UK Capital Gains Tax guide

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Introduction 

This is our UK Capital Gains Tax Guide (CGT) for UK contracting professionals who run their own companies. This guide to Capital Gains Tax is for limited company contractors, small business owners, and individuals who may make a Capital Gain. For layman, what is Capital Gains Tax (UK)? In short, CGT is a tax on the gain in value of an asset when you sell it. Our CGT guide covers the HMRC Capital Gains Tax allowance in 2023/24 and 2024/25 and how this works in practice. This contractor Capital Gains guide will examine how much Capital Gains Tax (UK) is and how to report CGT to the tax office. Indeed, the Capital Gains advice in this guide is sufficient for most UK contracting and other individuals who don’t have complex Capital Gains (UK) transactions.

If we consider when to report Capital Gains Tax, we’ll discover that you report Capital Gains taxes (UK) as part of your Self-Assessment Tax Return. Moreover, you must report and pay Capital Gains Tax on UK property disposals separately, too (we’ll cover this later). The latest Self Assessment (SA) Tax Return covers the year to 5 April 2024 and is due with HMRC by 31 January 2025. Likewise, the next SA Return will cover the year to 5 April 2025 and is due with HMRC by 31 January 2026.

This guide will examine the UK Capital Gains Tax rate for individuals and the UK Capital Gains Tax allowance for 2023/24, 2024/25 and beyond. Moreover, we will also consider how to report Capital Gains to HMRC and research what else to consider as part of the UK Capital Gains Tax process.

Capital Gains Tax guide -initial thoughts

UK 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 you earn. Each tax band has an income tax rate, and the tax payable depends on your overall income.
  • 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 sold it for. The rate of CGT payable depends on whether you’re selling residential property and whether you’re in the basic or higher rate of tax.

Basics of the CGT system

You may ask your accountant if the Capital Gains Tax-free allowance is separate from the Income Tax allowance, and the answer is yes. Each tax year, you have separate allowances for both taxes. In this CGT guide, for those with a UK contractor limited company or other small business, we’ll look to cover:

  • The application of CGT and how CGT works.
  • The CGT annual allowance.
  • How CGT works and when it comes into play.
  • Reporting Capital Gains Tax (CGT) to HM Revenue & Customs (HMRC).

This page from the HMRC website provides a good, detailed index on UK CGT-related areas. Also, this page from HMRC community forums lists some questions asked and HMRC answers to these.

Other preliminary thoughts

If you’ve made some gains on the disposal of assets, you may ask how to declare Capital Gains Tax and what the process is when you report these. Therefore, in this Capital Gains Tax guide, we’ll research how CGT works for UK contractors and individuals under the UK tax system.

UK CGT is a tax payable on the `gain in value’ when you sell or dispose of an asset. When there is a gain, the asset’s value may have increased since you bought it. On the other hand, you may incur a capital loss when you dispose of an asset. Such a loss can be set against Capital Gains in the current or future tax year.

When a CGT event arises, the actual gain is taxable, not the money received. Therefore, we’ll examine 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 may have to report any Self Assessment Capital Gains to HMRC.

Capital Gains Tax guide -the application of CGT 

When does CGT apply? 

In our Capital Gains Tax guide, let’s 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’s key to remember a CGT liability may be due on the gain you make, not the amount you sell this for.

For example, you buy a painting for £10,000 and sell it later for £30,000. This means you gain £20,000 (selling price £30,000 minus original cost £10,000). As a result, you’ll 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 isn’t your main home. This includes UK and overseas property when you have UK residence for tax purposes.
  • Your main home if you’ve let it out, use it for business, or it’s huge.
  • Shares that aren’t 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 rental property you’ve lived in for some time, you’re entitled to a reduction in CGT due to Private Residence Relief.

When does CGT not apply? 

You don’t have to pay CGT on any of the following assets:

  • UK government gilts and Premium Bonds.
  • Lottery winnings.
  • Betting wins.

UK Capital Gains Tax Guide -more thoughts 

Inheritance Tax & Capital Gains Tax (UK) 

If you inherit assets from someone who has died, you’ll not have to pay CGT until you sell them. At this point, you must know the asset’s value when you inherited it. When you sell this, you can determine the actual gain to report on your Self Assessment Tax Return. Therefore, keeping a record of such assets would be a good idea if you ever decide to sell them. When you do so, you’ll have the necessary information to hand.

Dispose of assets between partners 

Some disposals of assets are tax-free, such as gifts between an individual and their spouse or civil partner. However, this only applies if you’re 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 in a business venture, there may be tax to pay.

Give to charity 

When you give an asset to a charity, it’s 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 or less than its market value.

Exemptions -the annual CGT Allowance 2023/24, 2024/25 (UK) & beyond 

As part of this contractor CGT guide, please note there are various tax reliefs in the UK, including the annual Capital Gains Tax-free allowance. Every individual has an Annual Capital Gains Allowance (UK), allowing you to make a certain level of gains before any tax is payable. The Capital Gains annual exemption 2023/24 was £6,000. However, in 2024/25, the CGT annual allowance is now £3,000. Therefore, the recent CGT allowances are:

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

As you can see, the CGT exemption in 2023/24 was higher than in 2024/25. Moreover, we don’t know what the government will do beyond 2024/25. In the future, they may even abolish the allowance altogether.

