Capital Gains Tax in Nigeria: A Comprehensive Guide

Capital Gains Tax in Nigeria: A Comprehensive Guide

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Capital gains tax (CGT) is an important tax that affects people and businesses when they sell certain assets in Nigeria. It is a tax that you have to pay when you sell or get rid of certain assets, like real estate properties, stocks, or bonds. It’s based on the profit you make from selling these assets. For example, if you sell a house or stocks and make a profit, you may need to pay capital gains tax.

The Capital Gains Tax Act (CGTA) of 1967 (as amended) serves as the foundation for the capital gains tax regime in Nigeria. It outlines the rules and regulations that taxpayers must adhere to when calculating and paying their capital gains taxes. To administer capital gains taxes, the Federal Inland Revenue Service (FIRS) oversees the implementation and enforcement of the CGTA and other related regulations. The current rate of capital gains tax in Nigeria is 10% for both individuals and companies.

Calculating Capital Gains

Calculating capital gains is a crucial step in determining the taxable amount and fulfilling one’s obligations under the capital gains tax regime in Nigeria. Let’s delve into the key elements involved in calculating capital gains.

Cost of Acquisition

The cost of acquisition refers to the amount initially paid to acquire the asset. It includes the purchase price, any legal fees, commissions, and other transaction costs directly related to the acquisition. It’s essential to retain documentation, such as sales contracts and receipts, to accurately determine the acquisition cost.

Cost of Improvements

If the asset underwent improvements or enhancements during the period of ownership, the cost of these improvements can be deducted from the capital gains calculation. Modifications may include renovations, additions, repairs, or any other expenses incurred to enhance the value or quality of the asset.

Incidental Costs of Disposal

When disposing of an asset, certain expenses directly associated with the sale or transfer can be deducted. These incidental costs may include legal fees, brokerage fees, advertising expenses, and other transaction-related costs incurred in the process of disposing of the asset.

Proceeds Sale

The proceeds of the sale refer to the amount received from selling or disposing of the asset. It includes the actual sale price, any reimbursement of expenses, and any consideration received, such as stocks or other assets, if applicable.

Capital Gain Calculation

Once the relevant figures are gathered—the cost of acquisition, cost of improvements, incidental costs of disposal, and proceeds of the sale—the capital gain can be calculated. The capital gain is determined by subtracting the total deductions (cost of acquisition + cost of improvements + incidental costs of disposal) from the proceeds of the sale.

Tax Scenario

Let’s consider a practical example to illustrate the calculation of capital gains tax in Nigeria:

Mr Adebayo purchased a piece of land in Lagos for ₦5,000,000 in 2010. Over the years, he made improvements to the land, incurring expenses of ₦1,000,000. In 2023, Mr Adebayo decided to sell the land for ₦9,000,000.

To calculate the capital gains tax, we’ll follow these steps:

Step 1: Determine the Cost of Acquisition:

The cost of acquisition is the original purchase price plus any directly related expenses. In this case, Mr. Adebayo’s cost of acquisition is ₦5,000,000.

Step 2: Consider the Cost of Improvements:

Mr Adebayo made improvements to the land, which amounted to ₦1,000,000.

Step 3: Calculate the Incidental Costs of Disposal:

Assuming Mr Adebayo incurred legal fees and other transaction costs of ₦200,000 when selling the land.

Step 4: Determine the Proceeds of the Sale:

The proceeds of the sale are the amount Mr Adebayo received from selling the land, which is ₦9,000,000.

Step 5: Calculate the Capital Gain:

To calculate the capital gain, subtract the deductions (cost of acquisition + cost of improvements + incidental costs of disposal) from the proceeds of the sale.

Capital Gain = Proceeds of Sale – (Cost of Acquisition + Cost of Improvements + Incidental Costs of Disposal)

Capital Gain = ₦9,000,000 – (₦5,000,000 + ₦1,000,000 + ₦200,000)

Capital Gain = ₦9,000,000 – ₦6,200,000

Capital Gain = ₦2,800,000

In this example, Mr Adebayo has a capital gain of ₦2,800,000.

Step 6: Calculate the Capital Gains Tax:

With the current capital gains tax rate of 10%, Mr Adebayo’s taxable capital gain is subject to this rate.

Capital Gains Tax = Capital Gain x Tax Rate

Capital Gains Tax = ₦2,800,000 x 10%

Capital Gains Tax = ₦280,000

In this case, Mr Adebayo would owe ₦280,000 in capital gains tax on the sale of his land.

Assets Subject to Capital Gains Tax

Not all assets are subject to capital gains tax in Nigeria. While capital gains tax generally applies to the sale or disposal of certain assets, there are exemptions and exceptions to consider. Here’s an overview of the types of assets that may be subject to capital gains tax and those that are exempt:

Real Estate Properties

This includes land, buildings, residential properties, commercial properties, and any other form of real estate.

Stocks and Shares

Capital gains tax applies to gains made from selling shares in companies.

Bonds and Debentures: Gains realized from the sale of corporate bonds and debentures are subject to capital gains tax.

Goodwill

If goodwill is sold or disposed of any profit derived from the transaction may be subject to capital gains tax.

Intellectual Property Rights

The sale or disposal of intellectual property rights, such as copyrights, patents, trademarks, or trade secrets, may trigger capital gains tax liability.

Assets Exempt from Capital Gains Tax

Government Securities

Gains from government securities, such as treasury bills and bonds issued by the government, are exempt from capital gains tax. This exemption aims to encourage investment in government instruments and support the development of the capital market.

Transfers Between Spouses

The transfer of assets between spouses is exempt from capital gains tax. This provision recognizes the familial relationship and aims to facilitate inter-spousal asset transfers without tax implications.

Transfers to Beneficiaries Under Wills

When assets are transferred to beneficiaries through a will or inheritance, capital gains tax may not apply. This exemption acknowledges the nature of inherited assets and ensures that the transfer process is not burdened by additional tax obligations.

Gifts to Charities

Assets gifted to charitable organizations or institutions are exempt from capital gains tax. This exemption encourages philanthropy and supports charitable endeavours.

Transfers Between Related Companies

The transfer of assets between related companies may be exempt from capital gains tax. This provision recognizes the intercompany nature of the transaction and aims to prevent double taxation.

It’s important to note that while these exemptions exist, specific conditions and criteria may apply. It’s advisable to consult the Capital Gains Tax Act, relevant tax authorities, or tax professionals to determine eligibility for exemptions and ensure compliance with the applicable regulations.

The Bottom Line

It is important to note that capital gains tax differs from the other taxes that have been addressed in previous articles. Here are some key differences between capital gains tax and the other types of taxes (VAT, Personal income tax, Withholding tax).

Nature of Tax

Capital Gains Tax: Capital gains tax is levied on the profit or gains earned from the sale or disposal of certain assets, such as stocks, real estate, and other capital assets.

Other Taxes: Other types of taxes in Nigeria include income tax, value-added tax (VAT), corporate tax, withholding tax, and various import and export duties. These taxes are typically levied on different sources of income or transactions.

Taxable Event

Capital Gains Tax: The taxable event for capital gains tax occurs when a capital asset is sold or disposed of, resulting in a gain or profit.

Other Taxes: Other types of taxes are usually triggered by specific events, such as earning income from employment, conducting business activities, or engaging in taxable transactions.

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