In simple terms, Capital Gains Tax is a tax on the increase in value on an asset when you sell, or dispose, of it.
You will only pay Capital Gains Tax on the profit made on an asset after deducting the allowable tax-free amount for the tax year in question.
You purchased a piece of artwork for £5,000 and sold it later for £25,000. This means you made a gain of £20,000 (£25,000 minus £5,000).
If the gain is covered by the CGT tax-free exemption then no CGT is due. Different types of assets may be exempt from CGT altogether or may qualify for some CGT reliefs.
Disposing of an asset
Disposing of an asset includes the following:
- selling it
- giving it away as a gift, or transferring it to someone else
- swapping it for something else
- getting compensation for it - like an insurance pay out
Capital Gains Tax allowances
You only have to pay Capital Gains Tax on your overall gains above your tax-free allowance (called the Annual Exempt Amount).
You may also be able to reduce your tax bill by deducting brought forward capital losses, or claiming available reliefs.
What assets is Capital Gains Tax chargeable on?
You pay Capital Gains Tax on the gain when you dispose of:
- most personal possessions worth £6,000 or more, apart from your car
- property that isn’t your main home
- your main home if you’ve let it out, used it for business or it’s very large
- shares that aren’t in an ISA or PEP
- business assets
- overseas assets (subject to your residency and domicile)
These are known as ‘chargeable assets’.
Depending on the asset, you may be able to reduce any tax you pay by claiming a relief.
If you dispose of an asset you jointly own with someone else, you have to pay Capital Gains Tax on your share of the gain.
When is Capital Gains Tax not due?
Capital Gains Tax is not due in the following examples;
- Transfers of assets between husband, wife, civil partner or charity
- Capital Gains below the annual exempt amount
- Disposal of your home, or main residence
- Wasting chattels (assets with a useful life of less than 50 years, motor vehicles etc.)
- UK government gilts and premium bonds
- Betting or lottery winnings
- ISAs or PEPs
How do you report and pay Capital Gains Tax to HMRC?
You can report any Capital Gains Tax you need to pay either:
- straight away using the ‘real time’ Capital Gains Tax service
- annually via a Self Assessment tax return
You would usually report the gain through the Self Assessment system.
Information to complete the Self Assessment Tax Return
You will need:
- calculations for each capital gain or loss you report
- information from your records detailing the costs and the sale proceeds for each asset
- any other relevant details, such as any reliefs you’re entitled to
You can obtain more information about Self Assessment by visiting the section on our website or by contacting our tax advisers.
Capital Gains Tax Rates
If you pay higher rate Income Tax
If you are a higher rate or additional rate taxpayer the rates are as follows;
- 28% on your gains from residential property
- 20% on your gains from other chargeable assets
If you pay basic rate Income Tax
If you are a basic rate taxpayer, the rate you pay depends on the size of your gain, your taxable income and whether your gain is from residential property or other assets.
If this amount is within the basic Income Tax band you’ll pay 10% on your gains (or 18% on residential property). You’ll pay 20% (or 28% on residential property) on any amount above this.
Capital Gains tax can be a complex area, and care should be taken when preparing calculations to present to HMRC.
Our team has extensive experience in advising on capital transactions and can ensure that you are taking advantage of all of the available CGT reliefs while also fulfilling your obligations to HMRC.
Please contact us today.