Using CGT losses efficiently

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 2021/22 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 2021/22 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%).

Where in the same tax year there are gains which are taxable at different rates and the individual has losses in the same year or brought forward, the rules do not prevent them from deducting the losses from the gain(s) chargeable at the highest tax rate.

Example 3. In 2021/22 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 investor discovered when working out the CGT payable on gains made from selling their business.

Losses and BADR

In 2021/22 our investor made a gain from selling their café. The sale qualified for BADR 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.

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 investor this means they are stuck with the 28% rate for the gain on the sale of their property.