This is our UK Capital Gains Tax Guide (CGT) for UK contracting professionals. This guide to Capital Gains Tax 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 come to sell this. Our CGT guide covers the HMRC Capital Gains Tax allowance in 2022/23 and 2023/24 and how this works in practice. This contractor Capital Gains guide will also look at how much is Capital Gains Tax (UK) 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. What’s more, you also have to report and pay Capital Gains Tax on UK property disposals separately too (we cover this later on). The latest Self Assessment (SA) Tax Return covers the year to 5 April 2023 and is due with HMRC by 31 January 2024. Likewise, the next SA Return will cover the year to 5 April 2024 and will be due with HMRC by 31 January 2025.
In this guide, we’ll look at the UK Capital Gains Tax rate for individuals and the UK Capital Gains Tax allowance 2022/23, 2023/24 and the CGT allowances beyond this. What’s more, we’ll consider how to report Capital Gains to HMRC and research what else to consider as part of the UK Capital Gain 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’s 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.
Basics of the CGT system
You may ask your accountant, is Capital Gains Tax free allowance separate from 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).
Other preliminary thoughts
If you’ve made some gains on disposal of assets, you may ask how do I declare Capital Gains Tax and what’s the process when you report these. Therefore, in this Capital Gains Tax guide, we’ll research how CGT works for UK contractors and other 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 value of the asset will have gone up since you bought it. On the other hand, 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’s the actual gain which is taxable, not the amount of money you receive. Therefore, we’ll 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 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 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’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 property 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.
These are known as ‘chargeable assets’ and may be subject to tax bills if you sell them and make gains at a later date.
In addition, when you sell a rental property which you have also lived in for some time, you will be entitled to a reduction in CGT due to Private Residence Relief.
When CGT does not apply
You don’t need to pay CGT on any of the following assets:
- UK government gilts and Premium Bonds.
UK Capital Gains Tax Guide -more considerations
Inheritance Tax and Capital Gains Tax (UK)
If you inherit assets from someone who has died, you’ll not need to pay CGT until you sell them. At this point, you’ll 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’d 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’ll 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’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 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 annual CGT Allowance 2022/23, 2023/24 (UK) and beyond
As part of this contractor CGT guide, please take note that there’s various tax reliefs in the UK, one of which is the annual Capital Gains Tax free 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 annual exemption 2022/23 was £12,300. However, in 2023/24, the CGT annual allowance is now £6,000. Therefore, the recent CGT allowances are:
As you can see, the CGT exemption 2022/23 and prior to this was much higher than it is now in 2023/24 and beyond. What’s more, we also don’t know what the government will do beyond 2024/25. In the future, they may even abolish the allowance completely.
Capital Gains Tax Guide -how CGT works
The ways that CGT can come into play
As part of this CGT guide, let’s now look at how CGT comes into play. There are several ways that you could 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’ll need to pay CGT when:
- Your total taxable gains are above your Annual Capital Gains Tax Allowance.
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’ll need to do this for the personal possessions that you have sold or disposed of. This’ll 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 they can be carried forward to set off gains in future tax years.
When you’ve 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’s 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 its included on your return and it’s not a Self Assessment tax error. There’s also now an option to report any gains `real time’ to HMRC.
If you’re disposing of UK residential property, you may now need to report and pay CGT on UK property separately online through HMRC’s digital Real Time Capital Gains Tax service. This applies if your gain exceeds the CGT annual exemption or the total proceeds exceed four times the CGT allowance. When this is the case, you’re required to 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 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.
The rates of CGT in the UK
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), 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), you’ll 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’d 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’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 (this is now called Business Asset Disposal Relief).
Capital Gains Tax guide -paying your CGT bill 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’re paying your CGT bill, you can do this via your internet banking. As another option, 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’ll need:
- HMRC’s sort code and account number.
- Your SA payment reference number. This is your Self Assessment UTR, followed by a capital K.
In this guide containing free Capital Gains Tax advice we’ve covered all of the basics of how CGT works. We’ve looked at the Capital Gains allowance 2022/23 and 2023/24 and considered the different CGT rates which can apply. Basically, 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.
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