The UK's Capital Gains Tax (CGT) allowance is a crucial aspect of tax planning for many individuals. The annual exemption is £12,000 as of the 2022-2023 tax year, which means you won't pay any CGT on gains up to this amount.
CGT rates are also an important consideration. For basic-rate taxpayers, the rate is 10% on gains within the CGT band, while higher and additional-rate taxpayers pay 20% and 28% respectively.
What You Need to Know
Gains that fall within the annual exempt amount are tax-free, which can be a significant relief for those who've made some savvy investments.
You don't have to worry about Capital Gains Tax (CGT) on gifts between spouses and civil partners, which can be a big plus for those who want to pass on assets to their loved ones.
Your main residence is usually exempt from CGT, which means you won't have to worry about paying tax on the sale of your home.
Here are some key points to keep in mind:
- Gains within the annual exempt amount are tax-free
- No CGT on gifts between spouses and civil partners
- Main residence is usually exempt from CGT
Business owners may be eligible for a reduced CGT rate of 10% on the sale of their business by claiming entrepreneurs' relief, which can be a huge benefit for those who've worked hard to build their business.
What is CGT?
CGT, or Capital Gains Tax, is a tax levied on the profit made from selling an asset, such as a property or investment. This tax is usually paid by the seller.
The tax rate for CGT is determined by the type of asset being sold and the individual's income tax bracket. For example, if you're selling a primary residence, you may be eligible for a reduced tax rate.
CGT can be applied to various types of assets, including real estate, stocks, bonds, and even collectibles. This means that if you sell any of these items for a profit, you'll be subject to CGT.
The amount of CGT you pay is calculated by subtracting the original purchase price of the asset from its sale price, then applying the tax rate to the profit. This is often referred to as the "gain" or "profit".
Key Points
Gains that fall within the annual exempt amount are tax-free, which is a great relief for many investors.
You can gift assets to your spouse or civil partner without incurring capital gains tax (CGT), making it a tax-efficient way to transfer wealth.
Your main residence is usually exempt from CGT, which is a big advantage for homeowners.
Business owners may be eligible for a reduced CGT rate of 10% on the sale of their business by claiming entrepreneurs' relief.
Gains can be deferred by investing proceeds in Enterprise Investment Scheme (EIS) shares, providing a useful option for investors looking to delay tax payments.
Gifts into certain trusts can be 'held over', allowing you to transfer assets without immediately triggering CGT.
Reducing Your CGT Bill
You can use losses to reduce your gains in the same tax year. If you make more losses than gains, report them and carry them forward to reduce gains in future years.
If you've forgotten to report losses, you can claim them up to 4 years after the end of the tax year in which the losses were incurred.
To calculate your CGT bill, consider your income and tax bracket. If you're a basic-rate taxpayer but have made a large enough capital gain, you'll pay the higher rate of CGT on the amount that takes you over the threshold.
Here are some key points to keep in mind:
- Losses can be used to reduce gains in the same tax year.
- Unreported losses can be claimed up to 4 years after the end of the tax year in which they were incurred.
- Basic-rate taxpayers may pay the higher rate of CGT on large capital gains.
Calculating Your Bill
Your taxable gain is the amount left over after deducting the price you paid for the property from the sale price. This is also known as your net profit. You can find your taxable gain if you take the amount you sold your property for and deduct the price you paid for that property in the first place.
To calculate the taxable gains after your expenses and allowance, you need to take your taxable gains, deduct any allowable expenses, and then deduct the Capital Gains Tax allowance. For example, if your total taxable gain is £300,000 and you spent £10,000 on Stamp Duty and agency fees, your taxable gains after your expenses would be £300,000 - (£10,000 + £50,000) = £240,000.
You only pay tax on any gain over your allowance each tax year. The amount you pay in CGT depends on what you're selling and the income tax band you fall into. The current CGT allowance is £3,000, and you can find your taxable gain by taking the amount you sold your property for and deducting the price you paid for that property in the first place.
Here's a quick summary of how to calculate your taxable gain:
- Take the amount you sold your property for
- Deduct the price you paid for that property in the first place
- The amount left over = total taxable gains or your net profit
Calculating Actual Costs
To calculate your actual costs, you'll need to subtract any expenses from your total taxable gain. This can include things like Stamp Duty and agency fees, as well as any improvements you made to the property.
The article explains that you can subtract these expenses from your total taxable gain, which is found by subtracting the original purchase price from the sale price of your property. For example, if you sold a property for £400,000 and originally purchased it for £100,000, your total taxable gain would be £300,000.
You can also subtract any allowable expenses, such as improvements you made to the property. In the example, the person spent £50,000 improving the property, so they would subtract this from their total taxable gain.
