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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Losses: set off from 2010-11: example

An individual disposes of a business in August 2010. The assets of the business included in that disposal are the premises, disposed of at a loss of £20,000 and goodwill, disposed of at a gain of £25,000. He claims Entrepreneurs’ Relief (see CG63950+). He has not previously made any claims to Entrepreneurs’ Relief. He also makes the following non-business gains and losses in 2010-11:

  • a gain of £10,000 in May 2010
  • a gain of £17,000 in December 2010
  • a loss of £8,000 in January 2011.

His income for 2010-11 is £25,000 after deducting his personal allowance. The annual exempt amount for 2010-11 is £10,100 and the basic rate band is £37,400.

The net gain that qualifies for Entrepreneurs’ Relief is computed by deducting the loss on the business premises from the gain on goodwill, producing a net gain of £5,000. That gain will be taxed at 10%. The loss on the premises must be deducted from the gain on the goodwill made in the same qualifying business disposal, see CG64125, and that loss will not otherwise be available.

The unused amount of basic rate band is £12,400 (£37,400 less £25,000). This is further reduced by the net gain of £5,000 that qualifies for Entrepreneurs’ Relief, leaving £7,400 basic rate band left.

The gain of £10,000 in May 2010 is liable to be taxed at 18%.

Next the individual has to consider how to deduct his loss from his gains in the way that is most beneficial. He would do this by deducting the loss from gains taxed at the highest Capital Gains Tax rate. Without taking into account losses and annual exempt amount, £7,400 of the gain of £17,000 in December 2010 would be taxed at 18%. The remaining £9,600 would be taxed at 28%. So it is beneficial to set the loss of £8,000 primarily against this gain, leaving £9,000, of which £1,600 (£9,000 less £7,400) would be taxed at 28%.

Finally the individual has to consider how to deduct the annual exempt amount from his gains in the way that is most beneficial to him, by deducting it from gains taxed at the highest Capital Gains Tax rate. The annual exempt amount would first of all be set off against the net December 2010 gain of £9,000 after deducting losses, leaving £1,100 (£10,100 less £9,000) that can be set off against the May 2010 gain charged at the next highest tax rate, 18%.

Summary

  Entrepreneurs’ Pre-23 June   Gains from 23 June Total  
             
  Relief disposal gains        
Goodwill £25,000          
Premises (£20,000)          
  £5,000 £10,000   £17,000    
Set off loss       (£8,000)    
  £5,000 £10,000   £9,000    
Set off annual            
exempt amount   £1,100   £9,000    
  £5,000 £8,900   Nil    
Capital Gains            
Tax at 10% 18%        
Capital Gains            
Tax payable £500 £1,602     £2,102