It is quite common to assume that Capital Gains Tax (CGT) only affects professional investors or large corporations but that isn’t really the case.
CGT will normally be applied to gains made from the disposal of your personal assets. Whether it is a property you’ve recently sold or a profit made from your crypto assets, these gains could be liable to Capital Gains Tax.
In this guide, we’ll explain how Capital Gains Tax works and how you could potentially reduce your next tax bill.
The definition of Asset Disposal
The disposal of an asset does not necessarily refer to ‘selling an asset’. Swapping an asset, gifting and transferring it to someone else or getting compensated for it, may well be regarded as disposing of an asset as well.
That said, you may be exempt from Capital Gains Tax when transferring an asset to a family member as a gift.
When does Capital Gains Tax apply?
Capital Gains Tax is normally applied when a personal asset has increased in value over time and you have made a profit (gain) from selling or the disposal of that asset.
For tangible, personal belongings such as Jewellery, paintings or antiques, HMRC’s guideline is to declare every asset you have sold or disposed of above £6,000.
How is Capital Gains Tax calculated?
You’ll be taxed only for the gain made from the disposal of an asset, less the cost paid when the asset was originally purchased, along with any associated costs such as legal or improvement costs (if you are selling a property).
Deducting your CGT allowance
– The remaining value will then have the annual Capital Gains Tax allowance of £12,300 deducted from it to produce a net profit subject to tax as a capital gain.
CGT Calculation Example
If you’ve purchased a house for £140,000, with £10,000 of allowable costs, and sold it for £200,000, five years later. The £50,000 gain minus £12,300 CGT allowance (as long as you have no other Capital Gains), will be taxed as a capital gain, which will be taxed according to your tax band.
Which types of assets could be liable for Capital Gains tax
Cryptocurrency, Stocks and Shares
You might need to pay Capital Gains when making a profit for the selling of your crypto assets or other shares you own in your portfolio.
The CGT allowance of £12,300 will be applied to the gain made from your Cryptoassets.
This does not apply to investing in ISAs or PEPs, as profits made through them are exempt.
If you sell a property that isn’t your only and main place of residence.
Example – if you own and rent out a second property and decide to sell it. That second property will be liable for Capital Gains Tax.
You may be liable for CGT when disposing of tangible assets valued at more than £6,000.
These personal belongings could be:
- Coins and stamps
- Sets of things, e.g. matching vases or chessmen
What is your Capital Gains Tax rate?
The rate at which Capital Gains will be taxed depends on your income and the tax band you’re income is currently in.
For personal income that falls within the 20% basic tax rate, an additional CGT of 18% will be applied, while a higher income of £50,271 will be taxed at 28%.
Capital Gains Tax exemptions – when you do not have to pay?
- You have made a profit from a sale of a property that was your only and main place of residence.
- Your property or portfolio of properties are listed under your limited company. Hence, will be taxed under your Company Tax return rather than your personal Capital Gains Tax.
Inheritance and Family
- If you have inherited an asset, you will be liable for Inheritance Tax rather than Capital Gains Tax. If you decide to sell that asset in the future. You will then be liable to CGT in accordance with the general Capital Gains rules.
- You are also exempt from CGT when disposing of an asset to a spouse or civil partner as a gift. However, when that family member decides to dispose of that asset, they might be liable for Capital Gains Tax.
This does not apply to a circumstance where you’ve been separated from your partner during the relevant tax year.
You do not have to pay CGT if the the total profit made from the disposal of single or multiple assets was below £12,300.
- Donating an asset to charity is CGT exempt.
- Profit made by selling your car is also exempt unless it had been used for business purposes.
- Investing in ISAs, SIPP or Venture Capital Trust (VCT) does not attract a CGT liability.
- UK government gilts and Premium Bonds are exempt.
- Betting profits and lottery winnings are CGT exempt.
How can you reduce your Capital Gains Tax bill?
Your annual allowance
Every taxpayer has an annual Capital Gains allowance, which is currently £12,300 per year. Any capital gains up to this allowance cap are not subjected to tax.
That said, if you are a resident but not based in the UK, then this allowance may not be available to you.
Additionally, If you leave this allowance unused for a given tax year, you’ll lose it and cannot carry it forward or back.
Capital gains allowance and multiple owners
When an asset is owned by multiple owners, capital gains allowance will be multiplied by the number of owners. Hence, decreasing the total amount payable quite substantially.
If a property owned by 3 individuals, that have not already utilized any of their GCT allowance, was sold and made a profit of £50,000, the total CGT allowance deducted would be £36,900 (£12,300×3).
This will reduce the taxable profit made from that sale to £13,100 (£50,000-£36,900) and this would be split between the 3 owners, £4,366.67 each subject to the relevant rate of tax.
Your spouse’s allowance
The transfer of assets or investments between married couples is not subjected to CGT. If they then go on to sell the assets, they may be subject to CGT, once their allowance has been deducted.
Please note, however, that there are certain conditions attached to this and you may wish to consult your tax adviser accordingly.
You can report a loss to HMRC against gains made during this tax year and reduce your total taxable gains.
Unused losses or losses that haven’t been reported from previous years can also be brought forward to be deducted from gains made in the current tax year.
You can claim losses up to 4 years after the end of the tax year in which you have disposed of an asset.
Normally, you wouldn’t be able to claim losses for assets transferred to partners, spouses or family members, as these assets are generally not liable for Capital Gains Tax.
CGT Tax Relief on Savings – ISA & SIPP
Gains on investments held in an ISA or SIPP are not subjected to Capital Gains Tax, so it makes sense to try to use these standard, legitimate vehicles to hold your investments, where possible.
ISAs can be more easily accessed but you can only invest up to £20,000 per year in them.
On the other hand, SIPPs provide increased flexibility for investors than ISAs, but they do require some knowledge of financial markets or to have the ability to hire a financial adviser.
Business Asset Disposal Relief
Known as Entrepreneurs’ Relief until April 2021, the Business Asset Disposal Relief allows business owners to pay lower tax rates for capital gains made by the selling or disposal of their business.
With this scheme, you could be eligible to pay 10% CGT (instead of 18% or 28% for higher earners) for profits of up to £1,000,000 made from an asset disposal.
In this article, we have tried to review some common scenarios which can help you reduce your Capital Gains tax liabilities. However, your personal circumstances may vary and require specific advice. Furthermore, there are many more factors that could change your tax position for better or worse.
We always recommend advising with one of our accountants and review your finances before making a final decision.