Guide to UK Capital Gains Tax (CGT)
On 6th April 2008, an 18% flat rate of capital gains tax was introduced, replacing the old, rather complex taper system. This tax rate was upheld in all subsequent Budgets, including the latest in March 2011.
Prior to April 2008, share investors and those people with buy-to-let or second properties currently paid a minimum CGT rate of 24% after 10 years. Their position is much improved, with the new flat rate better than the best former rate of 24% which could only be achieved after long holding periods.
However, business owners, entrepreneurs and others who own shares in their employer saw their 10% CGT rise a whopping 80% up to 18%. Their is some relief for those business owners in that the first £10 million of gains upon selling their business is taxable at only 10% through the application of the Entrepreneur's Relief scheme.
We'll take a look now at how the current capital gains tax rate work in practice.
If you sell an asset
You bought some shares for £500.
You sell them for £2,000.
You have made a gain of £1,500 (£2,000 less £500).
If you give an asset away
If you give an asset away, you normally look at what it is worth, not what you get for it. The same is true when you sell it for less than its full worth in order to give away part of the value.
Three years ago, you bought a flat costing £75,000 for your daughter to use.
The flat is now worth £100,000.
You now give it to your daughter.
She might not pay you anything for it; or you might let her have it for less than what it is worth, say she pays you £60,000.
Either way, you have made a gain of £25,000 (£100,000 less £75,000).
If you dispose of an asset you had been given
You might dispose of an asset that you had received as a gift. When you work out the gain you normally use the market value of the asset when you received it.
Your sister gave you a garage worth £5,000.
You did not pay anything for it.
Later, you sell the garage for £8,000.
You are treated as making a gain of £3,000 (£8,000 less £5,000)
If you have inherited an asset
If you inherit an asset, the estate of the person who died does not pay Capital Gains Tax at that time. If you later dispose of the asset, you work out the gain by looking at the market value at the time of the death.
Your brother had acquired some shares for £2,000.
When he died, he left them to you.
No CGT is payable at that time.
At the time of his death, the shares were worth £6,000.
Later, you sell them for £9,000.
You have made a gain of £3,000 (£9,000 less £6,000).
Some other cases where you might have to pay Capital Gains Tax
You may also have to pay CGT if you dispose of part of an asset or exchange one asset for another. In addition, CGT may be payable if you receive a capital sum of money from an asset without disposing of it, for example if you receive compensation when an asset is damaged.
If you sell or give an asset to your husband or wife while you are legally married and living together, that does not give rise to a Capital Gains Tax charge.
If your husband or wife later sells the asset, he or she will work out the CGT at that time by looking at what you paid for the asset.
If you give an asset to a registered charity you will not have to pay CGT.
Most sorts of assets can lead to a CGT charge when you dispose of them, for example:
- shares in a company
- units in a unit trust
- land and buildings (but see below - 'What about my home?')
- higher value jewellery, paintings, antiques and other personal effects (see next section)
- assets used in a business, such as goodwill.
CGT is chargeable whether the assets are in the UK or abroad.
Some assets are exempt. For example, you will not have to pay CGT on
- your private car
- cash held in sterling
- any foreign currency held for your own or your family's personal use
- jewellery, paintings, antiques and other personal effects that are individually worth £6,000 or less (if you have a set, for example a set of chess figures, you do not pay CGT if the value of the set as a whole is £6,000 or less)
- Savings Certificates, Premium Bonds and British Savings Bonds
- UK Government stocks ("Gilts")
- assets held in an Individual Savings Account (ISA) or Personal Equity Plan (PEP)
- betting, lottery or pools winnings
- personal injury compensation.
What about my home?
You will not have to pay CGT when you dispose of your home if all the following conditions are met.
- Throughout the period that you owned it, it was your only home.
- You did actually use it as your home all the time that you owned it.
- Throughout the period that you owned it, you did not use it for any purpose other than as a home for yourself, your family and no more than one lodger.
- The house and garden do not exceed 5,000 square metres (about one and a quarter acres - roughly the size of a football pitch).
Even if not all of these conditions are met, you may still be entitled to relief against all or part of the gain.
You may have bought or acquired in other ways shares or units in a particular company or unit trust on a number of different occasions and now dispose of some of them. If so, there are special rules for identifying which of the shares or units you have sold, and for working out the gain.
You may have to pay CGT when you sell shares in the company where you work, but there are some special reliefs that may help you keep your tax bill down.
Start by listing all the assets that you have disposed of in the tax year (6 April to 5 April in the following year). You can ignore exempt assets and disposals that do not give rise to a Capital Gains Tax charge. You may be able to ignore the disposal of your own home.
Work out the gain on each asset.
There are many reliefs available that reduce or defer CGT.
- Some reliefs are available to many people. For example, taper relief reduces the amount of a gain charged to tax the longer an asset has been held.
- Other reliefs are available only in special circumstances.
- You may deduct some of the costs of buying, selling and improving assets when working out your gain.
- If you have made a loss, you may be able to set that against your gains.
You can then add up the total of your gains less reliefs and allowable losses to calculate your net gains for the year.
If the total of your net gains in a tax year is less than a certain amount, called the annual exempt amount (AEA), you will not have to pay Capital Gains Tax For the tax year 2009-10 the AEA is £10,100.
If your net gains are more than the AEA you pay CGT on the excess.
If the total value of all the assets that you dispose of in a tax year (ignoring exempt assets) is less than the AEA, then you will not have to pay CGT on those assets.
If you know that the total of the gains on the assets that you dispose of (apart from exempt assets) is less than the AEA even before thinking about losses and reliefs, then you will not have to pay CGT on those gains. However, you may still have to show the gains on your tax return.
Even if you have not disposed of any assets during a tax year you may still have to pay Capital Gains Tax, for example, if the gains of a trust or company with which you have some connection are attributed to you.
Unless you are sure that you do not have to pay CGT, you should ask for further information. The reliefs might mean that you do not have to pay any CGT this year.
If you think that you might have losses that are greater than your gains for the year, then you should find out more about CGT. If you notify your Tax Office you may be able to use the losses to offset gains in a future year.
For those interested in how to significantly reduce both CGT and income tax on property investments, we recommend the publication 'How to Avoid Property Tax'. For more information, click here.