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Capital Gains Tax

A tax on the profit made from selling or disposing of assets like property, shares, or investments.

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Comprehensive Guide to Capital Gains Tax (CGT) in the United Kingdom

Capital Gains Tax (CGT) is a tax on the profit (or "gain") made when you sell or dispose of an asset that has increased in value. It is the gain that is taxed, not the total amount of money received. This guide provides an overview of the UK's CGT system, including regulations, procedures, exemptions, and practical considerations for individuals and businesses.

1. What is Capital Gains Tax (CGT)?

CGT applies when you sell, give away, exchange, or otherwise dispose of certain assets. The tax is calculated on the profit made from the disposal, not the total sale price. CGT is relevant to both individuals and businesses, though the rules and rates differ slightly.

Key Points:

  • CGT applies to assets such as property (other than your main home), shares, business assets, and personal possessions worth over £6,000 (e.g., jewellery, antiques).
  • Disposing of an asset includes selling it, gifting it, transferring it, exchanging it, or receiving compensation (e.g., insurance payouts for a damaged asset).

2. Who Pays CGT?

CGT is payable by:

  • Individuals: UK residents are liable for CGT on their worldwide gains. Non-residents may also be liable for CGT on UK property or land.
  • Trustees: Trustees of a trust may need to pay CGT on gains made by the trust.
  • Businesses: Companies do not pay CGT but are subject to Corporation Tax on chargeable gains.

3. CGT Rates (2023/24 Tax Year)

The rate of CGT depends on your income tax band and the type of asset being disposed of.

For Individuals:

| Type of Asset | Basic Rate Taxpayer | Higher/Additional Rate Taxpayer | |----------------------------|-------------------------|-------------------------------------| | Residential Property | 18% | 28% | | Other Chargeable Assets | 10% | 20% |

  • Basic Rate Taxpayer: If your total taxable income and gains (after allowances) fall within the basic rate band (£12,571–£50,270 for 2023/24).
  • Higher/Additional Rate Taxpayer: If your total taxable income and gains exceed £50,270.

For Trustees:

  • 28% for residential property.
  • 20% for other chargeable assets.

4. Annual Exempt Amount

The Annual Exempt Amount is the tax-free allowance for CGT. For the 2023/24 tax year:

  • Individuals: £6,000
  • Trustees: £3,000 (or up to £6,000 if the trust is for a disabled person)

From April 2024, the Annual Exempt Amount will reduce to £3,000 for individuals and £1,500 for trustees.

If your total gains are below the Annual Exempt Amount, you do not need to pay CGT.

5. Exemptions from CGT

Certain assets and transactions are exempt from CGT. These include:

Exempt Assets:

  • Your Main Home: If it qualifies for Private Residence Relief (PRR), you won’t pay CGT on the sale of your primary residence.
  • Personal Possessions Worth £6,000 or Less: Items such as furniture, clothing, and cars.
  • ISAs and Pensions: Gains made within Individual Savings Accounts (ISAs) or pensions are tax-free.
  • Gifts to Spouses or Civil Partners: Transfers between spouses or civil partners are exempt.
  • Charitable Donations: Gifts to registered charities are exempt.

Exempt Transactions:

  • Selling assets at a loss (though losses can be used to offset gains).
  • Disposing of UK government gilts or Premium Bonds.

6. How to Calculate CGT

To calculate your CGT liability:

  1. Determine the Gain: Subtract the asset's original purchase price (or acquisition cost) and any allowable costs (e.g., legal fees, improvement costs) from the sale price.
  2. Deduct the Annual Exempt Amount: Subtract the tax-free allowance from your total gains.
  3. Apply the Tax Rate: Use the appropriate CGT rate based on your income tax band and the type of asset.

Example Calculation:

  • Sale price of a second property: £300,000
  • Purchase price: £200,000
  • Allowable costs (e.g., legal fees): £5,000
  • Gain: £300,000 - £200,000 - £5,000 = £95,000
  • Annual Exempt Amount: £6,000
  • Taxable Gain: £95,000 - £6,000 = £89,000
  • If you are a higher-rate taxpayer, CGT = £89,000 × 28% = £24,920.

7. Reporting and Paying CGT

You must report and pay CGT to HM Revenue & Customs (HMRC). The process depends on the type of asset and the timing of the disposal.

For Residential Property:

  • You must report and pay CGT within 60 days of the sale or disposal using the Capital Gains Tax on UK Property Account.

For Other Assets:

  • Report CGT on your Self-Assessment Tax Return.
  • The deadline for filing and paying is 31 January following the end of the tax year in which the gain was made.

8. Reliefs and Allowances

The UK offers several reliefs to reduce CGT liability:

Private Residence Relief (PRR):

  • Available for your main home.
  • Covers the period you lived in the property and the final 9 months of ownership (even if you were not living there).

Business Asset Disposal Relief (BADR):

  • Formerly known as Entrepreneurs’ Relief.
  • Reduces the CGT rate to 10% on qualifying business assets.
  • Lifetime limit: £1 million of gains.

Investors’ Relief:

  • Reduces the CGT rate to 10% on gains from shares in unlisted trading companies.
  • Lifetime limit: £10 million of gains.

Rollover Relief:

  • Defers CGT when you sell a business asset and reinvest the proceeds in a new qualifying asset.

9. Practical Considerations

  • Record-Keeping: Keep detailed records of all asset purchases, sales, and associated costs. HMRC may request evidence to verify your calculations.
  • Professional Advice: Consider consulting a tax advisor, especially for complex transactions or if you are a non-resident.
  • Non-Residents: If you are not a UK resident, you may still need to pay CGT on UK property or land. Special rules apply, so seek advice.

10. Penalties for Non-Compliance

Failing to report or pay CGT on time can result in penalties and interest charges. Ensure you meet all deadlines and provide accurate information to HMRC.

11. Useful Resources

  • HMRC CGT Guidance: www.gov.uk/capital-gains-tax
  • CGT Calculator: HMRC provides an online tool to estimate your CGT liability.
  • Tax Advisors: Seek professional advice for tailored guidance.

By understanding the rules, exemptions, and procedures for CGT in the UK, you can effectively manage your tax obligations and take advantage of available reliefs. Always stay informed about changes to tax laws and consult HMRC or a tax professional for specific advice.