CAPITAL GAINS TAX

Capital Gain Tax

Capital Gain Tax

Question 1

Keith and Judith's Capital Gains for 2011/12

When £40,000 is invested in a security for 1 year, pre tax return of 10% is earned and capital gain tax rate is 8% the net amount after tax will be as under:

Investment value in one year: £40,000

Capital Gains: £. 4,000

Capital Gain Tax @ 8% £. 6,000

Value after Tax: £50,000

Return after Capital Gain Tax: 9.2%

This value can be calculated through a single formula:

Value after tax = Principal * [(1+R) N (1-TCG) + TCG]

= 1,000,000 * [(1+10%) 1 (1-8%) + 8%]

= 1,092,000

Where

R: before tax rate of return.

N: No. of years

TCG: Capital Gain tax rate

In this way future value can readily be calculated for a number of investments.

In February 2012 she sells 400 Pearce plc shares for 2 per share (£2,080 disposal proceeds), incurring dealing costs of £105 including VAT.

Step 1

Number of shares Pool of actual cost

April 2006 The Section 104 holding is formed 1,000 £4,150

Step 2

January 2007

Add the allowable expenditure on the new shares to the pool of cost

Add cost of more shares 500 £2,130

1,500 £6,280

Step 3

May 2011

To calculate the gain or loss:

First, calculate the amount of allowable expenditure by multiplying the pool of cost by:

Number of shares sold = 700

Total number of shares in the holding 1,500

Cost £6,280 x 700

1,500 = £2,931

Second, calculate the gain or loss:

Disposal proceeds £3,360

minus allowable cost £2,931

Costs £ 100 £3,031

Chargeable gain £ 329.

Question 2

Shares sold to Pearce plc

 

 

 

 

 

 

January 1979

January 1980

March 1990

January 2000

March 2005

Face Value

£1,000 £1,000 £1,000 £1,000 £1,000

Coupon Payment

£100 £125 £150 £200 £75

Years to Maturity

3

5

6

4

6

Price

£1,078.73 £1,225.51 £1,381.32 £1,440.34 £1,023.83

After Rights Issue

 

Cash Flow

July 2010

1 May 2011

20 May 2011

24 June 2011

24 June 2011

Total

Liability

Year 1

£1,000 £1,250 £1,500 £2,000 £750 £6,500 £32,000

Year 2

£1,000 £1,250 £1,500 £2,000 £750 £6,500 £25,000

Once the disposable income has been identified, ...