This article provides a comprehensive guide on capital gains tax in the UK.
Introduction
Capital gains tax (CGT) is an important component of the UK tax system that applies to the profit gained from the sale of assets. This article aims to provide a comprehensive overview of capital gains tax in the United Kingdom, including its purpose, calculation, rates, allowances, exemptions, and potential strategies for minimising tax liability.
Understanding Capital Gains Tax
Capital gains tax is a tax levied on the profit made from the disposal of assets, such as property, investments, and personal possessions, that have increased in value. The purpose of CGT is to ensure that individuals and businesses contribute their fair share of tax when they realise gains. It is important to note that CGT does not apply to some assets, such as a primary residence that qualifies for principal private residence relief.
Calculation of Capital Gains Tax
CGT calculation involves subtracting the asset’s original cost from the final sale proceeds. The resulting amount is the chargeable gain, which is then subject to tax at the applicable rates. However, individuals and businesses can claim various reliefs, allowances, and deductions that can reduce their overall tax liability.
Capital Gains Tax Rates and Allowances
As of the 2021/2022 tax year, there are three different rates for capital gains tax in the UK, depending on the taxpayer’s income level
Standard Rate
Basic rate taxpayers are subject to a CGT rate of 10%, while higher and additional rate taxpayers face a rate of 20%.
Residential Property
For gains arising from the sale of residential property and certain carried interest, the rates are increased to 18% for basic rate taxpayers and 28% for higher and additional rate taxpayers.
Reduced Rate
Entrepreneurs’ relief, now known as business asset disposal relief, offers a reduced CGT rate of 10% for eligible business assets, subject to certain criteria. The lifetime limit for business asset disposal relief is £1,000,000. Additionally, individuals are entitled to an annual exempt amount (£6,000 for the 2023/2024 tax year), which means that they can realise gains up to this threshold without being subject to CGT.
Exemptions and Reliefs
There are several exemptions and reliefs available that can help reduce or eliminate capital gains tax liability in the UK.
Principal Private Residence Relief
Individuals are exempt from CGT on gains made from the sale of their main residence, provided certain conditions are met.
Annual Exempt Amount
As previously mentioned, individuals have an annual exempt amount that allows them to realise gains up to the threshold without incurring CGT.
Business Asset Disposal Relief
This relief, previously known as entrepreneurs’ relief, allows individuals to benefit from a reduced CGT rate of 10% on the disposal of qualifying business assets, subject to specific requirements. The lifetime limit for the business asset disposal relief is £1,000,000.
Gift Holdover Relief
This relief allows individuals to defer CGT when gifting assets to someone else, with the gain arising only when the recipient disposes of the asset. This can be claimed when gifting a business asset to an individual or a company or an asset into a trust.
Roll-over Relief
Roll-over relief allows individuals to defer CGT when selling an asset and using the proceeds to acquire another qualifying asset.
Losses
Capital losses can be offset against gains, potentially reducing or eliminating the capital gains tax liability.
Strategies for MinimiSing Capital Gains Tax Liability
There are several legitimate strategies that individuals and businesses can employ to minimise their CGT liability.
Timing of Asset Disposal
Timing the sale of assets strategically can help reduce overall CGT liability by utilising annual allowances effectively. Spacing out asset sales over multiple years can also ensure that gains fall within lower tax brackets.
Tax-Efficient Investments
Investing in tax-efficient schemes, such as Individual Savings Accounts (ISAs), EIS Shares, SEIS Shares and Venture Capital Trusts (VCTs), can provide opportunities for tax relief and deferral of capital gains tax.
Utilising Spousal and Family Transfers
Transferring assets between spouses, civil partners, and family members can help utilise multiple annual exempt amounts and potentially reduce overall tax liability.
Utilising Offsetting Losses
Capital losses can be offset against capital gains, reducing the taxable gain. Careful planning can help identify opportunities to offset gains with realised or carried-forward losses.
Professional Advice
Seeking advice from tax professionals, such as accountants or tax advisers, can help individuals and businesses navigate the complexities of capital gains tax and identify suitable strategies for minimising tax liability.
Capital gains tax is a significant aspect of the UK tax system, impacting individuals and businesses that realise gains from the sale of assets. Understanding the principles of CGT, including calculation, rates, allowances, exemptions, and available reliefs, is crucial for taxpayers aiming to minimise their tax liability. By staying up to date with current legislation and seeking professional advice when needed, individuals and businesses can make informed decisions and optimise their overall tax position.
At Spherical Accountants, our experts can help UK and non-UK resident clients with their capital gains tax planning and meeting compliance requirements. Please feel free to contact us on 020 7859 4047 or via email at info@sphericalaccountants.co.uk
Capital Gains Tax FAQs
1. What is Capital Gains Tax?
Capital gains tax is a tax levied on the increase in value of certain assets when they are sold, gifted or otherwise disposed of. In other words, it is a tax payable on the gain made from selling an asset, for example, a residential property, shares, land, commercial shop or in some cases cryptocurrencies.
2. How Much is Capital Gains Tax?
Capital gains tax is payable on the gain after using the previously unused capital losses, annual exempt amount and relief. Capital gains tax on the sale of a residential property is 18% for basic rate taxpayers and 28% for higher and additional rate taxpayers. CGT rate for the sale of other assets is 10% for a basic rate taxpayer and 20% for a higher and additional rate taxpayer.
3. How to Avoid Capital Gains Tax?
There are many legitimate ways in which the capital gains tax can be reduced or even completely eliminated. Reliefs like gift relief, roll-over relief, principal private residence relief, and re-investment relief are some of the reliefs that can help you reduce or eliminate capital gains tax.
4. Who Pays Capital Gains Tax?
The person who is making the disposal of the asset is responsible for paying capital gains tax. In the UK, individuals, companies and trusts pay capital gains tax.
5. When Do You Pay Capital Gains Tax?
On the sale of the residential property, the capital gains tax is payable within 60 days of the completion. For all other assets, capital gains tax is payable by 31 January following the end of the tax year.
