What is Capital Gains Tax (CGT Simplified)
Today we’ll discuss What CGT is, what assets qualify for CGT, who pays CGT, and the percentage charged.
What is Capital Gains Tax?
Capital gains tax is charged on the gains arising from disposal of a chargeable asset.
So, if Company A buys a generator for day-to-day use (a generator is an example of a chargeable asset) for 5 million naira, and later sells it for 6 million naira, Capital Gains Tax will be charged on the gains of 1 million naira.
What are chargeable assets?
Chargeable assets are assets owned by a legal entity, either by creation or acquisition, and later disposed. These assets are not part of the entity’s inventory, so they are not items purchased to be resold by the business; they are part of the assets for use.
However, circumstances may arise that lead to selling this asset and gains received from such sales, if any, will be subjected to CGT.
Chargeable assets include jewellery, buildings, land, patent rights, shares, copy rights, foreign currencies, stocks, debts, cars etc.
Some assets which aren’t chargeable to CGT when disposed are:
- Nigerian currency
- Nigerian government securities (such as treasury bills, treasury bonds)
- private residence
- gains received in form of retirement benefits
- life assurance policies
- personal injuries gratuities and loss of office below 10 million naira and;
- personal properties sold below One thousand naira.
The assets which are chargeable and non-chargeable to CGT are listed in the Capital Gains Tax Act. The assets mention previously are as listed in the Act as of 30th March 2021.
Is it expected that everyone who disposes a chargeable asset pays Capital Gains Tax?
No. The CGT Act states those that are exempted from paying CGT. Some of them are:
- religious bodies (like churches and mosques)
- educational institutions (like secondary schools and universities)
- statutory bodies
- co-operative societies registered under the co-operative society law and;
- trade unions registered under the trade union act.
Who Pays CGT?
Everyone not listed in the CGT Act as exempt, pays CGT.
What is the CGT Rate?
The statutory percentage of CGT is 10% of the gain.
Remember Company A, they purchased a generator for their day-to-day use for 5 million naira, they then sold it at 6 million naira. This means they made 1 million naira; this is their capital gain. The 1 million will be subject to 10% CGT, which is N100,000. This is what will be remitted to the relevant tax authority.
Capital gain can be rolled over in cases where the capital gained is reinvested in a similar asset.
Let’s say after Company A sold the generator purchased at 5 million naira for 6 million naira, they decided to buy a new one for 2 million naira. They will no longer need to pay the CGT on their initial capital gain of 1 million as it is assumed to have been rolled over into the similar asset procured with the gain.
However, if the new generator is being sold later, the purchase price will be calculated as:
the amount paid for the generator, which is 2 million in this case, less the capital gains from the sale of the previous generator, which is 1 million rolled over. Hence, the cost price of the new generator will be 1 million when calculating the CGT.