It’s that time of the year, when people are filing tax returns and I’m getting lots of questions from people asking specifically about paying Capital Gains Tax (CGT).
They want to know how this particular tax is paid, when it’s triggered, how they can minimise it, how do they file a return, what happens if they incur a loss etc.
What is a Capital Gain
In its simplest form, it’s the difference between the amount you received for something after its sale, minus the amount you paid for it, less any allowable expenses.
For example, if you bought something for €5,000, and sold it for €10,000, you’ve made a chargeable gain of €5,000 and you must pay CGT on this amount. So, you liable for CGT on the chargeable gain and not the full amount you receive.
When CGT has to be paid
Okay, when you make any capital gain, whether that is from the sale of shares, an investment property or whatever, the timing of your sale influences when the tax due has, to, be paid.
For example, if you dispose of an asset between:
n January 1 and November 30, you must pay CGT by 15th December of the same year.
n December 1 and December 31, you must pay CGT by 31st January of the following year.
And important to note, that it matters you stick to these dates, because if you don’t, and end up making a late payment, you’ll incur an interest charge, or if you make a late return you can be charged a penalty, so be mindful of these dates.
How to pay CGT
You must pay your CGT online using Revenue Online Service (ROS) or myAccount. So, you need to set up an account, register for CGT and then make the payment via ROS or myAccount.
Filing a Return
Just because you’ve paid your CGT doesn’t mean you’re done at that, because you must then file a return by October 31 of the following year.
And there are different types of CGT returns, the most common being:
Form 12 (paper version) – if you are a Pay As You Earn (PAYE) taxpayer who must submit a tax return
Form 11 – if you are self-employed (or have other income that is not taxed under PAYE)
Form CG1 – if you do not usually submit annual tax returns or use the online Form 12
You can use ROS to file your Form 11, and or you can post the Form CG1 or Form 12 to your local Revenue Office.
Information to include on your CGT return
When you complete your CGT return you will need to include:
n a description of asset or assets you disposed of
n the amount you received for the asset or assets
n any reliefs you have claimed
n any unused losses from a prior year that are to be offset
n the chargeable gain (or loss)
n your taxable gain and CGT rate.
How to calculate CGT
Even if you dispose of an asset and you’ve made no gain, or there was a loss and therefore no CGT liability, you still must file a return despite no tax being due.
When making your calculation, you have a personal exemption of €1,270. So, if your gain is less than that amount, you have no CGT to pay.
A very quick note on this annual exemption. It can’t be carried forward from year to year. So, what some people do to reduce or avoid CGT, they make a disposal of a sufficient number of shares (if they have any that is) each tax year to give themselves a gain of €1,270. The shares disposed of, can be immediately re-acquired if you want to continue to hold them. These transactions are sometimes referred to as Bed & Breakfast sales.
I digress a little, so back to calculating your CGT.
The rate for CGT in most instances is 33%. (a rate of 40% is applied of gains originate from foreign life policies and foreign investment products)
And there are other allowable expenses you can deduct from the sale of your asset, that can be used to reduce your CGT liability. For example, if you were selling an investment property, you can reduce the liability by accounting for monies that were used to add value to the property, or other costs incurred when you sold the property i.e. solicitor and auctioneering fees.
If you’re disposing of shares purchased through an employee share purchase scheme (ESPP) an allowable expense that can be deducted from a gain, is the income tax incurred when the shares were acquired.
Sale of asset €10,000
Purchased for €5,000
Capital Gain €5,000
Allowable expense €500
Annual Exemption €1,270
Chargeable Gain €3,230
Tax Due (33%) €1,066
CGT when disposing of shares bought at different times
It’s pretty easy calculating your CGT liability when the shares you bought were acquired at the same time, but it’s likely people will have bought shares at different times and at different prices and in different amounts, and in instances like this, there are special rules for calculating CGT.
So, when you acquire shares at different dates, when you begin to sell some of them, regardless of what shares you choose, for CGT purposes, the oldest shares are treated as being sold first.
This is known as the First-in First-out (FIFO) rule.
Let me give you an example of how this works in practice.
Let’s assume, Liam bought 50 shares via his employers ESPP scheme in 2017 for €150 per share. In 2019 he bought a further 40 ESPP shares at €180 per share.
In November 2020, he sold 60 shares for €12,000.
Because Liam only sold some of his shares, he has to use the FIFO rule to calculate the purchase price, and by doing so, he treats the calculation as if 50 of the 60 shares sold, were those bought back in 2017 and 10 shares that he bought in 2019.
Calculation of CGT:
50 shares bought in 2017 at €150 = €7,500
10 shares bought in 2019 at €180 = €1,800
Purchase Price = €9,300
Shares sold for =€12,000
Capital Gain =€2,700
Annual Allowance =€1,270
CGT Liability =€472
Liam has, to pay this amount by, 15th December 2020, and file a return by 31st October 2021.
If you make a loss:
You can only deduct the loss from a gain made on a subsequent disposal of same-class shares acquired within the four weeks. There will be times when you make a loss rather than a gain, and if your dispose of different assets in the same year and one makes a gain and the other a loss, you can use the loss to offset the gain, provided they happen in the same year.
If you have no gain to offset against, you can carry forward with you the loss and use them against future capital gains you may make. You just need to include the carried-forward loss in your calculation of CGT for the later year.
And if your spouse or civil partner has made a gain, you can transfer your loss to them and they can use it, if you can’t.
Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at firstname.lastname@example.org or www.harmonics.ie
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