A Guide to Capital Gains Tax

 

Simply put, Capital Gains Tax (CGT) is the tax paid on the profit you make when selling or disposing of an asset that’s increased in value during your ownership.

It’s important to note, the tax is levied on the gain made, not the total amount of money you received for the sale.

It’s important to understand your CGT obligations when selling property, shares, business assets or valuable personal items, as rules and rates for each type of asset may vary. For example, selling a second home or investment property can attract a higher rate of CGT compared to other assets.

Allowances and exemptions will also make a big difference to the amount you’ll pay.

 

AN EXAMPLE OF CAPITAL GAINS TAX

CGT is typically payable when you sell or dispose of an asset for more than you paid for it.

An example: You purchase artwork for £10,000 and sell it for £50,000. CGT is based on the £40,000 gain received, not the full £50,000.

Disposal includes:

• Selling the asset
• Gifting the asset
• Transferring the asset
• Exchanging the asset
• Receiving compensation for the asset such as an insurance payout.

 

CURRENT CGT ALLOWANCES

You only pay CGT on gains exceeding your Annual Exempt Amount (AEA).

For the 2024/25 tax year, the AEA threshold is £3,000, meaning if your total gains within a tax year are below £3,000 you’re not required to pay CGT. The threshold was reduced in April 2024 from £6,000, increasing the amount of people who’ll incur a CGT charge.

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.

 

CGT RATES

The rate of CGT you’ll pay depends on your overall taxable income and the type of asset sold.

• Basic Rate Taxpayers: If your annual income is under £50,270, you will pay 10% on most gains and 18% on gains from residential property.

• Higher Rate Taxpayers: If your annual income exceeds £50,270, the rates increase to 20% on most gains and 24% on gains from residential property.

 

ASSETS THAT FALL UNDER CGT

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 or an art piece that’s appreciated in value, it’s crucial to consider the potential tax implications. However, some personal possessions are exempt from CGT including:

• 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.

PROPERTY

Firstly, you don’t pay CGT when you sell your main home. This is known as Private Residence Relief.

CGT primarily applies to properties that are:

• 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.

Jointly owned properties are taxed only on your share of the gain, so it’s important to understand your ownership percentage. Read our blog on Capital Gains Tax when selling a residential property.

SHARES

Shares are usually subject to CGT when sold for a profit. However, shares held in tax-efficient accounts such as Individual Savings Accounts (ISAs) or Personal Equity Plans (PEPs) are exempt.

Specific employee share schemes, like the Enterprise Management Incentive (EMI), can provide certain reliefs.

BUSINESS ASSETS

If you own a business, certain business assets are liable for CGT. This includes:

• Machinery: Equipment used in business operations.
• Intellectual property: Patents, trademarks, and other intangible assets.

When selling a business or restructuring, understanding the CGT implications is crucial for effective financial planning.

 

CGT 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 CGT. This can be a strategic way to transfer assets without incurring tax liabilities.

TAX-EFFICIENT INVESTMENTS

Interest from ISAs, PEPs, and specific share sales 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 tax reliefs, including the potential for CGT exemption on gains from investments held for a specified period, 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 made in the same tax year as the loss, 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 CGT 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. By adhering to these deadlines, you’ll avoid penalties and interest charges.

REPORTING AND PAYMENT DEADLINES FOR UK RESIDENTIAL PROPERTY

For disposals of UK residential property, 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.

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’re already filing a self-assessment tax return, you should include your CGT 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 a ‘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. This is mainly used by individuals that do not usually complete a self-assessment tax return and are not required to do so and avoids the need to submit one. Whilst those in self-assessment can still use this service, you are still required to return the gain on your self-assessment tax return even if already reported via the real-time service.

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 must also comply with reporting requirements, regardless of whether they owe any CGT. If selling residential property, they must report the disposal within the same 60-day window. For other types of assets, the general rules for CGT reporting and self assessment apply.

By understanding these deadlines and methods, you can ensure compliance with CGT regulations, avoid penalties, and manage your tax liabilities efficiently.

 

SUPPORT WITH CAPITAL GAINS TAX

Navigating CGT can be challenging, but at TC Group we support our clients through strategic planning, mitigating your CGT liability whilst ensuring you remain compliant.

Our team will accurately calculate your gains, identify deductible expenses and allowances, and provide expert advice on timing asset sales. We handle your HMRC compliance, preparing and submitting accurate tax returns, so there’ll be no surprise penalties.

If you’re selling or disposing of an asset, speak to your TC Group Relationship Manager, or book a free consultation with your local TC Group team today.

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