Here's a step-by-step guide to calculating your actual costs:
- Take your total taxable gain
- Subtract any allowable expenses
- Subtract the Capital Gains Tax allowance
For example, if your total taxable gain is £300,000, and you spent £50,000 improving the property, and the Capital Gains Tax allowance is £3,000, your actual costs would be £300,000 - £50,000 - £3,000 = £247,000.
Business Asset Disposal
If you're looking to dispose of your business, you may be entitled to claim Business Asset Disposal Relief, formerly known as Entrepreneurs relief.
This relief is available on the disposal or part disposal of a trading business carried on by an individual either alone or in partnership. The relief is provided by a special rate of CGT of 10%, on disposals up to a cumulative lifetime limit of £1M.
To qualify for Business Asset Disposal Relief, your company must be your 'personal company', meaning you must hold at least 5% of the ordinary share capital and have the ability to exercise at least 5% of the voting rights.
You must also be an officer or employee of the company, and the company must be a trading company or the holding company of a trading group. Investment companies, including those which primarily hold buy to let properties, will not benefit from the reduced rate of CGT.
The rate of CGT will increase to 14% from 6 April 2025, and to 18% from 6 April 2026, on disposals up to £1M.
Here's a summary of the qualifying conditions for Business Asset Disposal relief:
- The company must be your 'personal company'
- You must be an officer or employee of the company
- The company must be a trading company or the holding company of a trading group
Property and CGT
You don't pay Capital Gains Tax (CGT) on the first £3,000 of profit from selling a property. This is known as the Capital Gains Tax allowance.
If you sell your main home, you'll likely qualify for Private Residence Relief, which can exempt you from CGT. For example, if you bought your home for £200,000 and sell it for £300,000, the £100,000 gain could be tax-free.
CGT applies to second homes or holiday properties, but you can still claim Private Residence Relief for the time you lived in the property. For instance, if you lived in a second home for 60% of the total period of ownership, you're eligible for Private Residence Relief for that percentage.
Here's a breakdown of the Private Residence Relief formula:
This formula helps calculate the part of the gain that's exempt from CGT.
Private Residence
You don't pay any Capital Gains Tax on your main residence. This is because it's considered exempt from CGT.
HMRC offers Private Residence Relief, which means you won't have to pay CGT on the gain you make from selling your main home. This relief is available for the period you officially lived in the property and the final 9 months you owned it.
If you let out part of your main residence, you're eligible for Private Residence Relief for the percentage of the home you occupy. For example, if you live in 60% of the property and let out 40%, you'll receive relief for 60% of the gain.
To determine which part of the gain is covered by Private Residence Relief, you'll need to follow the formula: Total gain (£) x (Period you occupy property as main residence in months ÷ Total period of ownership in months).
Here's an example of how this formula works:
You can use this formula to calculate the gain that's exempt from CGT.
Joint Asset Transfer
Transferring assets into joint names can be a great way to share the tax benefits with your partner. If you're married or in a civil partnership, consider transferring an asset into joint ownership.
By doing so, you can both make use of your tax-free allowance, with up to £6,000 of any gain being tax-free in 2024-25.
The transfer to your spouse or partner must be a genuine outright gift, as the tax benefits will be lost if it's not.
Paying and Reporting
You need to report and pay Capital Gains Tax on gains relating to assets that aren’t residential property in the tax year after you sold or disposed of an asset.
If you're reporting gains from non-residential property, you can do so in a self-assessment tax return or, if eligible, through HMRC's 'real time' Capital Gains Tax service.
For residential property, the deadline is 60 days from the sale completion date, which was changed to October 27, 2021.
Letting
Letting Relief is a tax break that can reduce the Capital Gains Tax payable on a property by up to £40,000 of tax-free gains.
To qualify for Letting Relief, you must have previously lived in the property you're selling and have let out part of it as residential accommodation at the same time. Since April 2020, you'll only be eligible if you live in the property at the time of its sale.
You'll need to share occupancy with your tenant when you sell the property to be eligible for Letting Relief. This means you'll need to find a tenant to live in the property with you.
The amount of Letting Relief you can claim is the lowest of three options: the same as the amount of Private Residence Relief you're going to receive, £40,000, or the chargeable gain you make from the letting.
When to Pay
If you're selling an asset that's not a residential property, you need to report and pay Capital Gains Tax in the tax year after you sold or disposed of the asset.
To determine the deadline, check if your gain is related to the sale of residential property. If it is, you'll have a different reporting deadline, but if not, you'll report the gain in your self-assessment tax return.
You can report Capital Gains Tax online, and if you're already registered for Self-Assessment, you must provide details of the sale in your Self-Assessment tax return.
If you're selling a property, you must report and pay any CGT due within 60 days of the sale if the completion date was on or after 27 October 2021.
You'll need to pay Capital Gains Tax on the capital gain you receive from the sale of other properties that aren’t your main residence, including buy-to-let properties, second homes, land, inherited properties, and business premises.
