Capital Gains Tax (CGT) for Individuals: A Simplified Explanation

What is Capital Gains Tax?

Capital Gains Tax (CGT) is a tax on the profit (gain) made when an individual sells an asset, like property or shares, for more than they paid. In the ACCA TX exam, you’ll calculate taxable gains after applying reliefs and exemptions. Gains can be taxable or exempt, depending on rules.

Let’s explore a basic CGT computation.

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Key Components of CGT Calculation

To calculate CGT, you:

1. Determine the Gain: Sale proceeds minus cost (and allowable expenses).
2. Apply Reliefs/Exemptions: E.g., Annual Exempt Amount (AEA).
3. Calculate Tax: Apply the tax rate to the taxable gain.

Formulae

• Gross Gain = Sale Proceeds - Cost - Allowable Expenses
• Taxable Gain = Gross Gain - Annual Exempt Amount (if applicable)
• CGT Payable = Taxable Gain × CGT Rate

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Numeric Example

An individual sells a painting in 2025:

• Sale Proceeds: $25,000
• Cost (bought in 2010): $15,000
• Allowable Expenses: $500 (e.g., auction fees)
• Annual Exempt Amount (AEA): $6,000 (assume UK 2025 rate)
• CGT Rate: 20% (basic rate taxpayer)

Step 1: Calculate Gross Gain

• Formula: $25,000 - $15,000 - $500 = $9,500
• Gross Gain = $9,500

Step 2: Calculate Taxable Gain

• Formula: $9,500 - $6,000 = $3,500
• Taxable Gain = $3,500 (AEA reduces the taxable amount)

Step 3: Calculate CGT Payable

• Formula: $3,500 × 20% = $700
• CGT Payable = $700

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What Does This Mean?

• Gross Gain ($9,500): The profit before exemptions.
• Taxable Gain ($3,500): After deducting the AEA.
• CGT ($700): The tax due on the sale.

The individual might check: Were all allowable expenses claimed? Did they use the full AEA elsewhere?

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Why It Matters for ACCA TX

CGT tests your ability to:

• Compute gains accurately.
• Apply exemptions and reliefs.
• Understand tax rates and deadlines.

Practice with scenarios (e.g., shares, higher rates) to ace the TX exam!

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