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What is Capital Gains Tax?

September 6, 2022
We’re not going to sugar coat it. Capital Gains Tax (CGT) can get quite complicated.But we’re here to make the accounting world as accessible as possible. So, by diving into the nitty-gritty of taxes and terminology, we’re about to save you a whole load of hassle.If you've ever sold something of value, and wondered what tax might be involved —  then read on. We’re going to break down the facts about Capital Gains Tax, and how you might be affected by it.After reading this article, you’ll be equipped with the tools to understand:
    Exactly what Capital Gains Tax isHow to calculate what you owe, andAvailable resources if you need some help
First thing’s first, let’s begin with a straightforward overview.

Capital Gains Tax: an overview

What you gain in profit is what’s taxed. The total sum of money you get from selling an asset isn’t taxed; Capital Gains Tax only comes into play if you’ve made a profit on your investment.In other words, a capital gain is the difference between an asset's selling price and its original purchase price.For example, if you spent £5,000 on a painting and then sold it for £25,000, you’ve made a gain of £20,000. It’s on the £20,000 that you’ll need to pay CGT.

What assets does Capital Gains Tax apply to?

If you’re selling assets for more than £6,000, the gains might be taxable.Typically, Capital Gains Tax applies when you dispose of:
    Shares (that aren’t in an ISA or PEP)Investment fundsBusiness assetsSecond homes and properties that aren’t your main residenceYour main home if it’s being let, or used for business (or if it’s very large)The sale of a businessAssets transferred at below their market valuePersonal possessions worth more than £6,000
These are known as ‘chargeable assets’.
If you dispose of any cryptoassets or cryptocurrencies, you might need to pay Capital Gains Tax. For more on whether you need to pay CGT, head over to HMRC’s guide to taxing cryptoassets.

Personal possessions that could be subject to Capital Gains Tax include:
    Household furniturePaintings, antiques, crockery, china and silverwareJewelleryLorries and motorbikesCollectible sets (chessmen, libraries of books, ornaments, etc.)Fine wine (yes, seriously) if it can be stored for over 50 years

Capital Gains Tax exemptions

A lot of private possessions are exempt from Capital Gains Tax. For example, you don't need to pay tax on the gains from selling a private car, unless it’s been used for business purposes.Equally, ‘wasting assets’ — which, according to HMRC, are items with an expected life of 50 years or less — are also exempt from Capital Gains Tax. This includes things like antique clocks, caravans and pleasure boats.As a rule of thumb, you don’t have to worry about Capital Gains Tax if you’re making gains on:
    ISAs or PEPsUK government gilts and Premium BondsBetting, lottery or pools winningsThe sale of your main homeGifts between married and civil partnersGifted personal possessions less than £6,000 per yearGifts to charitiesProceeds of life insurance policiesNational Savings & Investments products, child trust funds, and pensionsEmployee shares held in approved share incentive schemes
If you’re not sure if you need to pay tax on a certain asset, we recommend getting expert advice from one of our trained accountants.

Do I need to pay Capital Gains Tax if I’m selling my business?

You may have to pay Capital Gains Tax if you make a profit when you sell either part or all of your business — only if you’re a self-employed sole trader or in a business partnership.If you’re selling a limited company, you’ll need to pay Corporation Tax on any profits made from selling business assets.

How much Capital Gains Tax do I need to pay?

You only have to pay Capital Gains Tax on your overall gains above your tax-free allowance, known as your Annual Exempt Amount.The allowance for the current tax year is £12,300 for individuals and £6,150 for trustees (unless the beneficiary is vulnerable).Above that, the tax rate you pay depends on your taxable income and your marginal rate of personal tax.The following Capital Gains Tax rates apply for this tax year (2022/23):
Capital Gains Tax on residential propertiesCapital Gains Tax on other assets
Basic rate taxpayers18%10%
Higher rate taxpayers28%20%

