If you’re considering selling an asset, such as property, shares, or personal possessions, you might be wondering about Capital Gains Tax (CGT) and whether you’ll need to pay it. Here’s what you need to know about CGT and how it might affect you.
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What is Capital Gains Tax?
CGT is a tax on the profit made when you sell or dispose of an asset that has increased in value. It’s not the same as income tax, which is based on your salary, dividends, and interest. The rates of CGT are generally lower than income tax rates, and it’s important to note that not all assets are subject to CGT.
What is CGT payable on?
CGT is payable on most personal possessions worth £6,000 or more, including antiques, paintings, and jewellery. It’s also payable on property that isn’t your main home, shares not held in an ISA or PEP, cryptocurrencies, and business assets. However, if an asset hasn’t increased in value to the extent that you make a profit, you won’t be liable for CGT.
What counts as a disposal for CGT purposes?
Disposal for CGT purposes is more than just a simple sale of an asset. It includes selling an asset, giving it away, swapping it for something else, or receiving compensation, such as an insurance payout.
When don’t you pay Capital Gains?
CGT isn’t payable on cars (unless used for business purposes), items with a lifespan of fewer than 50 years, ISAs or PEPs, betting and lottery winnings, and government gilts and Premium Bonds. Additionally, there’s usually no CGT payable on gifts of assets made to your spouse or a charity.
How are Capital Gains calculated?
In most cases, your capital gain is the difference between what you paid for the asset and what you sold it for. 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, such as fees for valuing or advertising the asset prior to sale.
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). For the 2022/23 tax year, the tax-free AEA is £12,300 for individuals and £6,150 for trusts. If you realise more than one capital gain, you can decide which gain(s) the AEA can be allocated against. In April 2023, the exempt amount will be reduced by more than half to £6,000 per annum. From April 2024, this amount will be halved again to £3,000 per annum. There is currently no proposed change to the tax rates
On disposal of an asset, a capital loss may arise, which 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. However, for capital losses to be used, they must be claimed by including them on your self-assessment tax return.
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. For the 2022/23 tax year, the basic rate band is £37,700. Basic rate taxpayers pay 18% on gains from residential property and 10% on gains from other chargeable assets. Higher rate taxpayers pay 28% on gains from residential property and 20% on gains from other chargeable assets.
What if my only ‘income’ is Capital Gains?
If you have no taxable income and only capital gains, you have the full basic rate band available for taxing your capital gains.
Paying Capital Gains Tax
There are different ways to pay CGT due on UK residential property and gains on other assets. For 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’re not a UK resident for tax purposes, you’re still required to report the sale within 30 days, even if you have no tax to pay. Capital gains arising on other assets are reported via self-assessment tax returns, and the CGT is due by 31 January following the end of the tax year.
Reliefs and deferrals
Various reliefs are available when 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, and if certain conditions are met, CGT can be payable at 10%, subject to the lifetime limit of £1 million 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, it’s possible to claim gift relief. This transfers the cost of the asset to the person receiving the asset, so no or a reduced capital gain may arise.
Rollover relief is another CGT deferral relief available in respect of the disposal of business assets. If the sales proceeds are reinvested in another business asset within three years of selling the original assets, the CGT may be deferred. It’s 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 they’re inherently riskier than traditional investments.
In conclusion, understanding CGT is important if you’re thinking of selling an asset that has increased in value. There are various factors to consider, including what’s subject to CGT, how to calculate your capital gain, and when and how to pay the tax. By understanding the rules, you can ensure you’re compliant and potentially make use of reliefs and deferrals to reduce your tax bill.