What is Chargeable Capital Gain Tax?
To determine CGT, you first need to calculate the chargeable capital gain made on the asset disposal. This is arrived at by deducting the cost base from the sale proceeds.
Mathematically:
Chargeable Capital Gain = Sale Proceeds – Cost Base
Where:
- Sale Proceeds is the total amount received from transferring ownership of the asset. This includes cash, property, goods or any compensation received.
- Cost Base is what you paid to acquire the asset plus any related expenses and improvements made until the time of disposal.
Step 1: Determine Sale Proceeds
The sale proceeds is the full monetary consideration received from disposing the capital asset. This includes:
- Cash proceeds paid by buyer
- Fair market value of any goods or services received
- Other compensation such as assets or property
For example, if you sold your old car for N2 million cash and received a new TV worth N200,000, your total sale proceeds from disposing the car is N2.2 million.
Step 2: Determine Cost Base
The cost base includes:
- Purchase price paid for the asset
- Incidental costs related to acquiring the asset such as legal fees, taxes, commissions
- Improvement costs spent on the asset before disposal
- Expenses associated with selling the asset
Mathematically:
Cost Base = Purchase Price + Acquisition Costs + Improvement Costs + Disposal Expenses
For example, if you bought shares for N1 million, paid N50,000 in brokerage fees, and N20,000 in trading fees to sell the shares, the cost base is N1.07 million (N1m purchase + N50k acquisition costs + N20k disposal costs).
Step 3: Deduct Exemptions and Reliefs
Certain capital gains are exempt from CGT in Nigeria. Common exemptions include:
- Sale of primary residence if owner occupied for up to a year
- Gifts and inheritance transfers
- Proceeds reinvested through rollover relief
Step 4: Adjust Cost Base for Inflation
For assets held over 12 months, the cost base can be adjusted for inflation using the consumer price index (CPI). This minimizes the capital gain amount.
Adjusted Cost Base = Cost Base x CPI Adjustment Factor
Step 5: Compute Capital Gains Tax
Once chargeable capital gain is determined, CGT is calculated as follows:
CGT = Capital Gains x Tax Rate
Where standard tax rates are 10% for individuals, and 20% for companies.
Step 6: Report and Pay Capital Gains Tax
CGT should be properly declared and paid to FIRS within 90 days of disposing the chargeable asset. Late payment attracts hefty penalties.