How to calculate Capital Gains Tax

Here are 5 simple steps to work out how much tax to report and pay HMRC the Capital Gains Tax you owe:
    Work out how much taxable income you have. To do this, minus your Personal Allowance (£12,570 this tax year) from your income and subtract any tax breaks you're entitled to Work out your total taxable gains Subtract your tax-free allowance from your total taxable gains Add this amount to your taxable income If this amount is within the basic Income Tax band, you’ll pay 10% on your gains (or 18% on residential property). Or, if it’s above the basic tax rate, you’ll have to pay 20% (28% on residential property)
Clarifying the calculation, using an example:Let’s say your taxable income is £30,000. After selling some fine wine, your taxable gains are now £12,600. (Note: these taxable gains are not from a residential property).First, deduct the Capital Gains tax-free allowance (£12,300) from your taxable gain. That leaves £300 to pay tax on.Add this £300 to your taxable income, which is now a combined amount of £30,300. Since this falls within the Basic Rate tax band, you’ll need to pay Capital Gains Tax at 10%, bringing your total Capital Gains Tax amount owed to £30.

How to pay Capital Gains Tax to HMRC

HMRC doesn't send you a bill for Capital Gains Tax — instead, you have to work out (using the steps above, or with the help of an accountant) whether or not your total gains have exceeded your tax-free allowance.

If you’re above the allowance, you’ll need to report the Capital Gains Tax you owe as part of your Self Assessment.

To make sure you’re prepared, it’s important to keep hold of some records. We recommend keeping receipts, bills and invoices that show the date and the amount:
    You paid for an assetOf any extra costs (Stamp Duty, improvement costs, etc.)You received for the asset (include payments you’ll get in later instalments, or any compensation)
It’s also wise to keep any contracts for buying and selling assets, as well as copies of any valuations.

Capital Gains Tax deadline

However, there are some stricter deadlines for selling residential properties:
Date of saleWhen you must report and pay
If you sold a residential property in the UK with a completion date on or after 27th October 2021Within 60 days
If you sold a residential property in the UK with a completion date between 6th April and 26 October 2021Within 30 days
If you have other gains to reportIn the tax year after you sold or disposed of an asset if you file a Self Assessment tax return. If you're eligible, you may be able to use the 'real time' Capital Gains Tax service to report by 31st December in the tax year after the sale.

Do I pay Capital Gains Tax on inheritance?

Inherited an asset? Don’t worry — you won’t have to pay Capital Gains Tax until you sell it.At that point, though, you’ll need to know its value at the time you inherited it. From there, you can calculate (and report, if necessary) any gain on your tax return.As always, we recommend keeping a record. That way, if you ever do decide to sell, you’ll have all the information you need.

What about gifts?

If you’ve received a gift from someone who isn’t your husband, wife or civil partner, Capital Gains Tax will apply to those assets, too.A valuation needs to be made of how much the asset is valued at when gifted, and if a capital gain arises when you dispose of the asset, tax is applied.
There is tax relief available for gifts, however, so it’s best to chat with an accountant for more advice.

Claiming for a loss

You can claim for capital losses on your Self Assessment tax return. You don’t have to do it straight away — you’ve got up to 4 years to claim for your loss. If you’ve never made a gain and are not registered for Self Assessment, there are other ways of contacting the HMRC.You can report losses on any chargeable asset. The amount will be deducted from the gains you made in the same tax year. However, if your total taxable gain is still above the tax-free allowance, you can deduce unused losses from previous tax years.Depending on the type of asset, if your losses reduce your gain to below the tax-free allowance you can carry forward to remaining losses for future you.

Can I claim Capital Gains Tax relief?

Before you start worrying about the size of your tax bill, depending on the type of asset sold you may be able to claim Capital Gains Tax relief.
Business Asset Disposal ReliefPay 10% Capital Gains Tax on qualifying profits if you sell all or part of your business (instead of the normal rates)For sole traders, business partners or those with shares in a ‘personal company'
Business Asset Rollover ReliefDelay paying Capital Gains Tax when you sell or dispose of some types of asset if you replace themBuy the new asset within 3 years of disposing of the old one. Use the old and new assets in your business
Incorporation ReliefDelay paying Capital Gains Tax when you transfer your business to a companyTransfer all your business and its assets (except cash) in return for shares in the company
Gift Hold-Over ReliefPay no Capital Gains Tax if you give away a business asset — the person you gave it to pays tax when they sell itYou used the business asset for trading as a sole trader or partner

Got a question about tax?

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Our expert accountants are on hand, ready to answer your tricky tax questions. Save yourself a headache — give Ember a go today.