This is our Capital Gains Tax UK (CGT) Guide. It is for contractors and small business owners, as well as for individuals who may make a Capital Gain. The guide will be sufficient for most individuals who do not have complex Capital Gains transactions. We will explain here:
- The Capital Gains Tax allowance.
- What to do when it comes to reporting Capital Gains Tax.
In the UK, there are two tax systems:
- Income Tax system -this is tax that is due on income that individuals earn.
- Capital Gains Tax system -this is tax which is due when individuals or businesses sell assets and make a gain. The gain is the difference between what they paid for the asset and what they sell it for.
Other initial thoughts
Therefore, UK Capital Gains Tax is a tax that is 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, when you dispose of an asset you may make a Capital Loss. Such a loss can be set against any Capital Gains in the current tax year or in future tax year.
When a CGT event arises, please note it is the actual gain that is taxable, not the amount of money that you receive. Therefore, here we take the time to have a look at how the CGT rules work in practice.
As the time comes around to prepare your Self-Assessment tax return (SA) each year, you will need to report any Capital Gains to HM Revenue & Customs.
The application of CGT
When does CGT apply
Capital Gains Tax UK comes into play when you make a gain (or loss) as a result of selling or disposing of something that you own. It is key to remember that a tax bill may be due on the gain that you make, not the amount that you sell this for.
As an 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 £10,000). As a result, you will face a CGT bill on the £20,000 gain.
Therefore, CGT is essentially a tax on any gain that you make on the disposal of an asset. 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 as well as property overseas 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.
All of these are known as ‘chargeable assets.’
In addition, when you sell a property that you have also lived in for a period of 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.
Inheritance Tax and Capital Gains Tax
If you inherit assets from someone who has died, you will not need to pay Capital Gains Tax until you sell it. At this point, you will need to know the value of the asset when you inherited it. When you sell this, you are then able to work out the actual gain to report on your Self-Assessment Tax Return. 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 together with your partner, and they plan to keep the asset. If you separate or you no longer live together during the tax year then there may be tax to pay over. Likewise, if the asset that you gifted them was sold on in a business venture, there may also be tax to pay over.
Giving to charity
Giving an asset to a charity is also tax-free. However, you may have to pay tax if you are selling 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.
In the UK there are various tax reliefs and one of these is the Capital Gains Tax annual allowance. Every individual has an Annual Capital Gains Tax Allowance. For 2021/22, this is now £12,300. Therefore, you will not pay CGT on your first £12,300 worth of gains in the 2021/22 tax year
How UK Capital Gains Tax works
The ways that CGT can come 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:
- Your total taxable gains are above your Annual Capital Gains Tax Allowance.
Calculate your gains
When you calculate your gains:
- 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 that you have disposed of in the tax year (6 April to 5 April).
- Add together the gains from each asset.
- Deduct any allowable losses in the year and any cumulative losses brought forward. If you do 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 do exceed four times the CGT allowance, the gains will need reporting on your tax return.
Report your Capital Gains to HMRC
It is important that you report and pay Capital Gains. If you are reporting this on your tax return, please make sure it is included and is not a Self-Assessment tax error. There is also now an option available now to report any gains `real time’ to HMRC.
If you are disposing of UK residential property, it may now be reportable online. 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 will need to report the disposal online within:
- 30 days if the completion date was between 6 April 2020 and 26 October 2021.
- 60 days if the completion date was on or after 27 October 2021.
Rates of UK Capital Gains Tax
The 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 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 on your gains from other chargeable assets -10%.
If 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 on your gains from other chargeable assets -20%.
If you make gains from both 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, if you dispose of business assets such as your own limited company, and you meet the qualifying conditions, 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 (this is now called Business Asset Disposal Relief).
Paying your Capital Gains Tax to HMRC
When you make a Capital Gain, this is reported as part of your tax return. The Income Tax and Capital Gains Tax are payable 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 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.
Capital Gains Tax in the UK can be a little complicated, however this guide should give you a good overview. One important thing to remember is if you sell residential property, you now need to report this online and pay the tax to HMRC within 60 days.
Link to Contractor Advice UK group on