Capital Gains Tax
Capital Gains Tax is a tax payable on gains made when you dispose of an asset. The tax is payable on the gains you made between acquiring and disposing of the asset as opposed to the value of the asset. As mentioned CGT is payable when you dispose of an asset. Disposal includes selling, gifting, swapping or receiving other forms of compensation for an asset.
Are all asset disposals subject to CGT?
The answer to this is no. Firstly, individuals have an annual capital gains tax free allowance of £11,700. In addition personal possessions worth less than £6,000 are exempt. The following assets are also free of CGT:
- Cars including vintage cars
- Cash and shares held in ISAs
- Betting, lottery or pool winnings
- UK government gilts and premium bonds
- There is a relief on gains made when disposing of your main residence known as principal private residence relief
It is worth noting that if you gift an asset to someone you may be liable to pay CGT on the gift depending on who the gift was to.
Principal Private Residence Relief
Your main residence is exempt from corporation tax provided you have lived there throughout the period of ownership.
In cases where you have lived in the same house during the period of ownership, your main residence is exempt from CGT. If you have lived at other premises or have the let out the house for a portion of the period of ownership you will be entitled to partial relief (this includes if you have let out part of the property).
Also, if you have used part of your home exclusively for business purposes you will only be entitled to part of the relief. This is can be worth considering if you are a contractor with a home office.
This is only a summary of some of the more common issues surrounding principal private residence relief. See the HMRC Guidance on Principal Private Residence Relief for more info.
Calculating the CGT Liability
CGT is applied to the gains on the disposal of the asset. This is deemed to be the sale price or market value less the following
- Cost or original market value. If you have not purchased the item you will need to ascertain the market value when you acquired the asset.
- Incidental costs of purchase eg solicitors or estate agent fees
- Cost of improvements to the asset. with regard to property, you are only allowed to claim enhancements like an extension and not repairs.
What is the CGT Rate?
The rate of CGT you pay depends on the rate of income tax you are paying. If you pay tax entirely at the basic rate then the rate of CGT you pay will be 10% on most chargeable assets and 18% on residential property that does not qualify for principal private residence relief. If you pay tax at the higher or additional rate you pay CGT at 20% on most assets or 28% on a non-PPR property. If the gain you are applying CGT to pushes your income into the higher rate then you will pay some CGT at both rates.
There is also a 10% rate available for certain business assets which avail of Entrepreneurs Relief.
How do I report capital gains to HMRC?
You report capital gains and your liability to CGT on your self-assessment personal tax return. If you do not usually submit a personal tax return you can report CGT through the HMRC government gateway. You will need to set up an account to do this. Alternatively, you can register for a self-assessment return with HMRC. You will need to let them know that you should be removed from self-assessment once the return is complete so you do not have to submit future returns.
CGT is a complex area and this is just a brief introduction. Please contact us if you would like more information.