What is Capital Gains Tax in the UK?
Capital Gains Tax (CGT) is a tax charge realised on the gains from selling something you own. The increase in value of the sales charge in contrast to the purchase price is the capital gains you made from that transaction. To be subjected to Capital gains Tax, an asset should be held for more than one year.
The Capital Gains Tax is applicable for:
- Second properties
- Inherited properties
- Investment funds
- The sale of a business
- Assets transferred at less than their fair value
- Valuables which include bonds, jewellery, stocks, coin collections
A gain arises when you sell an asset for more than what was paid for it. For example, if you acquire shares for £5,000 and later sell them for £8,000, you have received a gain of £3,000. This difference will be the gains on which you will be liable to pay capital gains tax. Also, if you must give an asset away or offer it at a lesser price, it is considered as the worth of the asset. For example, suppose you have bought a house for £200,000 in the past and you decide to give it to your child, and if that house is worth £280,000 now, it would mean that you have made a gain of £80,000 for CGT purposes. However, the CGT does not apply for this transaction as it falls under a transaction with spouses and civil partners, although any sale of that asset would have been liable for CGT.
There are a few essential factors that you need to consider when preparing the CGT in the UK.
Which profits are tax-free from CGT?
You will not require to pay CGT for all the profits which you have received. Certain gains are excluded from CGT tax in the UK. It would be more helpful for you to understand the tax-free profits before you prepare any CGT calculations. Those are listed below:
- If you sell or gift your private cars
- If you sell your only or main home
- If you sell your buy to let or second home, which was your main home within the past 18 months
- The gifts between husband and wife or registered civil partners
- If you receive lottery winnings, pools, and betting
- Premium bonds and ISA or PEP income
- Proceeds from life insurance policies
What is the Capital Gain Tax in the UK?
The CGT tax differs based on whether you are an introductory, higher, or additional rate taxpayer in the UK. The type of asset which you have sold is also differing the tax rate of CGT. The below table indicates the CGT rates in the UK.
|Type of the asset||Basic – rate taxpayer||Higher / Additional rate taxpayer|
How to reduce your Capital Gain Tax?
For the CGT, HMRC has introduced the Capital Gains Allowance, which is £12,300. This allowance cannot be carried forward for future years. Every person has their allowance; therefore, a married couple can recognise gains of £24,600 for the tax year without incurring any tax liability. Hence, it is best to register the property under both names by equally splitting the equity. Usually, you can also assign assets between spouses and civil partners without any tax. Thus, it might seem right to consider transferring holdings to a spouse in a lower tax range or who has not utilised their allowance for the year.
Also, the gains or losses realised in the same tax year must be offset against each other. Through this, you can reduce the number of gains, which will be subject to tax. Furthermore, if your losses go beyond your gains, you will be able to carry them forward to set off against the gains you will obtain in the future if you have registered these losses with HMRC.
Additionally, as the CGT rate you pay depends on your income tax band, it is best to reduce your income tax rate for the particular tax year. For this, you can consider investing in pension contributions or charitable donations to increase your tax band. These will help you to decrease your CGT.
In addition to that, it is best to think about the possibility of a significant capital gain that you may build up in addition to the annual CGT allowance over time. You have the option to sell at least a part of the assets at the end of every tax year and then repurchase them to utilise your annual allowance to decrease this risk. Through this, you reset the cost of your asset at a higher level and thereby reduce the potential profit against which your future CGT liabilities will be calculated. The tax rules imply that you must stay for a 30-day cool-down period before repurchasing the same holding. If you’re not comfortable with this out-of-market risk, you could also consider investing in an exchange-traded fund (ETF) proposing similar exposure in the interim.
Also, suppose you live in a property before letting it out. In that case, it will be advantageous for you to get the exemption from CGT as, if the property has been your primary home for 18 months before selling it, you can presumably reduce the CGT bill when you sell it.
When is your tax due?
When you make a capital gain, you can disclose it to HMRC through the Capital Gains tax online services from the government. On the other hand, you can file your Self-Assessment tax returns as well. If you usually complete a tax return, you must also report any capital gains, irrespective of whether you’ve already submitted them through the online service.
Any sale of a property after 6th of April 2020 which generate a CGT bill needs to be paid within 30 days after filing the property return to HMRC.
It is always best to obtain advice from expert accountants before you work on the CGT bill.