Understanding Capital Gains Tax

Capital Gains Tax

A capital gain is the profit you make when you sell an asset for more than you paid for it. The law also sometimes taxes you on capital gains that you are deemed to have made when you give certain assets away or otherwise dispose of them without selling them.

Capital Gains Tax (CGT) was first introduced in 1965 and is a tax on the profit / gain you make from selling assets such as property, shares or other investments e.g. antiques and fine art. Capital gains are traditionally taxed at lower levels than income.

A charge to CGT usually arises after you sell an asset but can also occur when you:

• give away a chargeable asset;
• transfer a chargeable asset to another person;
• exchange a chargeable asset for something else; or
• receive compensation for the loss or destruction of an asset, e.g. an insurance payout.

At its simplest, a capital gain is calculated by deducting from the sale proceeds of an asset:

• what you originally paid for it (or its market value at the date you inherited it or when it was given to you);
• any costs you incurred when you bought it (e.g.: solicitors fees for buying a property);
• any costs you incurred enhancing or improving it; and
• any costs you incurred when selling it (e.g.: commission to a sales agent or auction house).

There are annual limits that allow taxpayers to make a certain amount of tax free capital gains each year.

Everyone is allowed to make a certain amount of tax free capital gains each year. The ‘annual exempt amount’ for the 2024-25 tax year is £3,000 (2023-24: £6,000). There is a lower rate of £1,500 (2023-24: £3,000) for most trustees.

CGT is usually charged at a simple flat rate of 20%*, which applies to most chargeable gains made by individuals. If taxpayers only pay basic rate Income Tax and make a small capital gain, they may be subject to a reduced rate of 10%*. Once the total of taxable income and gains exceeds the higher rate threshold, the excess will be subject to 20%* CGT.

*[An increase in CGT rates was announced with effect from the Autumn 2024 Budget date, 30 October 2024. The main CGT rates increased from 10% and 20% to 18% and 24%, respectively. The 18% rate applies to gains that fall to be taxed at the Income Tax basic rate band and the 24% rate to gains that fall to be taxed at the higher rate bands.

These increases bring CGT rates into line with those applying to the sale of chargeable residential property, apart from a principal private residence].

Unlike many other jurisdictions, CGT levied in the UK does not currently take account of how long an asset is held before it is sold. The CGT rates are therefore based purely on the amount of the gain and not on how long the asset was held. The Office of Tax Simplification (OTS) has recently undertaken a review of the CGT regime. One area that was raised was the possibility of making a distinction between the CGT treatment of short-term and long-term gains.

Limited companies do not pay CGT. Instead, they pay Corporation Tax on their chargeable gains which qualify for fewer reliefs and exemptions than those available to individual taxpayers.

Payment of CGT

CGT is usually due for payment on 31 January following the end of the tax year. For example, for the tax year ending 5 April 2024, any CGT due must be paid by 31 January 2025 in order to avoid penalties and interest.

Capital gains on residential property

The rules for reporting and paying CGT on the sale of a residential property changed with effect from 6 April 2020. This means that any CGT due on the sale of a residential property needs to be reported and a payment on account of any CGT due made has to be submitted to HMRC within 60 days of the sale completing. Any CGT due must also be paid in the same 60 day period.

This only applies to the sale of any residential property that does not qualify for Private Residence Relief (PRR). The PRR relief applies to qualifying residential properly used wholly as a main family residence.

Examples of property sales that are affected by this change include:

• a property that you have not used as your main home;
• a holiday home;
• a property which you let out for people to live in;
• a property you’ve inherited and have not used as your main home.

Notifying HMRC of liability to CGT

If you complete a Self-Assessment tax return, then you are required to notify HMRC of any taxable gains using the capital gains pages of the return. If you do not automatically receive a tax return each year you must still notify HMRC that you have a CGT liability. Tax geared penalties and interest are charged when CGT is paid late.

The law requires you to notify HMRC by 5 October following the end of the relevant tax year. HMRC will then issue a tax return, and this must be completed within 3 months and any tax paid by the same deadline.

You are only required to report capital gains as and when you have a liability to pay CGT. In most cases therefore no return is required where total gains in a tax year are less than the annual tax-free allowance. Of course, someone needs to prepare the calculations to establish whether there is a liability to CGT.

Losses

Sometimes you may sell an asset for less than you paid for it. In such circumstances you would make a capital loss. You can typically deduct capital losses from capital gains made in the same or future years. As a general rule, if the asset would have been liable to CGT had a gain taken place then the loss should be an allowable deduction.

Other exemptions from CGT

Apart from the family home, there are other exemptions from CGT and special rules that apply to gains made in relation to certain other assets, such as:

• Assets sold for less than £6,000 (e.g.: antiques and paintings);
• Wasting assets (e.g.: cars and wine);
• Stocks and shares held in an ISA account;
• National savings certificates and premium bonds;
• Winnings from betting, lottery or the pools;
• Compensation for personal injury;
• Qualifying investments in the Enterprise Investment Scheme.

None of the above exemptions apply when the gains arise through trading or business activities as distinct from occasional sales and disposals.

CGT on business assets

Business Asset Disposal Relief

When you sell a business, shares in a trading company or your interest in a trading partnership, you will often be able to claim Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief) so that you only have to pay 10% CGT rather than the normal rate of 20%*. Since 11 March 2020, this limit has been set at £1 million.

There are a number of qualifying conditions that you must meet in order to qualify for the relief. The lifetime limit means that you can qualify for the relief more than once, subject only to the fact that 20% tax will be charged once your total qualifying capital gains exceed £1 million.

A variant of Business Asset Disposal Relief, called Investors’ Relief (IR), is available to investors in unlisted trading companies. This relief applies a 10% rate of CGT to gains accruing on the disposal of ordinary shares in an unlisted trading company up to an additional lifetime cap of £10 million. Shares must be held for a minimum period of three years to qualify.

*[The rate of CGT for Business Asset Disposal Relief (BADR) and Investors’ Relief is increasing to 14% for disposals made on or after 6 April 2025, and to 18% for disposals on or after 6 April 2026.  The £1 million limit for BADR remains unchanged.

The Investors’ Relief lifetime limit will be reduced from £10 million to £1 million for qualifying disposals made on or after 30 October 2024].

Business Asset Roll-Over Relief

This relief from CGT is available when you sell a business asset and buy a new asset to replace it. If you satisfy all the necessary conditions, you can ‘roll-over’ the capital gain into the new asset. This enables you to postpone your liability to CGT until the replacement asset is sold without itself being replaced by another qualifying replacement.

Incorporation Relief

If you own a business as a sole trader, or in partnership with others, you may at some point want to convert this into a company. A capital gain will be deemed to arise when you do this by reference to the market value of your business assets including goodwill. A number of options exist in such situations.

Gift Hold-Over relief

Where a business asset is gifted or sold for less than its market value, CGT is still chargeable by reference to the market value of the asset. This commonly arises within families, for example, where a parent transfers a business or business premises to their children. In such cases the taxable gain can be postponed until the recipient of the gift sells the asset.

Page updated 6/12/2024