Capital gains tax is a very complex area of tax. We asked Anand in our Corporate Tax team to help us navigate the tax.
Capital gains tax (CGT) is the tax on the profit you make when you sell or ‘dispose of’ (including gifts) an asset that has increased in value during your ownership or deemed ownership. It is important to note that the tax is levied only on the gain made from the sale, not the total sale price.
CGT is important whether you’re selling property, shares or valuable personal items, as each type of asset has different rules and rates. For example, selling a second home or investment property can attract a higher rate of CGT than other assets. Certain allowances and exemptions can also make a big difference to the amount of tax you pay.
This guide will examine CGT in-depth, covering everything from how it is calculated to the allowances, exemptions, and reliefs available. By understanding these subtleties, you can plan better, be tax-compliant, and potentially save a lot of money.
An overview of capital gains tax
CGT is typically payable when you sell, gift or otherwise (see below) dispose of an asset for more than the value/cost at the date of acquisition. The tax is levied on the profit (gain) made from the sale, not the total sale price. For instance, if you purchase artwork for £10,000 and sell it for £50,000, CGT is calculated based on the £40,000 gain, not the full £50,000. The costs of acquisition and disposal e.g. legals, seller commissions, stamp duty land tax (where property is sold) etc are also deductible when calculating the gain.
Capital costs that enhancement the value of the asset can sometimes also be claimed against the gain but the details of this are beyond the scope of this article.
Disposal includes selling the asset, giving it away as a gift, transferring it, exchanging it, or receiving compensation for it, such as an insurance payout. Understanding what constitutes a disposal is essential to ensure compliance with CGT regulations.
Current Capital Gains Tax allowances
You only pay CGT on gains exceeding your Annual Exempt Amount (AEA). For the 2024/25 tax year, this threshold is set at £3,000. This means that if your total gains within a tax year are below £3,000, you won’t have to pay CGT. This threshold was reduced from £6,000 in April 2024, making it more likely that individuals will incur CGT on their gains.
It’s also worth noting that these allowances are not transferable between spouses or civil partners. Each individual has their own allowance, and any unused allowance cannot be carried forward to future tax years. However, assets can be transferred between spouses/civil partners with no CGT implications, thus allowing a couple to utilise one another’s allowances.
Capital Gains Tax rates
The rate of CGT you pay depends on your overall taxable income and the type of asset sold. Here’s a detailed look at how the rates apply:
• Basic Rate Taxpayers: If your annual income (plus the gain) is under £50,270, you will pay 10% on most gains and 18% on gains from residential property.
• Higher or Additional Rate Taxpayers: If your annual income (plus the gain) exceeds £50,270, the rates increase to 20% on most gains and 24% on gains from residential property. If the gain moves you from below £50,270 to above it, then some portion will be taxed at the lower 10%/18% and the balance at the higher 20%/24% rates.
The rates are structured to align with income tax bands, ensuring that those with higher incomes pay a higher rate on their capital gains. This progressive structure aims to provide a fair tax system where the wealthier contribute more.
There is a special 10% rate of CGT for Business Asset Disposal Relief qualifying disposals on certain business assets, shares in trading companies and furnished holiday lets.
Assets that fall under Capital Gains Tax
Any asset owned, whether in the UK or not is potentially subject to UK CGT. There are limited exceptions to this rule for non-domiciled individuals.
Personal possessions
Personal possessions such as artwork, jewellery, and antiques are subject to CGT if their value exceeds £6,000. Therefore, if you plan to sell a valuable heirloom, car registration number or an art piece that has appreciated in value, it’s crucial to consider the potential tax implications. However, some personal possessions are exempt from CGT, such as:
• Cars: Almost all cars are exempt from CGT, regardless of their value.
• Wasting assets: Items with a useful life of 50 years or less, such as certain machinery and equipment, are not subject to CGT as long as they are not used for business purposes.
Understanding which items are taxable and which are not can help you make informed decisions when selling personal possessions.
Property
CGT primarily applies to properties that are not your main home. This includes:
• Second homes: Properties used as holiday homes or secondary residences.
• Rental properties: Real estate held for rental income.
• Business premises: Properties used for business purposes.
Your primary residence is generally exempt from CGT due to Private Residence Relief (PRR). Jointly owned properties are taxed only on your share of the gain, so it’s important to understand your ownership percentage.
Shares
Share investments are usually subject to CGT when sold for a profit. However, shares held in tax-efficient accounts such as Individual Savings Accounts (ISAs), pension schemes or Personal Equity Plans (PEPs) are exempt.
Some employee share schemes, like the Enterprise Management Incentive (EMI), offer favourable tax rates.
Business assets
If you own an unincorpated business, certain business assets are liable for CGT. This includes:
• Machinery: Equipment used in business operations.
• Goodwill.
• Trading premises.
• Intellectual property: Patents, trademarks, and other intangible assets.
Companies have different tax rules on intellectual property.
When selling a business or restructuring, understanding the CGT implications is crucial for effective financial planning.
Capital Gains Tax exemptions
Main residence
Private Residence Relief (PRR) exempts your primary home from CGT. To qualify, the property must be your main residence for the entire period of ownership. However, there are specific rules and conditions:
• Letting Relief: If part of the property was let out, you might still qualify for partial relief.
