Introduction to capital gains tax
Capital gains tax (CGT) applies to all manner of assets and a charge may occur when you dispose of an asset and make a profit (gain). The tax rates for 2018/19 are 10% (up to the basic rate band) and 20% (higher rate band). However, there is an 8% uplift in this rate for gains on residential investment property.
A chargeable gain may arise in any of the following instances:
- Sales of assets or parts of assets
- Gifts of assets or parts of assets
- The loss or destruction of assets
If you make a gain on an asset, you should check whether it is exempt and if not inform HMRC immediately, otherwise they can penalise you heavily. Disposals of foreign assets may also be chargeable in the UK if you are a UK resident, although double taxation relief may be available to avoid a double tax charge from both countries.
Limited companies do not pay CGT. Instead they pay corporation tax on any gains and therefore they do not get a tax free annual allowance. However, they can apply indexation allowance to reduce the effects of inflation on a gain.
Some asset disposals are exempt including:
- Private cars
- Cash held in Sterling
- Foreign currency for personal use
- Assets held in tax free investments
- Transfers of assets between spouses and civil partners
- Personal goods disposed of for £6,000 or less
- A domestic dwelling which has been your only main residence for the full period of ownership
- 'Wasting assets' with a predicted life of 50 years or less (unless they have been used in a business)
Shares and securities are not exempt and people often forget about disclosing gains made on sales of shares or forget to claim loss relief if they lose money on shares.
Each individual has their own annual allowance. Therefore if you are married, it might be worth transferring assets or shares in assets to your spouse. Then when you dispose of the assets, you will both make use of your tax free annual allowance.
Try to stagger the disposal of any assets which are liable to CGT over a number of years to make use of your tax free annual allowance (£11,700 – 2018/19).
Make sure you inform HMRC of any capital losses you make as these can be offset against other gains in the same tax year or future tax years. Keep good records and don't delay telling HMRC or you may not be able to utilise any losses. Many people forget about recording losses especially on investments such as shares or securities.
There are a wide range of reliefs available to business owners to reduce their CGT liability. Please read the following page for further guidance: Capital gains - business reliefs
Personal pension contributions and gift aid donations can effectively raise your tax rate thresholds and potentially reduce a CGT liability.
There is an exemption on your principle private residence which applies to domestic properties which have been your main residence at any time. The whole of a gain is exempt if you have lived in the property throughout the whole period of ownership. If not, or if there has been partial business use, the gain will be time apportioned.
From April 2014, the last 18 months of ownership of a property are exempt from CGT provided you have lived in the property at some point (prior to this it was 3 years).
Where you own more than one home you can choose which one is your main residence as long as both have been lived in as your main residence at some point. You need to make an 'election' as to which home is to be treated as your main residence, but you must do this within two years of the date when you had a change in the number of properties. You must also actually physically reside at the nominated property and evidence may need to be provided, such as your residential address on the electoral register or on bank statements etc.
The principle private residence relief is also extended to any gain accruing while a property is let, up to a certain limit, and provided you have lived in the property at some point. You should contact us to help you calculate the amount of relief available if you think this applies to you.
Further information about capital gains tax can be found on the HMRC website:
This information is not meant as a substitute for professional advice and by no means covers every scenario. Almost every rule described here will be subject to many exceptions and caveats. Tax legislation is extremely complex and can be difficult to understand. You should discuss your circumstances with a qualified professional before acting on any information contained within this website. Tax legislation is constantly changing and the information contained within this website is written from our current understanding and interpretation of the tax system as of 6 April 2018.
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