Introduction
This is our UK Capital Gains Tax Guide (CGT) for contracting professionals. It is for limited company contractors, small business owners, and individuals who may make a Capital Gain. For the layman, what is Capital Gains Tax (UK)? In short CGT is a tax on the gain in value of an asset when you sell this. Our guide on CGT for you as a UK contractor will cover the Capital Gains Tax allowance in 2023/24 and 2022/23 and how this works in practice. The Capital Gains guide will also look at how much is Capital Gains Tax (UK) and how to report CGT to the tax office. Indeed, this will be sufficient for most UK contracting and other individuals who do not have complex Capital Gains transactions.
Therefore, in this CGT guide for those with a contractor limited company or other small business we will cover:
- The application of CGT and how CGT works.
- The Capital Gains Tax allowance.
- How CGT works and when it comes into play.
- Reporting Capital Gains Tax (CGT) to HM Revenue & Customs (HMRC).
Initial thoughts
Tax systems
As part of this CGT guide for UK contractors, please take note, in the UK there are two tax systems:
- Income Tax system -this is a tax on income that individuals earn and a higher income tax band comes into play the more that you earn.
- Capital Gains Tax system -this is a tax due when individuals or businesses sell assets and make a financial gain. The gain is the difference between what they paid for the asset and what they sell it for.
Other preliminary thoughts
In this Capital Gains Tax guide let us now investigate how CGT works.
UK Capital Gains Tax is a tax payable on the `gain in value’ when you sell or ‘dispose of’ an ‘asset.’ When there is a gain, the value of the asset will have increased in value since you bought this. Alternatively, you may make a Capital Loss when you dispose of an asset. Such a loss can be set against any Capital Gains in the current or future tax year.
When a CGT event arises, it is the actual gain which is taxable, not the amount of money you receive. Therefore, we take the time to look at how the CGT rules work in practice.
As a limited company contractor, when the time to prepare your Self Assessment tax return (SA) comes around each year, you also have to report any Capital Gains to HMRC.
The application of CGT
When does CGT apply
In our Capital Gains Tax guide, let us now investigate when CGT comes into play.
CGT may be payable when you make a gain (or loss) from selling or disposing of something you own. It is key to remember that a CGT liability may be due on the gain that you make, not the amount that you sell this for.
For example, you buy a painting for £10,000 and sell it later for £30,000. In turn, this means that you make a gain of £20,000 (selling price £30,000 minus original cost of £10,000). As a result, you will face a CGT bill on the £20,000 gain.
Therefore, CGT is a tax on any gain you make on an asset’s disposal. It applies to most classes of assets when you sell or dispose of them:
- Most personal possessions worth £6,000 or more, apart from your car.
- Selling a property that is not your main home. This includes UK property and overseas property when you have UK residence for tax purposes.
- Your main home if you have let it out, used it for business, or it is huge.
- Shares that are not in an ISA or PEP.
- Business assets.
These are known as ‘chargeable assets’ and may be subject to tax bills if you sell them and make gains later.
In addition, when you sell a property, you have also lived in for some time, you will be entitled to a reduction in CGT due to Private Residence Relief.
When UK Capital Gains Tax does not apply
You do not need to pay CGT on any of the following:
- UK government gilts and Premium Bonds.
- Lottery winnings.
- Betting wins.
UK Capital Gains Tax Guide -more considerations
Inheritance Tax and Capital Gains Tax (UK)
If you inherit assets from someone who has died, you will not need to pay Capital Gains Tax until you sell them. At this point, you will need to know the asset’s value when you inherited it. You can work out the actual gain to report on your Self Assessment Tax Return when you sell this. Therefore, it would be a good idea to keep a record of such assets, should you ever decide to sell them in the future. When you do so, you will have the necessary information to hand.
Dispose of assets between partners
Some disposals of assets are tax-free, such as gifts between husband and wife or between civil partners. However, this only applies if you are still with your partner and they plan to keep the asset. If you separate or no longer live together during the tax year, there may be tax to pay. Likewise, if the asset you gifted them was sold on in a business venture, there may also be tax to pay.
Give to charity
When you give an asset to a charity this is also tax-free. However, you may have to pay tax if you sell an asset to a charity. This will apply when you sell it for more than you paid for it or less than its market value.
