Capital Gains Tax – The Complete Guide (2023/2024)
Capital Gains Tax, or CGT, is the tax which is charged when a property or some other type of asset is sold. It can also be charged if the property or asset is traded. If the property or asset gains a profit in the sale or trade, then it is liable for Capital Gains Tax. The profit gained is what determines the amount of Capital Gains Tax to be paid rather than the total amount of money that was transferred. For example, if you sell a property for £200,000 and you had originally paid £150,000, then you would pay Capital Gains Tax based on the £50,000.
What Is Capital Gains Tax?
Capital Gains Tax is a tax owed to the government for properties or assets that are sold or traded to gain a profit.
Capital Gains Tax, How It Works?
When a substantial profit is made on a sale or a trade, a certain percentage of that profit is paid to the government for Capital Gains Tax. The CGT must be paid no later than sixty days after the completion of the sale or trade. If the amount of profit is under a certain limit, then Capital Gains Tax does not need to be paid.
When contracts are exchanged between the buyer and the seller, this is referred to as disposal. The disposal date is the date that the government regards as the completion of the sale and that is when they start counting the days until your Capital Gains Tax is due.
The government does have a deadline for you to pay the Capital Gains Tax, however, it is self-reported. While other taxes, such as income tax and VAT are deducted automatically, Capital Gains Tax, being a self-reported tax is not. A qualified accountant or a qualified tax advisor can guide you through this process. They can ensure that the Capital Gains Tax is correctly calculated and that they are in line with the current HMRC directives. This is important to help your sales transaction to run smoothly.
As previously mentioned, from the disposal date, you are given sixty days to pay the Capital Gains Tax on your property. If you do not pay your liability within the sixty days you are subject to penalties. If you wait too long to pay your liability prosecution is not out of the question. Thus, you want to be sure that you work quickly with your accountant or tax advisor to make calculations and make your payment.
How Much Does A Sale Have To Be To Be Liable For Capital Gains Tax?
It is probably obvious that most property sales are going to be subject to Capital Gains Tax, but as previously mentioned other sales could also be subject to Capital Gains Tax. Currently, if personal possessions, also referred to as assets, are sold at anything over £6,000, you will need to refer to your accountant or tax advisor for calculations to determine the amount of your liability. Sales of assets below £6,000 are not, currently subject to Capital Gains Tax.
What assets would bring in more than £6,000? Art and sculptures are often bought at low prices and gain appreciation over time. This type of collection can be sold for more than £6,000. Shares, not ISA or PEP Business assets, but other shares, is an asset. The goal with shares is to let them mature and appreciate. When they do, you may be able to sell them for over £6,000. Another, increasingly common asset that may be sold for more than £6,000 are Cryptocurrencies, including Bitcoin and Ethereum, among others.
Am I Liable For Capital Gains Tax On Gifted Properties?
The short answer is yes. You may be required to pay Capital Gains Tax on properties that have been gifted to you upon your sale of the properties. The tax would be calculated based on how much the property was worth on the date that the person passed away and how much you sold the property for.
Do I Have To Pay Capital Gains Tax On Transfers?
When a property is transferred, usually due to a divorce or some type of separation and that property is then sold, you are still liable to pay the Capital Gains Tax.
Who Pays Capital Gains Tax On Shared Property?
Shared property is a common occurrence. When the shared property is sold individual proportions are determined among those who shared the property. Each individual would then pay their share of the Capital Gains Tax, based on their proportion of profit.
Do I Pay Capital Gains Tax On Non-UK Properties?
Yes. If you are a UK resident and you sell a property in another country, you must self-report your sale and you are liable to pay Capital Gains Tax on that property. That said, there are a specific set of rules for UK residents who are temporarily living somewhere else regarding Capital Gains Tax. To fully understand this set of rules, it is highly advisable to work with a qualified tax professional or an accountant. They can explain the rules to you and determine how they apply to you and your situation.
Do I Pay Capital Gains Tax If I Am Not A UK Resident?
Yes. If you are not from the UK, but you owned and sold a property in the UK, then you are also liable to pay Capital Gains Tax.
When Is Capital Gains Tax Not Applicable?
As mentioned, previously, if your profit is less than £6,000, then you do not owe Capital Gains Tax. Also, if you sold a property that was your main residence and you consistently lived in that property, then you can utilise the Principle Private Residence, PPR, relief. This relief is exactly that; it relieves you of the liability of having to pay Capital Gains Tax on your sale. Wasting assets are also not liable for Capital Gains Tax. These assets include anything that will last less than fifty years. This could be a car or a boat. Also exempt from Capital Gains Tax are gifts given between spouses or civil partners, child trust funds and assets that are held in ISAs or PEPs.
How Much Will You Have To Pay Capital Gains Tax?
The amount of Capital Gains Tax that you will be liable for where your income falls. It also depends on what type of sale you made. What are the Capital Gains Tax Rates (CGT rates) for residential property 2023/24?
If your income falls below £50,270, then you are a basic taxpayer, and your rate is set at 18%. Other assets are set at 10%.
If your income is greater than £50,270, then you are a higher or additional rate taxpayer and your rate is set at 28%. Other assets are set at 20%.
If you are a personal representative of someone who has passed away and has sold their home, then your rate is 28%.
Can I Get Business Asset Disposal Relief?
Business asset disposal relief, also referred to as entrepreneurs’ relief, is for sole traders or business partners selling all or even a dividend of their ownership in a company. This relieves you of being liable to pay Capital Gains Tax on that sale. You must have had ownership in that company for a minimum of two years to qualify for this relief.
