Capital Gains Tax: The Basics
Capital Gains Tax (CGT) applies when assets are sold. Individuals pay through Self-Assessment tax return and Companies pay through their Corporation Tax return.
If you need to declare a Capital Gain, find our Self-Assessment services here.
The most common assets applicable to CGT are land, buildings and shares. CGT can be very complex, we hope to explain the basics for you here. Contact us for more detailed, specialist advice.
What is a Capital Gain?
When the value of an asset at the date it is sold is higher than when it was purchased, a Capital Gain is made.
You are able to deduct the following costs to reduce the amount of the chargeable gain:
Incidental costs of acquisition (e.g. solicitor's fees)
Expenditure to enhance the value of the asset (e.g. extension costs)
Incidental costs of disposal (e.g. estate agent's fees)
Tax reliefs and allowances (see below)
An annual exemption of £12,300 for 2020/21 is available to individuals so total gains made in the tax year up to this amount are exempt from tax.
Any unused annual exemption from previous years cannot be carried forward or transferred to another person.
How is a Capital Gain Taxed?
CGT is charged at the rate of 20% where the total taxable gains and income are above the income tax basic rate band and 10% below.
For residential property (that do not qualify for private residence relief) CGT is charged at 28% on gains above the basic rate band and 18% below.
There are examples of tax reliefs which can reduce the chargeable gain:
Business incorporation relief – available when you transfer your business into a limited company in exchange for shares
Holdover gift relief – on some gifts of business assets, or gifts made into trusts mean the tax does not become payable until the person, or trustee who receives the gift disposes of it
Entrepreneurs’ relief – allows the capital gain from sale of part or all of your business to be taxed at an effective CGT rate of 10%. From March 2020 the relief applies to the first £1 million of qualifying lifetime gains. Gains in excess of this limit or which do not qualify for other reasons will be taxed at 10% or 20% (18% or 28% for residential property and carried interest).
Any capital losses made on a chargeable transaction are netted off against any capital gains made in of the same tax year. They are applied before the annual exemption. Unused capital losses are carried forward against future capital gains, they cannot normally be carried back. To make use of a capital losses it must be reported to HMRC within five years and ten months of the end of the tax year in which it arose.
Gains made on some assets are not subject to CGT which include:
The sale of your only or main residence is exempt, although it can become partly chargeable in some circumstances such as if it is let out or used for business purposes;
Transfers of assets between husband and wife or civil partners. Such transfers are treated as being made at no gain/no loss;
Most chattels whose value decreases over time (called wasting assets);
Non wasting and business chattels where the disposal proceeds do not exceed £6,000;
Private motor cars;
Gifts to charity and certain amateur sports clubs;
SAYE contracts, savings certificates and premium bonds;
Betting winnings and prizes including the lottery;
Compensation for damages for personal or professional injury;
Some compensation payouts for mis-sold pensions;
Life assurance policies in the hands of the original owner or beneficiaries;
Company reorganisations and takeovers where there is a share for share exchange.
Tax Schemes Available
There are certain types of investment which have been designed with preferential tax treatments for Capital Gains Tax and Income Tax, mainly to encourage investment in new companies and also to encourage employees to own shares in the companies they work for.
Schemes include the Enterprise Investments Scheme (EIS) which gives income tax and capital gains tax relief on investments made in companies with assets worth less than £15million. A similar scheme Seed Enterprise Investments Scheme (SEIS) with similar reliefs for smaller companies.The Enterprise Management Incentive Scheme is a share option scheme which can be used to provide tax efficient targeted incentives to key employees or employee groups.
Payment of CGT
CGT is paid through the self-assessment system and gains and losses must be declared on your self-assessment return. The gains after all reliefs and exemptions are added to your taxable income and then taxed at your top marginal rate. The tax is payable by 31 January following the tax year in which the gain arose.
Capital Gains Tax is a specialist area and you should contact us for advice in minimising CGT liabilities and read about our services here.
Equal Accountancy Ltd offers Accountancy and Bookkeeping services in Hemel Hempstead and surrounding areas across Herts, Beds and Bucks. We offer a range of services for Limited Companies, Self-Employed individuals and Landlords including Year End Accounts, Corporation Tax returns, Self-Assessment Tax returns, Payroll services, VAT returns, Bookkeeping and Company Secretarial. Get in touch today for a free, non-obligatory quote for your business needs.