A Guide to Capital Gains Tax
By Zoe Gibbons, tax specialist and partner at Perrys Chartered Accountants
In 2018, it was estimated that the total net wealth of private households in Great Britain was £14.6 trillion with £5.9 trillion of that in property assets. *
If you own assets, such as property, that you want to sell or dispose of, you could be liable for Capital Gains Tax (CGT). However, there can be a lot of confusion around paying CGT, how it is calculated and when it applies.
What is Capital Gains Tax?
CGT is a tax on the profit you make from an asset when you dispose of it. Disposing of an asset includes selling it, gifting it, transferring it to somebody else, exchanging it for something else or receiving compensation for it, such as an insurance pay out. It is important to note that CGT is only payable on the ‘capital gain’ i.e. the profit and not the full amount of the sale proceeds.
Which assets are subject to Capital Gains Tax?
Assets that are subject to CGT include:
· Residential property – unless it is your only home or main residence and is covered by ‘private residence relief’
· Commercial property
· Rental property
· Shares, excluding those held in an ISA or PEP
· Business assets
· Personal property worth more than £6,000, excluding your car
· Cryptocurrency, such as Bitcoin
Some assets are exempt from CGT, such as your car.
The good news is, you will not usually pay CGT on gifts to your husband, wife, civil partner or a charity. CGT does not apply to UK government gilts, Premium Bonds or betting, lottery and pools winnings. However, there are some exceptions.
If someone dies and you inherit an asset, then Inheritance Tax will usually be paid by the estate of the person who has died. However, if you decide to dispose of the asset at a later date, then CGT might apply.
If you are living abroad, but own property or land in the UK, then CGT will apply on disposal. If you are a UK resident, but your assets are overseas then CGT may still apply on disposal of your overseas assets. However, there are some special rules for overseas assets. Therefore, it is worthwhile seeking professional advice to ensure you fully understand your tax position.
How is Capital Gains Tax calculated?
CGT will only apply when your total gains on an applicable asset you dispose of exceed your annual tax-free allowance, which is currently £12,300 for an individual or £6,150 for trusts.
Depending on the type of asset you are disposing of, you may be able to reduce the tax you pay by claiming a relevant tax relief or deducting losses on disposals of other assets. For joint disposals, you will pay CGT on your share of the gain.
To work out your total taxable gains you will need to
1. Establish the gain for each applicable asset
2. Add these gains together
3. Deduct any allowable losses
The amount leftover is the amount that is subject to CGT. CGT rates vary depending on the type of asset you are disposing of and your current annual income, but range from 10% to 28%.
How do I report Capital Gains Tax?
Reporting CGT depends on when you made the gain and the type of asset you are disposing of.
For properties, you will need to report and pay any tax owed within 30 days of the sale. If you do not do this, you may have to pay interest and you could be fined.
For all other gains, you have a choice of how and when you report the tax, but you must report it by 31 January in the tax year after you made the gain.
When you report your CGT, you will need to know the calculations for how you reached your tax position and details of how much you bought and sold the asset for. This will include any other relevant information, such as the costs of disposing of the asset and any tax reliefs you are entitled to. You will also need to disclose the dates you took ownership and when you disposed of the asset.
How do I pay my Capital Gains Tax liability?
For paying CGT on property, you will need to use a HM Revenue & Customs’ (HMRC) Capital Gains Tax on UK Property account.
For all other assets, you can use the ‘real time’ Capital Gains Tax service or simply report these on your next self-assessment tax return.
To set up a Capital Gains Tax on UK Property Account or ‘real time’ Capital Gains Tax Service you will need a Government Gateway user ID and password. If you don’t already have one of these, you can set one up.
CGT is a complex process. In order to avoid costly mistakes, it is highly recommended that you seek the advice of an experienced accountant who can help you with the calculations and make any payments you owe.