Typical investments that you might have to pay capital gains on include a second property or buy-to-let, shares and funds, unless they're held in an Isa or pension, the sale of a business, and valuable possessions if they're sold for more than £3,000.
Here are some key reporting deadlines to keep in mind:
- Selling an asset that's not a residential property: report and pay in the tax year after the sale.
- Selling a residential property: report and pay within 60 days of the sale if the completion date was on or after 27 October 2021.
Remember to check the current tax-free allowance for the tax year, as this will affect how much profit you need to make on your items before you're taxed on them.
Tax Reliefs and Exemptions
Tax reliefs and exemptions can significantly reduce your Capital Gains Tax (CGT) bill. There are certain reliefs that can further reduce the CGT owed on the sale of your property, such as Private Residence Relief and Letting Relief.
The annual exemption is £3,000 (£6,000 in 2023/24), and if the total of all gains and losses in the tax year fall within this exempt amount, no tax is payable. Gains in excess of the annual exemption will be taxable.
You can also use your allowances by moving investments into a Stocks and Shares ISA or SIPP, if you have the available allowance, as these don't pay UK dividend tax or CGT. Consider selling employee shares in several tranches so that each year's gain is within your annual tax-free allowance.
Here are some key tax exemptions:
- Gifts between husband and wife or registered civil partners, although tax may be due later if the new owner sells the item
- Gifts to charities
There's no CGT payable where assets are gifted to a charity, and these gifts are on a no loss/no gain basis, similar to a transfer between spouses.
Annual Exemption
The annual exemption is a valuable tax relief that can save you a significant amount of money on your capital gains tax bill. You have an annual capital gains tax exemption of £3,000 (£6,000 2023/24), which means if the total of all gains and losses in the tax year fall within this exempt amount, no tax is payable.
This exemption is not transferable, so if you don't use it, the unused amount is lost. It's also not possible to carry back or forward the exemption to a different tax year.
Trusts have a different annual exemption amount, which is half of the individual's exemption, currently £1,500 (£3,000 2023/24). However, if the settlor has created more than one trust, the exemption is shared among the trusts.
Companies are not eligible for the annual exemption.
Here's a breakdown of the annual exemption amounts:
Keep in mind that this exemption is a great opportunity to save on taxes, but it's essential to use it wisely and within the tax year.
Gifts Between Spouses
Gifts between spouses can be a great way to transfer assets without incurring capital gains tax (CGT).
There is typically no CGT payable when property is passed to a spouse or civil partner. Assets pass on a no loss/no gain basis, meaning the original acquisition cost is used when calculating gains when the recipient spouse disposes of the asset.
To qualify for the spousal exemption, spouses or civil partners must be living together. They will generally be treated as living together unless they're separated under a court order, there's a formal deed of separation, or circumstances show that separation is likely to be permanent.
Here are the key timescales to keep in mind:
- Up to 3 years from the end of the tax year in which they separate
- Unlimited time when the assets are subject to a formal divorce agreement or separation order
It's worth noting that the rules changed on 6 April 2023, so if you're separating, make sure to check the new timescales.
Gift Hold-Over
Gift Hold-Over allows you to transfer gifts to your spouse or civil partner without incurring a tax liability.
If the recipient of the gift is still alive when you die, the gift can be set against your estate, reducing the amount of tax due.
Gifts of up to £3,000 can be made each tax year, and any unused allowance can be carried forward to the following year.
Unused annual exemptions can be carried forward for up to 3 years, allowing you to make larger gifts in certain years.
This can be particularly useful if you've had a good year financially and want to make a larger gift to your spouse or civil partner.
Gifts can also be made from your annual exemption, which is £3,000 in the 2022-2023 tax year.
This exemption is in addition to any gifts you make under the Gift Hold-Over rules.
Gifts made under the Gift Hold-Over rules are not subject to inheritance tax on the recipient's death.
However, if the recipient dies within 7 years of the gift, the gift may be subject to tax on their estate.
Frequently Asked Questions
How is CGT calculated in the UK?
CGT in the UK is calculated by finding the gain made on an asset's sale, typically the increase in sale price compared to the purchase price, after holding it for more than a year. This gain is then taxed on the profit made.
Do non UK residents get a capital gains allowance?
Yes, non-UK residents are entitled to a Capital Gains Tax Allowance of £3,000 per year, just like UK residents. However, non-domicile UK residents choosing the remittance basis are not eligible for this exemption.
Sources
- https://www.hl.co.uk/tools/calculators/capital-gains-tax-calculator
- https://www.which.co.uk/money/tax/capital-gains-tax/capital-gains-tax-allowances-and-rates-aWBJB5W44zCc
- https://www.rossmartin.co.uk/capital-gains-tax/110-capital-gains-tax-rates-a-allowances
- https://www.charcol.co.uk/guides/capital-gains-tax-guide/
- https://techzone.abrdn.com/public/personal-taxation/CGT-Relief-Exemptions
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