How Do I Calculate The Capital Gains Tax On A Property?
To calculate the Capital Gains Tax, you must know your original purchase price, how much money you put into the property for updates and the sales price. Thus, you would take the sales price and subtract the original price and update costs. The total would be the amount you are liable to pay Capital Gains Tax. But, remember, you pay a percentage of that profit. Refer to your earnings bracket to know what percentage you will pay.
A Few Other Key Aspects Of CGT To Note
- The CGT Allowance 2022/23: For the 2022/23 tax year, the CGT allowance for people living on their own is set at £12,300, and for married couples or civil partners, it is set at £24,600. So, any profits that fall below this are not subject to Capital Gains Tax.
- Capital gains tax in Scotland: Scottish and Welsh taxpayers must follow the same rules and pay the same rates as those living in England.
- Reporting and Paying Capital Gains Tax on UK Property: When you sell a property that is subject to Capital Gains Tax, you must report the details of the sale. This includes the profit that you made as well as your liability. This is to be reported to HM Revenue and Customs (HMRC). Remember, you must make the payment within sixty days of the completion of the property sale. In doing so, you will avoid penalties and prosecution.
- Capital Gains Tax Rates 2022: For the 2022/23 tax year, the rates for Capital Gains Tax on residential property are 18% for basic rate taxpayers. The rates for Capital Gains Tax on residential property are 28% for higher and additional rate taxpayers. For other assets, the rates are 10% for basic rate taxpayers and 20% for higher and additional rate taxpayers.
- Capital Gains Tax on Residential Property: Capital Gains Tax is applicable on profits that are made from the sale of residential property owned by non-residents who have owned property in the UK. Conversely, UK residents, selling a property in another country are liable to pay capital gains tax on the profit made from that sale.
- Capital Gains Tax Relief: There are a variety of relief options available that can reduce Capital Gains Tax liability. These may include Business Asset Disposal Relief. The Business Asset Disposal Relief offers a lower rate of 10% for qualifying business assets.
- Capital Gains Tax on Second Homes: If you own more than one property and only one of them is your main residence, you will likely be subject to Capital Gains Tax on gains you have made from the sale of your second home. This is because your main residence is the property on which you can benefit from the Principle Private Residence Relief.
- Capital Gains Tax on Inheritance: Inheriting a property does not mean you will be subject to Capital Gains Tax. Capital Gains Tax will only apply if you decide, at a later time, to sell your inherited property. It is then based on the increase in value from the date that you inherited it.
- Capital Gains Tax Rates and Bands: The rates for Capital Gains Tax often change each year. The rates are typically announced in the annual budget by the Chancellor of the Exchequer. The tax bands and rates can vary based on factors including the type of asset (residential property, shares, cryptocurrency), the individual’s income tax bracket, and if there are any specific reliefs the individual qualifies for.
- Capital Gains Tax on Gifts: If you give an asset as a gift to someone, it is considered disposal. You may be liable to pay Capital Gains Tax on the gain if the asset has increased in value since you originally purchased it. This, however, does not apply to gifts between spouses and civil partners. Gifts between spouses and civil partners are usually exempt from Capital Gains Tax.
- Capital Gains Tax on Shares: Capital Gains Tax applies to gains made from the sale of shares as well as gains made from the sale of other financial investments that are not held within an Individual Savings Account (ISA) or Personal Equity Plan (PEP).
- Capital Gains Tax on Cryptocurrencies: Cryptocurrencies, such as Bitcoin and Ethereum, are also subject to Capital Gains Tax. Any gains that you make from buying and selling cryptocurrencies are taxable. Losses on these can be offset against gains and thus will affect how much Capital Gains Tax you are liable for.
- Capital Gains Tax on Business Assets: When selling business assets, such as machinery or equipment that is not attached to a building, Capital Gains Tax may apply. Of course, there are reliefs available, such as the Business Asset Disposal Relief, which can significantly reduce the tax liability that you may owe.
- Capital Gains Tax and Inflation: In some countries, including the UK, Capital Gains Tax is not adjusted to account for inflation. This means that individuals may end up paying tax on gains where inflation has had a hand in increasing the profit. People often refer to this as ‘inflationary gains.’
- Capital Gains Tax Planning: You must plan your financial transactions very carefully to be able to minimise your Capital Gains Tax liability. You can utilise strategies such as finding tax reliefs, timing your sales in a way as to optimise the tax brackets, and considering tax-efficient investment options like ISAs. An accountant or a tax advisor can also help you in your financial planning to be able to minimise Capital Gains Tax liability.
- Capital Gains Tax on Trusts: Different rules and rates apply to Capital Gains Tax for trusts. When your asset is in a trust, you need to have a clear understanding of how Capital Gains Tax will affect your profit. A professional tax advisor or an accountant can help you to understand the ins and outs of trusts and Capital Gains Tax with trusts.
- Reporting Capital Gains: Capital Gains Tax must be reported to HMRC through a self-assessment tax return. This applies to both UK residents and non-residents selling UK property in the UK. It is extremely important to be sure your records are kept accurately so that you can report the correct information.
- Double Taxation Agreements (DTAs): If you are a UK resident and you are liable for Capital Gains Tax on profits you have made from assets in a different country, you may be able to claim relief under a DTA to avoid having to pay double taxes.
Keep in mind that tax laws and regulations can be very complex. Your circumstances are different than others’ circumstances. When navigating Capital Gains Tax rules on any assets, personal or business, it is highly advised to gain advice from a qualified tax professional or an accountant to be sure that you are in full compliance with all of the rules and laws and to optimise your tax position.