Capital Gains Tax

A CGT question is three decisions in a fixed order: what's exempt, what rate, what order the losses go in. First, the annual exempt amount of £3,000 comes off the top — the first slice of the year's gains is simply not taxed. Second, the rate: CGT borrows the client's INCOME tax position — gains fill whatever basic-rate band the client's taxable income has left, at 18%, and spill over into 24% beyond it. Before the exam shows you a 'higher-rate CGT' figure, ask what the client's income was; taxing a whole gain at one rate because the client 'is a basic-rate taxpayer' (or ignoring the leftover band because the gain is big) are the two standard wrong answers. Third, losses — and this is where the exam gets its cleanest traps, because the two kinds of loss follow OPPOSITE rules. Current-year losses are compulsory and unprotected: they come off current-year gains in full, first, even where that wastes the annual exempt amount — there is no election to save them. Brought-forward losses are protected: they are used only down to the level of the annual exempt amount, never below it, so nothing carried from the past is wasted covering a gain that was already tax-free. Anticipate the symmetrical mistake before it forms: candidates either give current-year losses the brought-forward protection, or force brought-forward losses to be used in full. Each kind of loss follows the other one's rule in a wrong answer.