Capital Gains Tax (CGT) An Ultimate Guide

Capital Gains Tax (CGT) applies when chargeable assets are disposed of and applies to individuals and trustees but not to limited companies. However, Limited Companies do pay Corporation Tax on the gains that they make.

Chargeable assets include all forms of a property unless it is specifically exempt. The main assets it tends to apply to our land and buildings, shares, and business assets, including goodwill. CGT can be very complicated, and the rules are far more detailed than can be explained in this summary.

How a Capital Gain occurs

A capital gain occurs when the value of an asset at the date it is disposed of is higher than when it was acquired. An asset is discarded either by sale or by gift. If you give away an asset in an uncommercial transaction, the market value will replace any actual consideration paid.

For assets acquired before March 31, 1982, the cost usually is taken to be the value on that day, although the actual price can be used in some circumstances.

The following also reduces the amount of the chargeable gain.

• Incidental costs of acquisition;
• Expenditure to enhance the value of the asset;
• Incidental charges of disposal; and
• Tax reliefs and allowances (see below).

Tax Rate

For Individuals:

• If your total taxable income (including gains) is above the basic rate band, CGT on property gains is 28%, and 20% on other chargeable assets.
• For gains that fall within the basic rate band, the rates are 18% for residential property and 10% for other assets.

For Trustees and Personal Representatives of Deceased Estates:

• The CGT rate is 28% for gains on residential property and 20% for other assets, regardless of income level.

Tax Exemption

• Rollover Relief: This allows you to delay paying Capital Gains Tax (CGT) on the gain from selling a business asset if you reinvest in a new qualifying business asset. The reinvestment period starts one year before the sale and ends three years after acquiring the new asset.
• Incorporation Relief: This relief applies when you transfer a business to a limited company in exchange for shares. It can defer CGT on the value of the business.
• Holdover Gift Relief: For certain business assets or when assets are placed in trust, CGT may be deferred until the asset is later disposed of by the recipient, such as an individual or trustee.
• Business Asset Disposal Relief (formerly Entrepreneurs’ Relief): This allows you to reduce the CGT rate to 10% on the sale of qualifying business assets. The lifetime limit for qualifying gains is £1 million as of April 2020.

Loss of Money

Any capital loss incurred during an irreversible transaction in the same tax year is offset against any capital gain. Such shall be implemented before the annual withdrawal.

Unused capital losses are carried forward against the future, typically not returnable capital gain. To claim a capital loss, it must be declared to HMRC within five years and ten months of the end of the tax year in which it happened.

Entrepreneurs’ Relief

• Application: Business Asset Disposal Relief (BADR) allows qualifying business disposals, such as the sale of all or part of a business or shares in a personal company, to be taxed at 10% CGT instead of the standard rates (10%/20% on non-residential gains, or 18%/28% on residential property gains).
• Lifetime Limit: Since April 2020, the lifetime limit for BADR is £1 million.
• Qualifying Criteria: Ownership of at least 5% of the company’s shares/voting rights and a minimum ownership period of two years.

Annual Wavier

Main CGT Exemptions

Some primary CGT exemptions include:

• Primary Residence: Gains on the sale of your main home are usually exempt unless part of the property is rented out or used for business purposes.
• Transfers between Spouses/Civil Partners: Transfers between married or civil partners are exempt and are treated as no gain/no loss transactions.
• Wasting Assets: Chattels with a predictable life of 50 years or less, like certain machinery.
• Small Chattels: Non-wasting chattels worth less than £6,000.
• Private Motor Vehicles: Exempt from CGT.
• Gifts to Charity: Exempt when assets are donated to charities or amateur sports clubs.
• Certain Financial Instruments: SAYE contracts, savings certificates, premium bonds, and life assurance policies held by the original owner or beneficiaries.
• Betting Winnings and Lottery Prizes: Fully exempt.
• Compensation Payouts: Certain types, like damages for personal injuries and some compensation for mis-sold pensions, are exempt.

Tax Schemes Available

HMRC provides several tax-efficient schemes to encourage investments in small businesses and employee ownership:

• Enterprise Investment Scheme (EIS): Offers income tax and CGT relief for investments in smaller companies. Eligible companies must have assets worth less than £15 million.
• Seed Enterprise Investment Scheme (SEIS): Provides similar tax benefits for investments in smaller companies, capped at a lower threshold.
• Enterprise Management Incentive (EMI): A share option scheme for tax-efficient incentives targeting key employees.

Payment of CGT

CGT is declared and paid through the self-assessment system, with gains added to your taxable income and taxed at your applicable marginal rate. Payment is due by 31st January following the tax year in which the gain was realized.