What Is Chargeable Gain?

"Chargeable gain" is a British term for the increase in an asset's value between the time it is purchased and the time it is sold, which becomes subject to capital gains tax. Chargeable gains can often be offset by chargeable losses, reducing the amount of tax needed to be paid. U.K. taxpayers are also allowed to reduce chargeable gains by taking inflation into account (also known as an "indexation allowance").

Key Takeaways

  • "Chargeable gain" is a term used in the United Kingdom for the increase in an asset's value between the time it was purchased to the time it was sold, also known as appreciation.
  • Any profit realized from the sale of an asset is subject to a capital gains tax.
  • U.K. taxpayers are allowed to offset the taxable amount by recording allowances against the value. This includes inflation.
  • If the asset was a gift or acquired by other means than a purchase, its market value at the time it was received is used in place of the purchase price to calculate the chargeable gain.

Understanding Chargeable Gain

It is always the hope of an investor that when an asset is purchased it will appreciate in value. If an investor buys Stock ABC for $10, they hope to sell it at a higher price, making a profit off the purchase and sale. In most nations, the profit made from the purchase and sale of an asset is subject to a tax.

Certain expenses associated with buying, selling, or improving the asset, such as fees or commissions, may be deducted from the amount of the chargeable gain. For example, if a British corporation sells an office, land, or securities it owns at a profit, HM Revenue and Customs (the U.K. equivalent of the Internal Revenue Service in the U.S.) categorizes the event as a chargeable gain.

If the assets in question qualify for capital allowances, any loss claimed against the chargeable gain would also be reduced by value stemming from the capital allowances. For instance, if an asset that was acquired for 7,000 British pounds might generate 2,000 British pounds in capital allowance while it was owned. When the asset is later sold, for example, for 3,000 British pounds, the company would only record 2,000 British pounds as the capital loss.

In the U.S., for an asset held for more than one year, the capital gains tax is either 0%, 15%, or 20%, depending on the individual's income. If held for less than a year, the capital gains tax is the same as the ordinary income tax.

Chargeable gain can be thought of as being equivalent to the U.S. term capital gain. In the U.S., any profit on an appreciation of an asset is subject to a capital gains tax. In the U.K., the capital gains tax for basic income is 10% (18% on residential property) or 20% (28% on residential property) for those individuals above the basic tax bracket.

Special Considerations

If the asset was not purchased because it was received as a gift or by other means, its market value at the time it was received is used in place of the purchase price to calculate the chargeable gain. Chargeable gains can include compensation received for damages to or the destruction of an asset.

For instance, if a company purchased machinery used for production and that machinery is later damaged in a fire, the company might receive funds as recompense for that damage. If the compensation exceeds the purchase price or the current market value of the machinery, which may vary due to age, the excess funding could qualify as a chargeable gain.

Items not counted as chargeable gains include any gains that stem from proceeds that fall under income taxation, the gains from exempt assets, as well as other types of exemptions, such as personal exemptions on capital gains tax.

There may also be thresholds for when taxes are triggered on chargeable gains. This is typically allowed for the initial money recorded as gains up to a specific threshold, which may change depending on the limits set for each tax year. Taxes would then be levied on the chargeable gains that exceed that threshold.