Capital Gains Tax (CGT) is tax that’s payable on any profit made after selling assets. It is declared and paid through your Self Assessment tax return.
Assets that are subject to Capital Gains Tax if sold at a profit include:
• Properties – including second homes, buy-to-let properties and agricultural land
• Business assets
• Personal possessions worth more than £6,000 which are not classed as “wasting assets”.
A “wasting asset” is one which has a limited lifespan, of 50 years or less.
CGT also applies to any properties that you own and sell overseas, so long as you are a resident of the UK.
What’s exempt from Capital Gains Tax?
There are some assets that you can sell or exchange without worrying about the profits being subject to Capital Gains Tax. Exemption occurs on profits from the following:
• Your primary private residence
• Stocks and shares held in tax-free savings accounts like ISAs and PEPs
• Government investments such as National Savings Certificates, Premium Bonds or loan stock from the Treasury
• Any winnings from forms of betting
• Any money earned from personal injury compensation cases
• Any foreign currency you bought for your personal use outside the UK
• Up to £6,000 a year of personal possessions, including antiques, furniture and jewellery
There are also other ways to be exempt from Capital Gains Tax.
Transfer to a spouse or partner
You can transfer any gifts to your husband, wife or registered civil partner without incurring the tax – although any gains may be passed to them and they may be taxed in the future as a result.
Charitable gifts are also not subject to Capital Gains Tax.
What is Private Residence Relief?
If you have one home, you will qualify for Private Residence Relief (PRR) and so won’t have to pay Capital Gains Tax on any profits you make from its sale. However, you won’t be exempt from selling your main home if you develop it into property to let, use some of it solely for business, haven’t used it as your sole residence or bought it with the intention to make a profit.
If your home has grounds of more than 5,000 metres then you may also not be eligible for the full amount of PRR.
If you live in more than one home you can nominate to HMRC which classifies as your ‘main’ place of residence, which allows you to choose the property that’s set to make the most profit upon sale. However, you will still have to justify the above criteria. Unless you nominate your ‘main’ home to HMRC within two years of buying a property, they will decide based upon a range of facts which home is classed as yours.
Capital Gains Tax on death
Any assets that you leave when you die won’t be subject to Capital Gains Tax, although your estate may have to pay Inheritance Tax on the transfer of these assets. Find out more about what you might have to pay through Inheritance Tax.
Indexation: Capital Gains Tax rates
The amount of Capital Gains Tax that you will pay on your profits will vary depending on how much personal income tax you pay:
• Those paying basic income tax pay CGT at 18%
• Those paying higher rate of income tax pay 28%
However, capital gains and income tax circumstances will be merged if your personal profits takes you over the threshold.
If your income keeps you in the lower band but have made enough capital gains to push your income over the threshold at which income tax is increase (£31, 865), you’d pay 28% on any capital gains that occur above that threshold.
As of 2018/19, you can have a personal allowance of £11,850 for any capital gains that can make every year before paying any tax. If you’re married or in a civil partnership, assets and their gains can be transferred to your spouse or partner and combined to make a joint allowance of £23,700.
How to work out if you’re due to pay CGT
1. Take the final value of the asset you’ve sold
2. Deduct the amount you initially paid for it. If you’ve owned it before 31 March 1982, use its market value from that date
3. Deduct any costs you incurred while selling the asset. This could include stamp duty, advertising and improvement costs
If you have sold the asset as a loss, you can use this ‘negative’ CGT to be offset against any future profits you’re due to make.
No case of asset management or tax planning is the same, so if you require further information or for a free informal chat about sorting out your tax and capital gains affairs feel free to get in touch.