Capital Gains Tax, what is it?
Posted on 27th August 2022
To put it simply, if you sell an asset that you or your business owns and it has increased in value since you bought it, you may need to pay Capital Gains Tax on it. For example, if you bought an antique for £6,000 but later sold it for £26,000, you would pay CGT on the profit you made – £20,000.
Disposing of an asset can mean one of several things:
You sell the asset
You give the asset away as a gift or transfer ownership to someone else
You swap the asset for something else
You get compensation for the asset i.e., an insurance payment if it gets lost or destroyed
So, if any of the above occurs with qualifying assets, and the value when it is ‘disposed of’ has increased from that at which you acquired it, Capital Gains Tax may apply.
Some assets that you dispose of will not be liable for Capital Gains Tax and if your gains for the year fall under your tax-free allowance then you will also not need to pay any Capital Gains Tax.
What is the Capital Gains Tax-Free Allowance?
You will only need to pay Capital Gains Tax on any gains (or profits) made from disposing of qualifying assets that are above your tax-free allowance (or Annual Exempt Amount).
The tax-free allowance for Capital Gains Tax for the tax year 2022-23 is £12,300.
So, if your total gains from selling or ‘disposing of’ assets come in at £12,300 or less, you will not need to pay any Capital Gains Tax.
Using the example above, if the antique that you sold was the only qualifying asset that you made a gain from in that tax year, the amount you would need to pay Capital Gains Tax on would be calculated as the profit of £20,000 minus your tax-free allowance of £12,300. So, you would pay CGT on the resulting £7,700.
There are ways to reduce your total gains for the year that could help reduce the amount of CGT you pay if your total gains are over the tax-free allowance threshold, but we’ll get to those in a bit.
What do you pay Capital Gains Tax on?
As already mentioned, you pay CGT on any gains made from the sale or disposal of qualifying assets above your Capital Gains tax-free allowance of £12,300.
But what counts as a qualifying asset?
Assets that can qualify for Capital Gains Tax:
Personal possessions worth £6,000 or more (not including cars)
Coins and stamps
Sets – i.e., matching vases, chess sets etc.
Property that is not your main residence i.e., second homes or a rental property – your own home qualifies for Private Residence Relief
Your main home if it is over a certain size, used for business, or you’ve let, or part let it (not including having a lodger)
Shares not in an ISA or PEP
What is the rate of Capital Gains Tax?
The tax rate for Capital Gains Tax differs depending on whether you pay higher rate Income Tax and whether the asset is residential property or not.
For higher rate Income Taxpayers, you would pay 28% on gains from the disposal of residential property and 20% on gains from any other chargeable assets.
If you pay the basic rate of Income Tax, the rate all depends on your taxable income for that year, whether the gain is from residential property or other chargeable assets, and the size of your gain.
For basic rate Income Taxpayers, to work out the rate of Capital Gains Tax you would pay you need to work out your taxable income (total income minus Personal Allowance and other Income Tax reliefs), work out the total amount of taxable gains you have made for the year and deduct your CGT tax-free allowance from it, and add this to your taxable income. If the figure you come to is less than the upper threshold for basic rate Income Tax (£37,700), then you would pay 18% Capital Gains Tax on any gains made from residential property and 10% on all other chargeable assets. If the amount comes to over £37,700 then you would pay the higher Capital Gains Tax rates on your gains.
Using our example from above again, if your taxable income (after all deductions) comes to £20,000, you add the taxable gains of £7,700 as worked out above (total gains minus tax-free allowance), and then add the two figures together, equalling £27,700. As this is below the £37,700 threshold you would pay the lower rate CGT of 10% on the £7,700 gains, meaning you would pay £770 in Capital Gains Tax.
What about Capital Gains Tax for business?
You only pay Capital Gains Tax for business if you are a self-employed sole trader or part of a business partnership. If you are a limited company, you would pay Corporation Tax on any business assets you sell or dispose of for a profit.
Capital Gains Tax for business works in pretty much the same way as above in that you may need to pay CGT on profit made from disposing of certain business assets. But you may need to use the market value of the asset to work out your gain in certain scenarios as opposed to working it out by calculating the difference between what you paid for it and what it was sold for.
What counts as a business asset for Capital Gains Tax purposes?
A business asset for Capital Gains Tax purposes includes:
Buildings and land
Fixtures and fittings
Plant and machinery
Your business’ reputation
What can I deduct from my gains to reduce the amount of Capital Gains Tax that needs paying?
There are certain deductions you can make from your total gain when selling or disposing of assets that can reduce the amount of Capital Gains Tax you will need to pay.
Things you can deduct include:
Fees such as valuation or advertising fees
Costs for improving the asset (note: this does not include normal repair costs)
Stamp Duty Land Tax and VAT (except where you can reclaim the VAT)
There are also other forms of tax relief for Capital Gains Tax for business as well, such as Business Asset Disposal Relief, Business Asset Rollover Relief, Incorporation Relief, Gift Hold-Over Relief, and Disincorporation Relief.
There are also certain rules that apply to any assets that are disposed of as a gift to a spouse, civil partner, or charity. You can also potentially deduct any losses made from your overall gains for the tax year too.
When dealing with Capital Gains Tax and potential tax relief or deductions from your gains, it is always worth speaking with an accountant familiar with Capital Gains Tax as there are certain rules and exceptions.
If you’d like any assistance with working out whether you need to pay Capital Gains Tax, your total gains after any deductions, relief you may be eligible for, and for help declaring it and paying HMRC, get in touch with us today.
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