CGT can be extremely complex, and with large sums of money potentially at play, frantic Googling probably isn’t the best way forward.
Here, we aim to answer some of your burning CGT-related questions using language you can understand.
What is Capital Gains Tax?
Simply put, Capital Gains Tax (CGT) is a tax chargeable on the profit you make when disposing of something that you own.
It is the gain you make that is taxed, not the total amount of money that you receive.
‘Disposing’ of an asset refers to:
- selling it;
- gifting, or transferring it to someone else;
- swapping it; or
- getting compensation for it – for example, by way of an insurance pay-out.
Capital Gains Tax for individuals
If you are an individual disposing of a property that is not your main residence, a main residence that has been let out or used for commercial purposes, any personal possessions worth more than £6,000, or shares that are not held in an Individual Savings Account (ISA) or Personal Equity Plan (PEP), you may be liable to pay CGT.
Capital Gains Tax for business owners
If you are a self-employed sole trader, or in a business partnership, you may be liable to pay CGT when you dispose of all or part of a business asset, including:
- land and buildings
- fixtures and fittings
- plant and machinery
- registered trademarks
- your business’s reputation
- shares
(Other organisations, such as limited companies, pay Corporation Tax on the profits made from selling their assets).
Current Capital Gains Tax rates
Depending on how much you earn in a tax year, your income in excess of the personal allowance will fall into one or more income tax ‘bands’, of which there are three; basic rate, higher rate and additional rate.
When it comes to CGT, it is these same bands which determine exactly how much you are liable to pay.
If you are a self-employed sole trader, or in a business partnership, you may be liable to pay CGT when you dispose of all or part of a business asset, including:
- The proportion of the gain which falls within the available basic rate band will attract CGT at 10 per cent (18% for residential properties).
- The balance of the gain, which falls within the higher or additional rate bands will attract CGT at 20 per cent (28% for residential properties).
It is also worth bearing in mind that a surcharge of 8 per cent applies to gains relating to the sale of residential properties that are not your main home and carried interest. In these circumstances, the gain falling within the basic rate band is taxed at 18 per cent, with any excess taxed at 28 per cent.
What allowances and reliefs are available to me?
Every taxpayer resident in the UK is entitled to an annual CGT exemption, which is set by the Government. This means that you will not pay CGT on gains worth less than the prescribed tax-free amount. For details of the annual exemption applicable at present, click here.
Worth bearing in mind is the significant changes to the CGT annual exemption that were announced at Autumn Statement 2022, which will see the tax-free amount drop from £12,300 to £6,000 from April 2023 and fall again in April 2024 to £3,000.
Your taxable gain is the amount remaining after deducting your annual exemption, as well as any capital losses, if applicable. Capital losses can be offset against any capital gains you make in the same tax year, or they can be carried forward. To make use of any capital losses, you must claim these on your Self-Assessment Tax Return.
Unlike capital losses, if you do not utilise your annual CGT exemption, this cannot be carried forward or transferred to another individual.
Assets gifted to a charity or community amateur sports club, or gifts between spouses and civil partners are generally exempt from CGT, whilst reinvesting your gains can enable you to defer or reduce the amount of CGT you are liable to pay.
In addition to personal reliefs, there are other reliefs that exist solely to benefit businesses.
Arguably, the most popular is Business Asset Disposal Relief (BADR) which enables sole traders, business partners and those who hold shares in a ‘personal company’ to pay just 10 per cent CGT on qualifying profits if they sell all or part of their business. The relief can also be claimed on more than one occasion, on gains up to a lifetime limit of £1 million.
Other reliefs and exemptions such as holdover relief, investor’s relief, incorporation relief, rollover relief and EIS relief are also available to business owners or qualifying investors.
When disposing of assets, we would encourage you to seek professional advice, at the earliest opportunity, to ascertain which relief/s you are entitled to.
Reporting and paying Capital Gains Tax
Before you report the Capital Gains Tax that you are liable to pay, you must have the calculations for each gain or loss that you will report, proof of costs and proceeds relating to each asset and any other relevant details, such as reliefs that you are entitled to.
How you report your liabilities will depend on the nature of the asset you are disposing of.
Disposal of UK property on or after 6 April 2020
If you are disposing of UK residential property, you must report and settle your CGT liability within 60 days if the completion date was on or after 27 October 2021, via a CGT on UK Property account. This will require you to have a Government Gateway user ID and password.
A 30 day deadline applies where disposals completed between 6 April 2020 and 26 October 2021.
Worth noting is that if you jointly own a property, that you are disposing of, each person owning a share of the asset is responsible for reporting their own portion of any loss or gain.
Slightly different rules apply if you are non-UK resident and disposing of UK land or property, and so it is worth seeking professional advice to understand your obligations.
Disposal of other assets chargeable to CGT
If your capital gain is from any other asset, you can report this liability via your Self-Assessment Tax Return, in the tax year after your disposed of the asset, or by using the ‘real time’ Capital Gains Tax service.
If you report using the online service, this must be done by 31 December following the end of the tax year in which the gain was accrued, and you’ll still need to include details of the disposal on your tax return.
For more information, click here.
Capital Gains Tax planning
Capital Gains Tax can affect both individuals and business and should always be carefully considered as it can often involve particularly large sums of money.
Recent changes to legislation have seen the timing of a transaction, and preparedness in respect of reporting liabilities, become increasingly critical. It is never too soon to consider Capital Gains Tax planning and a proactive approach could make a significant difference to your resulting liability.
Regularly reviewing your position, considering your tax rate and total gains over the tax year, is important if you are to take advantage of the reliefs that may be available to you and to manage your liabilities in a tax-efficient manner.
How can my accountant help?
It’s important to bear in mind that your circumstances are likely to be very different to the next person, so it is essential that you seek professional advice at the earliest opportunity.
Discussing your upcoming plans with a tax adviser or accountant could help you to significantly reduce your liabilities, by identifying opportunities for proactive tax planning.
If you’d like to talk to one of our experts about effective tax planning, please contact us today.
