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More often than not, the money you gain from a sale will be taxed, with gain defined as the difference between what you paid for an asset and what you sold it for.
You are probably aware that you can make certain deductions when calculating how much tax you owe. This can be really helpful, as it reduces the amount of tax you have to pay overall. But it’s important to know what deductions are permitted, as it means you won’t accidentally try to deduct anything that isn’t allowed. Plus, there may be some deductions you can make that you haven’t heard of. Read on to learn all about what counts as an allowable deduction for capital gains, and what this looks like in practice.
Losses
If an asset sells for less than you bought it for, remember to report this to HMRC, as the loss will then be deducted from any gains you made in the same tax year. It’s also worth noting that if, after doing so, your gains are still above the threshold for your tax-free allowance (£12,300 for an individual, £6,150 for trusts), you can also deduct unused losses from previous years. There’s no rush to do this, as losses can be deducted up to four years after you dispose of the asset.
Acquisition
The cost of acquiring an asset (or the cost you incur when creating something you then sell) is considered an allowable deduction for capital gains. Certain fees fall under acquisition costs, such as those paid to estate agents or solicitors when buying a house. Any Stamp Duty you have paid can also be deducted.
Be aware, however, that in the case of an inherited asset, the acquisition cost is the market value on the date of the previous owner’s death. So even if the market value increases, the acquisition cost will stay the same and you can’t deduct more.
If you acquire an asset as a gift, this can also affect the acquisition cost. If it’s given to you by a spouse, your acquisition cost is whatever they paid for it, but if it’s from anyone else, your acquisition cost is usually its market value on the date you received it.
Asset Enhancement
Enhancement refers to anything that adds value to the asset. Using a house as an example, this includes the costs involved in building an extension, fitting new bathrooms and kitchens, or having new windows installed. However, minor repairs and adjustments, such as fixing a small leak or fitting new locks, are not considered enhancements and therefore cannot be deducted from capital gains.
Other Things to Consider
It’s important to remember your tax-free allowance. This isn’t a deduction, but capital gains are only taxed once you surpass a certain amount. For 2021-2022, that allowance is £12,300 per year for an individual. So you do not need to pay Capital Gains Tax on the first £12,300 you make from sales.
If you’d like further advice on deductions for capital gains, we here at AccountantFor are happy to provide it. Get in touch with us and see how our accountants across the UK can help you to understand capital gains tax and find out more about what you can deduct.
Last Updated on May 29, 2024 by Daniel Tannenbaum ACCA
