or brought forward, the rules do not prevent you from deducting them from the gain(s) chargeable at the highest tax rate.
Example 3. In 2019/20 Bob, a higher rate taxpayer made two gains: £45,000 from the sale of a residential property (chargeable at 28%) and £16,000 from antique furniture (chargeable at 20%). He has capital losses brought forward of £5,000. He can use the losses and his annual CGT exemption (£12,000) against the gain on the property and so reduce his CGT bill by £4,760 ((£12,000 + £5,000) x 28%).
Sale of a business
The examples illustrate how the worth of capital losses can vary in relatively simple situations. In other circumstances the use of losses are less straightforward as one our subscribers discovered when working out the CGT payable on gains made from selling their business.
Losses and BADR
In 2019/20 our subscriber made a gain from selling their café. The sale qualified for BADR (formerly entrepreneurs’ relief) and so the 10% rate applies. In the same year they made a gain of £18,000 from selling a residential property on which the 28% tax rate applies. When working out the CGT position for the sale of an unincorporated business the gain or loss for each business asset must be calculated separately. Therefore, while the overall gain from the sale of the café was £40,000, this was actually a gain of £60,000 relating to the café premises and a loss of £20,000 in respect of the goodwill which they had bought three years earlier when they acquired the business.
Trap. Gains and losses from the sale of business assets to which BADR applies must be aggregated, i.e. the losses cannot be used to reduce capital gains made on assets which do not form part of the business. Unfortunately for our subscriber this means they are stuck with the 28% rate for the gain on the sale of their property.
Generally, you can use capital losses, and your annual capital gains exemption, to reduce tax payable at the highest rate. However, where gains and losses relate to the sale of business assets to which business asset disposal relief applies, the losses must first be used against business-related gains.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.