Capital gain & Taper relief

[raguvun]

Could anyone explain the complexity of capital gain tax. Every year there is an allowance against capital gain tax. If you are to sell an investment property which was bought in Nov.1999 and sold this year in july 2006, what will be the tax exepmtion. Would you also get a taper relief as you have had the property for over 3 years. The nett profit between sell & bought is �35000

[Pumpsticks]

Very simply, the gain is first reduced by indexation and taper relief. Indexation only applies for assets bought before 17 March 1998. This is a little complicated so i won't divulge further. as it won't apply in your case.

Taper relief is then applied. In you example you get 6 years taper relief- that is only 80% of the gain would be chargeable. In your case therefore only �28,000 would be chargeable.

The annual allowance you talked about is then taken from this figure. The annual allowance in question is the figure when the asset is sold. This year it is �8,800. Therefore your total chargeable gain is �19,200.

This is then added to your income to calculate the tax due- i.e. if you pay at the higher rate it is taxed at 40%, basic rate 20%, lower rate or nil rate 10%. If it spans two tax bands, i.e. basic rate and higher rate, you pay part of it at basic rate and part at higher rate.

Hope that is clear?

[raguvun]

Thank you very much - Pumpsicks.
Just one thing if you can clear that for me. How is taper relief calculated. From your explanation, I can see that for seven years it will be 20% of the gross gain. Would it have changed for different number of years. Once again thanks for your reply

[Pumpsticks]

The taper relief is reduced for assets held for over three years, as you originally suspected. So after three years 95% of the gain is chargeable, and it goes down in 5% blocks until an asset has been held for 10+ years when only 60% of the gain is chargeable. It is calculated on full years so if you bought in November 1999 and sold in July 2006 you get 6 years. Had you held the property unitl November you would have received 7 years and a furthther 5% discount i.e. 75% of the gain would be chargeable.