What is Capital Gains Tax?

Capital gains tax is payable on any profit you make when you sell a qualifying item that has increased in value.

CGT is only applicable to the amount of gain you have made and not the total value of the asset sold or disposed of.

For example; you bought an antique writing desk for £2,000 and then sell it for £8,000. You have made a gain of £6,000 (£8,000 – £2,000 = £6,000).

Each individual is entitled to a capital gains tax allowance called an annual exempt amount which let’s you make a gain every year without having to pay CGT.

The rate of capital gains tax you pay depends upon which tax bracket you are in, basic, higher or additional rate as per your income.

It can be quite complex to work out how much tax you actually owe and can be costly if you get your calculations wrong.

Our CGT guide is designed to provide the basics to help you make sense of capital gains tax so you can dispose or sell any assets in the best way for you.

Do I only pay Capital Gains Tax if I sell my item?

No, capital gains tax applies to ‘disposing of an asset’ too, which has multiple meanings. It includes; transference to another owner, giving as a gift, selling, compensation received for it and swapping it for another item.

What are ‘chargeable assets’ for Capital Gains Tax?

This is the list of things that you must pay capital gains tax on when you ‘dispose’ of them:

  • Any property that is not your main home.
  • Shares that are not in a PEP, ISA or NISA.
  • Business assets.
  • Your main home if it is used for business, is very big or you have rented it out.
  • Personal possessions that are valued at over £6,000, except for a car.

There are a number of reliefs available that you might be able to apply to your circumstances to make that tax bill smaller.

Is there anything you don’t have to pay Capital Gains Tax on?

Yes, there is some good news:

  • Any gifts to a charity, your spouse or civil partner.
  • Any gains that are under your Personal Allowance figure.
  • Pool, lottery or gambling winnings.
  • UK government gifts.
  • Premium Bonds.
  • PEPs, ISAs and NISAs.
  • Inherited assets are usually subject to inheritance tax, so you only pay Capital Gains Tax on anything you then sell at a later date.
  • Assets or people that are abroad.

If you are a UK non resident (for tax purposes) you still have to pay CGT on any British residential property but not on any other UK assets, as long as you do not return within 5 years of departure.

If your asset is not in the UK, then you may still have to pay CGT. There are a specific set of rules if you are a ‘non-domiciled’ UK resident claiming the ‘remittance basis’.

What is the CGT annual exempt amount?

The capital gains tax annual exempt amount is set at £3,000 per person.

The capital gains tax annual exempt amount is given at the start of each new tax year and allows you to make a gain of that amount without having to pay any CGT.

You are not able to carry forward unused annual exempt allowances into future tax years or backdate them.

What are the Capital Gains Tax Rates?

You only pay CGT on gains that take you over your annual exempt amount. The rate at which you will pay depends partly on the type of item sold or disposed of and the rate at which you pay tax normally.

  • Basic rate income taxpayers pay either 10% or 18% capital gains tax. If your gain takes your taxable income into a tax bracket above basic rate you will pay some CGT at the lower and higher rate.

The 10% tax CGT rate is specifically for a chargeable asset that is not a residential property. Qualifying residential properties are charged at the higher rate of 18%.

  • Higher rate and additional rate taxpayers pay 20% or 28% CGT.

Higher and additional rate taxpayers are charged 20% for a chargeable asset that isn’t a residential property and the higher rate of 24% for properties.

You can use our landlord specific capital gains tax guide if you are planning on selling a rental property.

How do I know if I need to pay CGT?

It can be rather tricky to work out what you owe, if anything!

Firstly for every chargeable asset you have ‘disposed of’ within the tax year, work out your gain. Then add all of these figures together and takeaway your allowable losses.

Any taxable gains that are over your allowance must be reported to HMRC and you will need to pay CGT on them.

If you are selling a property HMRC have a free work out your gain calculator which is easy to use and estimates what you could owe in CGT.

HMRC will calculate your CGT bill based on the information in your annual tax return.

How do I report and pay Capital Gains Tax?

You must register for and submit a self assessment tax return, making sure that you have completed the relevant sections concerning capital gains.

Details of each gain will be required, including original cost and the price you sold it for. Your excellent records will be invaluable to this process!

HMRC will then work out your CGT bill, which you must pay by the given deadline. HMRC are renowned for dishing out substantial penalties for late filing, inaccuracies and late payments – don’t get caught out.

Top tip!

For individuals and businesses an indisputable piece of advice is to keep all your receipts and maintain your records diligently.

Are there different rules for Capital Gains made by my business?

It is the same principle; it just applies to different assets and depends on your business’s set up.

For example you would pay CGT on these items if you are a sole trader, in a partnership or are self employed;

  • Registered trademarks.
  • Shares.
  • Plant and machinery.
  • Fixtures and fittings.
  • Business reputation.
  • Land and buildings.

You can also deduct particular costs from the amount you have to pay CGT on. For example; VAT, stamp duty, costs of improvements made to the asset and specific related professional fees (e.g. Valuer).

You cannot deduct any business expenses costs that you can claim or interest on a loan taken in order to buy the asset in question.

Are there any tax reliefs available to help with the CGT amount?

There are four different tax reliefs that could bring down or delay the total CGT you have to pay:

  • If you turn your business into a limited company then you can get Incorporation Relief which delays the CGT bill.
  • If you are in a business partnership, a sole trader or have shares in a ‘personal company’ then you might be eligible to claim Entrepreneurs’ Relief. This means that if you sell part or all of your business you only pay 10% CGT on profits.
  • As a sole trader or partner, if you used the asset for trading and then give it away you could claim Gift Hold-Over Relief. This means the person you give it to will pay the tax when they sell it.
  • Business Asset Rollover Relief is a possible way of delaying the payment of CGT when you buy a new asset within 3 years of ‘disposing of’ the of old one.

Do I need a Capital Gains Tax Accountant?

Taking advice on capital gains tax from an accountant before you sell, transfer or dispose of an item can bring you valuable tax savings.

Reviewing your CGT tax planning options with an accountant ensures any exemptions and reliefs are used properly and applied to your capital gains tax computations correctly.

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