Capital Gains Tax (CGT)
Capital Gains Tax is a tax on a profit you make from disposing of your personal asset worth £6,000 or more, not the money you receive from the sale. This means expenses that relate to the sale and purchase of the asset such as legal fees are allowable and are included in the CGT calculations. If you, however, make a loss from your disposal, then you can set the loss against gains from another sales and you pay tax on the total profits.
There are reliefs such as Rollover Relief, Gift Relief or Business Asset Disposal Relief (previously known as Entrepreneur Relief) available to either reduce or defer Capital Gains Tax that you have to pay if certain conditions are met. Disposal in this context means:
- giving your asset away (as a gift)
- transferring your asset to someone else
- swapping your asset for something else
- receiving compensation for the stolen or damaged asset e.g insurance payout
Assets that have useful life of not more than 50 years (called wasting chattels) are exempt from Capital Gains Tax. Useful life of asset is determined from the date of purchase. Any losses incurred from the sale of these exempt assets are also not allowed to offset against other gains. This means if you sell a wasting chattel, you will pay no CGT at all even though you make profits from the sales. So if, for instance, you own racehorses and then sell them even with high profits, there is no tax to pay. These exempt assets include, for example:
- UK government securities (gilts)
When you, as an individual, dispose of an asset, you will have to pay Capital Gains Tax on the gain you make. How you report this gain and pay your tax will depend on the type of the asset you dispose of:
- UK residential property sold from 6 April 2020: if you sell a UK residential property on or after 6 April 2020, then you must report and pay your CGT using capital gains tax on UK property account:
- within 30 days of the sale completion date if the property is sold between 6 April 2020 and 26 October 2021
- within 60 days of its sale completion date if the property is sold on or after 27 October 2021
- any other gains that are not from UK residential property sold after 6 April 2020: if you, for example, sell shares in a UK company, you can choose how and when to report your CGT:
- if you know what to pay, you immediately report and pay your tax by using the real time Capital Gains Tax service (you will need a Government Gateway user ID and password). The gains will need to be reported by 31 December in the tax year after the gains are made
- you report and pay your tax in a self assessment tax return in the following tax year after you sell the assets
A non-UK resident must report their sales of UK property (residential & non-residential) or land as a non-resident whether there is tax to pay or not. So if you are a non-UK resident and you dispose of a UK property or land, then you have to:
- submit a non-resident Capital Gains Tax return if you sell the UK property or land on or before 5 April 2020
- report and pay your non-resident Capital Gains Tax by using the Capital Gains Tax on UK property service if, from 6 April 2020, you dispose of:
- UK residential property or land
- UK non-residential property or land
- mixed use UK property (a property that has both residential and non-residential use) or land
- your rights to assets if at least 75% of their value are from UK land (indirect disposals)
Organisations such as limited company do not pay Capital Gains Tax but Corporation Tax on gains (called chargeable gain) made from disposing of the assets. The gains are included in their corporation tax computation. An indexation allowance, up to December 2017, is also available to reduce its chargeable gains and tax to pay. The tax liability will be part of the corporation tax payable.
Unless CGT reliefs apply, the CGT rates for individuals are:
- for gains on non-residential property, the rate is 10% (if you are a basic rate taxpayer) and 20% (if you are a higher or additional rate taxpayer); and
- for the residential property gain, it is 18% (for a basic rate taxpayer) or 28% (for a higher or additional rate taxpayer)
Unlike individuals, a company, however, pays tax on its chargeable gain at the same rate as its corporation tax (currently 19%).
Annual Exemption Amount (AEA)
Each individual is entitled to an Annual Exemption Amount, which is similar to their Personal Allowance. The current AEA is £12,300 (£6,150 for trusts). This means the first £12,300 of your gain will be tax free and you pay Capital Gains Tax on all gains above the AEA. However, if you do not use your AEA in any tax year, you will waste or lose it because you cannot carry forward your AEA to the following year.
In contrast, a company does not get an AEA as individuals do because it gets an indexation allowance instead.
Special rules for Capital Gains Tax apply when you dispose of or transfer gifts or assets to:
- your spouse or civil partner unless:
- you and your spouse or civil partner are separated or do not live together at all in the tax year
- you give gifts or assets to your spouse’s or civil partner’s business to sell
- a registered charity
So when you transfer or disposing of your assets to your spouse or civil partner (for personal use) and/or to a charity, you do not have to pay Capital Gains Tax.
Capital gains tax advice
Our accountants are fully qualified as well as experienced and very reliable. If you are looking for peace of mind services, then feel free to contact MW Accounting Services and we are more than happy to help.