What is Capital Gains Tax and How do I compute it?

Capital Gains Tax is a tax on the profit obtained from a disposal or exchange of certain kinds of assets. In Nigeria, Capital Gains tax is 10% of the profits from the sale of the qualifying assets. It is recognized in law under the Capital Gains Tax Act .

While CGT is 10% of your Capital Gains the tax authorities provide guidelines for determining what can be deducted from the sales proceeds before arriving at the Capital Gains. The formular for calculating Capital Gains Tax is as follows;

N

Sales Proceeds                                   XXX

Less: Allowable Expenses             (XXX)

Net Sale Proceed                               XXX

Deduct: Cost of Acquisition          (XXX)

Capital Gains                                      XXX

Capital Gains Tax at 10%               ZZZ

Steps used in computing CGT

Step 1 : Identify what the Sales proceeds of the asset you disposed

Step 2: Deduct the allowable expenses as determined by the tax office to arrive at the Net Sales Proceeds

Step 3: Deduct the cost of acquiring the asset originally from the Net Sales proceeds to arrive at the Capital Gains

Step 4. Multiply the Capital Gains by 10% to arrive at the Capital Gains Tax.

Allowable Expenses

As mentioned, certain allowable expenses must be deducted from the Sales proceeds before arriving at the Net Sales proceeds. They are as follows

• Selling expenses such as advertising and marketing cost spent before you sold the asset
• Professional fees such as fees paid to Estate Agents, Solicitors, Surveyors, Accountants, Estate Valuers, commissions etc
• Cost of refurbishing or improving the asset before being disposed

Note that allowable expenses typically considered under the company income tax or petroleum profit tax is not allowed. For example staff salaries, payment to suppliers, utility bills etc. Also note that when Assets are sold as stock or in the ordinary course of a business their profits are not subject to capital gains tax but to corporate tax of 30%. For example, if your business involves buying and selling houses then those houses are considered as stock and will be subject to capital gains tax.

What if I sell part of an asset?

This falls under partial disposal of an asset and is still subject to Capital Gains Tax. However, when part of an asset is sold, the problem is that of determining what the cost of the part being disposed is. For example, Imagine you bought a box of jewelry worth N1million 5 years back. You now decide to sell part of the jewelry  for N822,000. Assuming the remaining jewelry is valued at N2.1million What is the capital gains to be paid assuming you spent N55,ooo on selling expenses.

Since we need to determine the actual cost of part disposed the formula recommended by law is as follows;

X       Multiplied by Z

X   + Y

X – Sales proceeds of part disposed

Y- Market Value of part not disposed

Z – Cost of acquiring the whole asset

We know X = N822,000, Y= N2.1million and Z= N1million.

Cost of part not sold is therefore N822,000/N822,000+N2,100,000 = 28.1%

28.1% multiplied by N1,000,000 = N281,314.17.

Capital Gains Tax can now be calculated as follows;

Sales Proceeds                N822,000

Less Expenses                (N55,000)

Net Sales Proceeds       N767,000

Cost of Part Sold         (N281,314.17)

Capital Gains                N485,685.83

Tax @10%                     N48,568.58

Are all Assets sold subject to Capital Gains Tax?

No. The following assets are exempted from Capital Gains

1. Gains on Stock, shares, and other government securities such as
treasury bonds, premium bonds and savings certificates.

2. Ecclesiastical, charitable or educational institutions of a public
character.

3. Any statutory or registered friendly society.

4. Any co-operative society registered under the Co-operative
Societies Law of any State in the Federation of Nigeria.

6. Gains on a decoration awarded for gallantry conduct.

7. Gains accruing to statutory bodies.

8. Gains arising from acquisitions, mergers, or takeovers provided
that no cash payment is made in respect of the shares acquired.

9. Gains on policies of assurance or deferred annuity unless the
beneficiary is not the original Owner as in an estate.

10. Compensation for a wrong or injury of libel, slander, enticement,
loss of office in a personal or professional capacity.

11. Gains from the main or only private residence of the individual
provided that the area does not exceed one acre.

12. Gains on private vehicles.

13. Gains on any asset used for the purpose of a trade or business
provided that the gain is used for replacing the old asset sold.

14. Gains from a provident or retirement benefit scheme.

15. Unit holders of a Unit Trust provided the proceeds are not
reinvested.

16. Any diplomatic body.

Who collects Capital Gains Tax?

The Federal Inland Revenue Service