• Periods of absence: Certain periods when you were not living in the home may be exempt, provided specific criteria are met.
Gifts
Gifts to your spouse or civil partner and gifts to charities are exempt from Capital Gains Tax. This can be a strategic way to transfer assets without incurring tax liabilities.
Spousal planning can also be effective to crystallise gains to use the annual exemption each year.
Tax-efficient investments
Interest, dividends and specific share sales within ISAs, PEPs and pension schemes are outside the scope of CGT. These tax-efficient investment vehicles can help grow your wealth without triggering CGT.
Investing in the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS), and Venture Capital Trusts (VCTs) can also provide significant CGT exemptions. These schemes offer attractive income tax and CGT reliefs, including the potential for CGT exemption on gains from investments held for a specified period (as well as deferring gains from earlier disposals), making them highly beneficial for investors looking to minimise their CGT liabilities.
Capital losses and reliefs
If you incur a loss on the sale of an asset, you can offset this loss against any gains, reducing your overall CGT liability. Here are some key points to consider:
• Claiming losses: You must claim the loss in your tax return to offset it against gains.
• Carry forward: Unused losses can be carried forward to future tax years, providing flexibility in tax planning.
Professional advice can help ensure you maximise the benefit of these reliefs.
When must Capital Gains Tax be reported and paid?
Reporting and paying CGT must be done by specific deadlines, which vary depending on the type of asset and the nature of the disposal. Adhering to these deadlines is crucial to avoid penalties and interest charges.
Reporting and payment deadlines for UK residential property
For disposals of UK residential property, the key deadlines are:
• For disposals completed on or after 27 October 2021: You must report the sale and pay any CGT due within 60 days of the completion date. This applies to the sale, gift, or transfer of the property.
• For disposals completed between 6 April 2020 and 26 October 2021: The reporting and payment deadline was 30 days from completion. These tighter deadlines aim to ensure that tax liabilities are settled promptly and reduce the risk of non-compliance.
Reporting the gain requires separate registration online with HMRC. There are limited exceptions to permit paper filings as an alternative. Non-UK residents are subject to slightly different reporting rules as shown below.
Reporting and payment deadlines for other assets
For other types of assets, such as shares, personal possessions, and business assets, the CGT reporting and payment process is slightly different:
• Self assessment tax return: If you are already filing a self assessment tax return, you should include your Capital Gains Tax calculations in your annual return. The deadline for submitting your self assessment tax return online is 31 January, following the end of the tax year in which the disposal occurred. If you file a paper return, the deadline is 31 October of the same year.
• Real-time capital gains tax service: HMRC offers an optional ‘real-time’ CGT service for more immediate reporting. This allows you to report gains and pay any CGT due before the end of the tax year, providing a convenient option for those who prefer not to wait until their annual tax return.
The importance of timely reporting
Failing to report and pay CGT on time can result in significant penalties and interest. HMRC imposes these penalties to encourage timely compliance and accurate reporting. For instance, if you miss the 60-day deadline for a residential property sale, you could face initial penalties and daily charges until the tax is paid.
Non-residents and CGT reporting
Non-residents disposing of UK property (residential, commercial and shares in companies owning UK property) must also comply with reporting requirements, regardless of whether they owe any CGT. They must report the disposal within the same 60-day window.
By understanding these deadlines and methods, you can ensure compliance with CGT regulations, avoid penalties, and manage your tax liabilities efficiently.
How we can assist with capital gains tax
CGT can be daunting, but we can provide invaluable assistance in managing and mitigating your CGT liability. Here are some key ways we can help:
Accurate calculation of gains: We ensure precise calculation of capital gains by identifying deductible expenses and applying all available reliefs and allowances. This minimises your taxable gain and maximises the benefits of tax exemptions.
Strategic tax planning: We offer strategic advice on the timing of asset sales to maximise tax allowances and offset losses against gains. We also help utilise specific reliefs like Business Asset Disposal Relief to reduce Capital Gains Tax rates on qualifying business assets.
Compliance and reporting: We ensure compliance with HMRC regulations by preparing and submitting accurate tax returns and reports. We help maintain comprehensive records to meet all reporting deadlines and help you to avoid penalties and interest charges.
Advice on complex transactions: For complex transactions such as business asset sales, mixed-use properties, and jointly held assets, we provide expert guidance on accurately calculating CGT liability and applying for relevant reliefs.
Estate planning and inheritance: In estate planning, we develop strategies to minimise CGT on inherited assets. We advise on gifting strategies and using trusts to reduce tax liabilities for heirs.
Ongoing support and advice: We provide ongoing support by keeping up with changes in tax legislation and offering proactive advice to adjust strategies and minimise future CGT liabilities. We play a crucial role in managing capital gains tax efficiently. Our expertise in tax planning, compliance, and strategic advice helps optimise financial outcomes and ensure full compliance with tax regulations. For personalised CGT assistance, contact us; our expert team is dedicated to helping you achieve your financial goals while managing your tax obligations effectively.
If you would like help with any area of Capital Gains Tax, talk to us. You can contact us on 020 7870 9050 or email us at hello@rpgcc.co.uk.