Exemptions -the Capital Gains Tax Allowance in 2022/23, 2023/24 (UK) and beyond
As part of this CGT guide, please take note that there are various tax reliefs in the UK, one of which is the Capital Gains Tax annual allowance. Every individual has an Annual Capital Gains Allowance (UK) and this allows you to make a certain level of gains before any tax is payable. The Capital Gains Tax Allowance 2022/23 was £12,300. In 2023/24, the Capital Gains Tax allowance has now reduced to £6,000. Therefore, to summarise:
| Tax year | CGT allowance | Trust exemption |
|---|---|---|
| 2021/22 | 12,300 | 6,150 |
| 2022/23 | 12,300 | 6,150 |
| 2023/24 | 6,000 | 3,000 |
| 2024/25 | 3,000 | 3,000 |
UK Capital Gains Tax Guide -how CGT works
The ways that CGT can come into play
As part of this CGT guide, let us now look how CGT comes into play. There are several ways that you could be perceived to dispose of an asset. Besides selling an asset, you may also give it away or transfer it to another individual. You could also swap the asset for something else. Another way is you receive compensation if the asset has been lost or destroyed. This could be when you are receiving an insurance pay-out.
Therefore, you will need to pay CGT when:
- You sell an asset, and
- Your total taxable gains are above your Annual Capital Gains Tax Allowance.
Calculate your gains
When you calculate your gains:
- Step 1 -work out the gain for each asset (or your share of an asset if you jointly own this). You will need to do this for the personal possessions that you have sold or disposed of. This will include shares, property, or business assets you have disposed of in the tax year (6 April to 5 April).
- Step 2 -add together the gains from each asset.
- Step 3 -deduct any allowable losses in the year and any cumulative losses brought forward. If you make losses when disposing of assets, these are called Capital Losses, and these can be carried forward to set off gains in future tax years.
When you have made overall gains, but these are not above the annual exemption, you may still need to report your gains on your Tax Return. This will apply unless:
- You are registered for Self Assessment; and
- The total amount that you sold the assets for was less than four times your CGT allowance.
Therefore, if the total proceeds exceed four times the CGT allowance, the gains will need reporting on your tax return.
UK Capital Gains Tax Guide -report your Capital Gains and pay tax to HMRC
Reporting your gains
In our Capital Gains Tax guide let us now turn to how to report and how to declare Capital Gains.
You must report any Capital Gains and pay any tax due on these. If you report this on your tax return, please ensure it is included and is not a Self Assessment tax error. There is also now an option to report any gains `real time’ to HMRC.
If you are disposing of UK residential property, it may now be reportable online through their digital service. This applies if your gain exceeds the CGT annual exemption and the total proceeds exceed four times the CGT allowance. When this is the case, you are required to report the disposal online within a certain number of days from the date of completion. Therefore, as the rules currently stand, you must report and pay any Capital Gains Tax on most sales of UK property within 60 days.
The rates of UK Capital Gains Tax
The UK Capital Gains Tax rates differ, and this depends on:
- How much an individual earns.
- What sort of asset the gain is made upon.
If you are a basic rate band taxpayer (your total taxable income is under £50,270), the rate of CGT you will pay depends on the size of your gain, your taxable income and whether your gain is from residential property or other assets:
- On your gains from residential property -18%.
- Upon your gains from other chargeable assets -10%.
When you are a higher rate band taxpayer (your total gross income is over £50,270), you will pay:
- On your gains from residential property -28%.
- Upon your gains from other chargeable assets -20%.
When you make gains from residential property and other assets, you can use your tax-free allowance against the gains that will be chargeable at the highest rates (for example, where you would pay 18% or 28% tax).
Furthermore, suppose you dispose of business assets such as your own limited company and meet the qualifying conditions. In that case, you will pay CGT at a reduced rate on any final Capital Distributions from the company. The tax rate here is 10% under Entrepreneur’s Relief (now called Business Asset Disposal Relief).
Paying your Capital Gains Tax (UK) to HMRC
When you make a Capital Gain, this is reported as part of your tax return. The Income Tax and CGT payment are due by 31 January, following the end of the tax year.
As mentioned, when you dispose of residential property, the tax is payable within 30 or 60 days of the completion date.
When you are paying your Capital Gains Tax, you can do this via your internet banking. Alternatively, you can make payment via the HMRC website. This link takes you to the HMRC payment services page and shows how you can make a payment. When paying via internet banking, you will need:
- HMRC’s sort code and account number.
- Your SA payment reference number. This is your Self Assessment UTR, followed by a capital K.
Final thoughts
Capital Gains Tax in the UK can be a little complicated. However, this Capital Gains Tax guide should give you a good overview. One important thing to remember as part of this CGT guide is that if you sell residential property, you must report this online and pay the tax to HMRC within 60 days.
Link to Contractor Advice UK group on