Capital Gains Tax – how does it work?
11th October 2019
Raj Seewooruttun See profile
Capital Gains Tax (CGT) is a liability that arises when an individual or trustee makes a chargeable gain on the sale of a chargeable asset. A chargeable gain, in its simplest form, is the difference between the disposal value and the acquisition cost of the asset.
It’s worth noting that not all assets are chargeable. Examples of exempt assets are:
- Chattels (or personal possessions) that are bought and sold for less than £6,000 (for example, paintings)
- Wasting chattels – possessions that have a predictable useful life of less than 50 years; these include clocks and watches
- Shares held in an ISA.
Other assets not mentioned above, such as shares not held within an ISA, are potentially chargeable upon disposal.
CGT is collected by HMRC through the self-assessment system, and you will need to submit a tax return to declare any gain. Both the return, if submitted online, and the tax payment are due on 31 January following the tax year of disposal.
Property relief on CGT
There are a variety of reliefs to bear in mind when calculating your CGT due, which may be available depending on your circumstances. For example, if you are selling your main residence, you may be entitled to Principal Private Residence Relief, which could cover the whole or part of the gain, depending on how long the property was occupied as your main residence. There is also currently the potential of lettings relief if you let out the property for some of the time you owned it.
Annual allowance and making a loss
Normally, every UK resident is entitled to an annual allowance, and you will only pay CGT on any gains over this. For 2019-20, this annual exemption is £12,000 per person.
Of course, you may not always make a gain. If you make a loss, these are first offset against gains in the same tax year. If the losses exceed the gains in that tax year, they can be carried forward and offset against future gains to reduce the CGT due then. These losses can be carried forward indefinitely until they are used.
Higher or additional rate taxpayers
The rate of CGT due on a disposal will depend on your income for the year. If you are a higher or additional rate taxpayer, gains will be taxed at 20% (28% for residential property). If you are a basic rate taxpayer, you will pay 10% (18% for residential property) on the portion of gain within the basic rate income tax band; any amount over this will be charged at the higher rates.
We can help to calculate your CGT position, reviewing any of the reliefs available to you, and prepare your tax return to include the disclosure of the gain to HMRC. It’s important to let your adviser know as soon as possible after (or potentially before) a gain is realised, so that it can be accurately calculated and you have the correct supporting documentation.
If you let us know when you’re considering selling an asset, we can assess the position with you and help to identify potential tax savings. To find out more, visit our Capital Gains Tax Services page, get in touch here or contact Raj Seewooruttun to see how we can help you.