Capital Gains Tax Guide -how does CGT work? 

Ways CGT can come into play 

As part of this CGT guide, let’s look at how CGT comes into play. There are several ways you could dispose of an asset. Besides selling it, you could give it away or transfer it to another individual. On the other hand, you may swap the asset for something else. Another way is to receive compensation if the asset has been lost or destroyed. This could be when you’re receiving an insurance payout.

Therefore, you must pay CGT when:

  • You sell an asset, and
  • Your totaltaxable gains are above your Annual Capital Gains Tax Allowance.

How can you calculate your gains? 

When you calculate your gains, please follow these steps:

  • Step 1 -work out the gain for each asset (or your share of an asset if you jointly own this). You must do this for the personal possessions you sold or disposed of. This will include shares, property, or business assets you’ve 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 previous cumulative. If you make losses when disposing of assets, these are called Capital Losses, and they can be carried forward to set off gains in future tax years.

When you’ve made overall gains that are not above the annual exemption, you may still have to report your gains on your Tax Return. This will apply unless the total amount you sold the assets for was less than four times your CGT allowance. From 2024/25 onwards, you won’t need to report the transactions if the total amount you sold didn’t exceed £50,000.

Therefore, in 2023/24, if the total proceeds exceed four times the CGT allowance, you’ll need to report the gains (or losses) on your tax return. Likewise, in 2024/25, if the total proceeds exceed £50,000, you’ll need to report the gains or losses on your return.

UK Capital Gains Tax Guide -how can you report & pay your Capital Gains to HMRC? 

How do you report your gains?

In our Capital Gains Tax guide, let’s now turn to how to report and declare Capital Gains. You must report any Capital Gains and pay any tax due on them. If you report this on your tax return, please ensure it’s included and not a Self Assessment tax error. Moreover, there’s now an option to report any gains `in real time’ to HMRC.

If you dispose of UK residential property, you may have to report and pay CGT. You can do this online through HMRC’s digital Real Time Capital Gains Tax service. HMRC now has a UK property account service that can be added to a Government Gateway account, which accountants can use for their clients.

Reporting property sales applies if your gain exceeds the CGT annual exemption or the total proceeds exceed four times the CGT allowance (£50K in 2024/25). When this is the case, if you sold a property on or after 6 April 2020, you must report the disposal online within 60 days from the date of completion for all disposals after 27 October 2021. Any disposals occurring before this date (but after 5 April 2020) had to be reported within 30 days of the date of completion. Therefore, as the rules stand now, you must report and pay any Capital Gains Tax on any disposals of UK property within 60 days. This is a page for an example of the UK property return for CGT. Also, here are the guidance notes for completing this.

In 2024/25, investors must report capital gains to HMRC if gains exceed the annual exempt amount or if the proceeds from disposals during the year exceed £50,000.

What are the UK CGT tax rates? 

The Capital Gains Tax rates (UK) can differ for individuals depending on one’s circumstances. Therefore, the Capital Gains Tax rate (UK) depends on:

  • How much an individual earns.
  • What sort of asset the gain is made upon.

If you’re a basic rate taxpayer (your total taxable income is under £50,270) in 2023/24, the rate of CGT you’ll 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’re a higher rate taxpayer (your total gross income is over £50,270) in 2023/24, you’ll pay:

  • On your gains from residential property -28%. In 2024/25, this is now 24%.
  • 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 are chargeable at the highest rates (for example, where you’d pay 18% or 28% tax).

Furthermore, suppose you dispose of business assets such as your limited company and meet the qualifying conditions. In this case, you’ll 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).

Comment following the March 2024 budget: The CGT rate remains at 10%, to the extent that any income tax basic rate band is available, and 20% thereafter. Higher tax rates apply for certain gains, mainly chargeable gains on residential properties, with the exception of any element that qualifies for Private Residence Relief. Therefore, these rates are changed from 18% and 28% in 2023/24 to 18 and 24% in 2024/25.

Capital Gains Tax guide -how to pay your CGT bill to HMRC

When you make a capital gain, it is reported as part of your tax return. The Income Tax and CGT payments 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. 

You can pay your CGT bill via your internet banking. Another option is to make a payment via the HMRC website. The HMRC payment services page shows how you can make a payment. When paying via internet banking, you’ll require the following:

  • 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 

In this guide containing free Capital Gains Tax advice, we’ve covered all the basics of CGT. We’ve looked at the Capital Gains allowance for 203/24 and 2024/25 and considered the different CGT rates that can apply. As you can see, CGT in the UK can be a little complicated. However, this CGT 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

LinkedIn    https://www.linkedin.com/groups/4660081/

Published On: April 6th, 2024 / Categories: Company Taxes, Guides, Tax Guides /

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