- What is Capital Gains Tax and what is it payable on?
On the sale (or disposal) of something (an ‘asset’), if it has increased in value to the extent that you make a profit, CGT may be due. In simple terms, CGT is a tax on the profit when you dispose of an asset that has increased in value.
CGT is different to income tax which, as it sounds, is charged on income such as salaries, dividends and interest. The rates of CGT are generally lower than income tax rates.
Assets include:
- Most personal possessions worth £6,000 or more e.g. antiques, paintings, jewellery
- Property that is not your main home – residential or commercial
- Your main home if it has been let out or used for business purposes
- Shares not held in an ISA or PEP
- Cryptocurrencies
- Business assets
Example 1
You bought a necklace for £5,000 and later sold it for £20,000. This means you made a capital gain of £15,000 (£20,000 - £5,000).
CGT is charged on the net gain arising and not the total amount of money that you receive.
Making a profit on disposal of an asset does not guarantee a CGT liability.
To reduce capital gains, there is a CGT allowance, various reliefs/deferrals and not all assets are subject to CGT, some are tax free! See below for more details.
2. What counts as a disposal?
A disposal for CGT purposes is more than a simple sale of an asset. A disposal of an asset includes:
i) Selling it
ii) Giving/gifting it away or transferring it to someone else
iii) Swapping it for something else, e.g. another asset
iv) Receiving compensation, e.g. insurance payouts on loss of an asset
It is important to note that a CGT liability can arise even without a traditional ‘sale’ occurring and in cases when no money is received for an asset.
3. When don’t you pay Capital Gains?
CGT is not payable on:
i) Cars (unless used for business purposes)
ii) Anything with a lifespan of less than 50 years
iii) ISAs or PEPs
iv) Betting and lottery winnings
v) Government gilts and Premium Bonds
The second point covers all items of machinery and also items such as antique clocks and watches.
Usually there is no CGT payable on gifts of assets made to your husband, wife, civil partner, or a charity.
4. How is Capital Gains calculated?
In most circumstances, your capital gain is the difference between what you paid for the asset and what you sold it for, i.e. proceeds less cost.
In addition to the actual cost of the asset, further deductions can be made for costs associated with both the acquisition and disposal of the asset.
For example, fees for valuing or advertising the asset prior to sale would be deductible. If you paid VAT on the acquisition of an asset (and you cannot reclaim it) this is also a deductible cost.
Any enhancement/improvement expenditure is also deductible. For example, the cost of an extension on a second home would be a deductible cost in calculating the capital gain arising on disposal.
For assets that have been owned since before March 1982, there are specific rules around the deductible acquisition cost.
5. Capital Gains allowances
A CGT liability only arises if your overall capital gains for a tax year exceed the tax-free allowance, the Annual Exempt Amount (“AEA”).
The tax-free AEA for the 2023/24 tax year is:
- £6,000 for individuals (£3,000 from April 2024)
- £3,000 for trusts (£1,500 from April 2024)
If you realise more than one capital gain, you can decide which gain(s) the AEA can be allocated against.
Example 2
Following from the example in Q1, on the sale of the necklace, you have realised a capital gain of £15,000.
After deduction of the AEA this leaves a taxable gain of £9,000.
6. Capital losses
On disposal of an asset, sometimes a capital loss may arise. These can be offset against other capital gains arising in the same or future tax years. These capital losses can be used to reduce your capital gains down to the AEA.
For capital losses to be used, they must be claimed by including it on your self assessment tax return. It is possible to write to HMRC to claim these if you do not submit a tax return.
Example 3
Following from the example in Q1, on the sale of the necklace, you have realised a capital gain of £15,000. From a disposal in a previous tax year, you have capital losses brought forward of £2,000.
After deducting the losses, this leaves a capital gain of £13,000 against which the AEA is deducted.
This leaves a taxable gain of £7,000.
7. What are the current Capital Gains rates?
The rate of CGT depends on the size of your gain, your taxable income and whether or not the asset disposed of is residential property (other than your main home).
For the 2023/24 tax year the basic rate band is £37,700.
Basic rate taxpayers
18% on gains from residential property
10% on gains from other chargeable assets
Higher rate taxpayers
28% on gains from residential property
20% on gains from other chargeable assets
If your capital gain exceeds the basic rate tax band, CGT will be payable at both the basic and higher rates.
Example 4
Your taxable income is £25,000 and your taxable gains are £15,000. Your gains are not from residential property.
First, deduct the AEA from your taxable gain. After deducting the £6,000, this leaves £9,000 to pay tax on.
Add this to your taxable income. Because the combined amount of £34,000 is less than £37,700 (the basic rate band for the 2023/24 tax year), you pay CGT at 10%.
This means you’ll pay £900 in CGT.
Example 5
The same scenario as Example 4 but with taxable income at £30,000.
You have gains to pay tax on of £9,000.
Add this to your taxable income. Because the combined amount of £39,000 exceeds £37,700, you will pay CGT at 10% and 20%.
After deducting your taxable income, you have £7,700 of basic rate band remaining. You pay 10% CGT on this amount (i.e. the amount taking you up to £37,700) and on the balance, £1,300, you pay CGT at 20%.
This means you’ll pay £1,030 in CGT.
8. What if my only ‘income’ is Capital Gains?
Income and capital gains share the same tax bands, as shown in Examples 4 and 5.
Consequently, if you have no taxable income and only capital gains, you have the full basic rate band available for taxing your capital gains.
Example 6
You have no income and have realised capital gains of £75,000. After deducting the AEA, you have taxable gains of £69,000.
You have the full basic rate band available so £31,300 of the capital gains are subject to CGT at 10%. £25,000 of the gains are subject to CGT at 20%.
This means you’ll pay £10,030 in CGT.
9. Paying Capital Gains tax
There are different ways to pay CGT due on UK residential property and gains on other assets.
In respect of UK residential property, you must report and pay any CGT due within 30 days of selling it. This requires an HMRC ‘Capital Gains Tax on UK property account’. Even if you are not UK resident for tax purposes you are still required to report the sale within 30 days, even if you have no tax to pay.
For capital gains arising on other assets, ordinarily these are reported via self assessment tax returns. The CGT will be due by 31 January following the end of the tax year.
10. Reliefs and deferrals
Capital Gains Tax reliefs include things such as non-domicile tax reductions.
There are various reliefs available where specific conditions are met. These are predominantly deferral reliefs with Business Asset Disposal Relief (“BADR”) providing relief through a lower rate of taxation.
BADR (formerly Entrepreneurs’ Relief) is a key relief. If certain conditions are met in respect of both the individual and the asset, CGT can be payable at a 10%. This is subject to the lifetime limit of £1million of capital gains.
Gift relief (hold over relief) is a deferral relief. Where business assets are gifted, including shares in some companies and assets used for business purposes, in some cases, it is possible to claim gift relief This in essence transfers the cost of the asset to the person receiving the asset. Consequently, nil or a reduced capital gain may arise.
Rollover relief is another CGT deferral relief available in respect of the disposal of business assets. Broadly, if the sales proceeds are reinvested in another business asset within three years of selling the original assets, the CGT may be deferred. It is possible that partial relief may be available if not all of the sales proceeds are reinvested.
A further form of reinvestment deferral relief is available when investments are made in small companies. These fall under the Enterprise Investment Scheme (“EIS”) and Seed Enterprise Investment Scheme (“SEIS”). In addition to CGT deferral options, both EIS and SEIS schemes offer income tax advantages but are, ordinarily, inherently more risky than traditional investments.