Capital Gains Tax and costs

Matthew2018 wrote: »

Yes you are right, HMRC does appear to act the way you say, calculating the gain without accounting for operating costs. If those are the rules there's nothing I can do about it.

There is no "HMRC appear to" about it. It's not about how they 'appear' to be treating it based on some obscure case law and grey areas. It is about what the relevant law says: taxation of chargeable gains act 1992 is over 25 years old by now and there has been a capital gains tax in this country for over fifty years. If you go to outher countries with capital gains regimes, you'll find much the same.

You are looking to be taxed under the capital gains regime. That relates to gains made on disposing of a capital item for more than you paid for it. So, 'operating costs' do not come into it. There is no 'operating a business' if you are claiming to have simply sold an asset for more than you have paid for it on an ad hoc basis without operating a business.

As mentioned in an earlier post: If you prefer, you could tell them you were operating a business of trading in whisky or diamonds or paintings. Then you can claim the 'operating costs' of that business as deductable from your sales income. But you won't get the preferential capital gains tax treatment.

However, as far as I am concerned, that does not make it equitable. If I have made a paper gain according to HMRC rules of £15,000 but have paid storage and insurance costs over several years, of £15,000, then you know and I know that I have made no gain at all. If I have to pay CGT on some of that paper gain then it effectively becomes a tax on capital not a capital gains tax.

You did make the gain, which is why you have tax to pay. Paying for someone to look after the goods or insuring them does not change the fact you made money by buying them at a lower price than you sold them at. The only time you get to include the operating costs is if you are doing it as a trading business.

Likewise I pay income tax on the salary from my job. I spend most of that salary living my life. But I don't get to deduct the costs of rent and food and utilities etc which are necessary for my survival and thus to complete my job's work: because it's not a tax on 'the financial surplus from living my life', it's a tax on employment income.

This is much the same as someone who owes a personal loan or some car finance or a mortgage, and has to pay interest out to the providers of finance, but at the same time has some money in a bank account that earns income, and is expected to pay income tax on the interest income to the extent it exceeds the relevant allowances and reliefs, without deducting the interest they paid out over the year. That's because it's a tax on interest income not a tax on profit - unless you are running a business, where tax is on profit and certain interest expense might be legitimate deduction.

So, tax on an individual who is making money other than by way of business does not allow all the deductions you might want, for 'operating costs'. That's normal.

I have to disagree with you about balance sheets. A balance sheet shows the state of affairs at a particular point in time. It can only show the value of of an asset at that point in time. It cannot show any increase or decrease in that asset value so no gains can be calculated.

Generally in most accounting systems the cost of each asset is recorded; and various rules allow you to change the carrying value of the asset. In the world of financial investment accounting it is possible to revalue assets at fair value at a period end; which doesn't cause you to lose track of what the assets originally cost, but is a separate process to recognise unrealised gains and losses at a point in time.

Even if you had two balance sheets at two different year ends you still would not have enough information to calculate gain. You could have made two purchases during the year, one major sale at the end of the year and 4 small sales during the year (1 per quarter) to cover fees. The calculation of CGT in this situation is complex.

Well, there are 5 cgt calculations because there are 5 disposals, but it will sound complicated if you try and do all the steps at once as one big event rather than keeping the records in a deentt level of detail as you go along.
I think the comment was a simplification but perhaps the poster things of it as 'balance sheet', because when acquiring the asset you replace the balance sheet item of 'cash' with the balance sheet item of 'cost of new asset acquired with the cash'. Then when you sell the asset you replace the cost of that asset that was in your balance sheet with cash again, whch takes its place on the balance sheet and the difference between the cash you are now getting and the cost you'd originally paid, falls out of the caluclation as a balancing figure: the gain or loss on disposal..

You can think of it as P&L-led if you like, but really, the P&L doesn't create the gain number - you are not bringing in any income items or operating expense items into the gain calculation, it is simply the cash proceeds received into the balance sheet less the carryng cost of the assets which had been previously acquired and stored in the balance sheet. What falls out as the difference is the gain, but you do not look at multiple P&L accounts and add or subtract them to work out what the balance sheet numbers are. It is the other way around: you konw what the balance sheet numbers are, because the'yre on your contract notes (for share purchases/sales) or they're on your receipts (if purchasing and selling a painting), and the different between them is the profit (or loss) on selling that item.