Capital Gains Tax Allowances

Understanding capital gains tax

The tax paid on the profit of selling or disposing of an asset, which increases the value or capital, is referred to as Capital Gains Tax (CGT). It is the gain made that is taxed, not the total amount of money received. For example, Ben purchases an asset worth £5,000 and sells it later for £20,000. Thus, the gain made is the difference between the selling price and purchase price, i.e. £15,000. However, some assets are tax-free and there is no need to pay CGT. This applies if all the gains within a year are under the tax-free allowance limit. Disposing of an asset includes – selling it, giving the asset as a gift, or transferring the asset to someone else or receiving reimbursement for it.

Taxable items

Capital Gains Tax is payable on the disposal of:

• Most personal belongings worth £6,000 or more, apart from a car; personal belongings may include:
  • Jewellery
  • Coins and stamps
  • Antiques
  • Paintings or other artworks
  • Sets of things, e.g. a chess set
  • Property that isn’t the main home
  • The main home if let out or used for business
  • Business assets

  CGT is not paid on gifts to a spouse, civil partner, or a charity. CGT is not paid on certain assets either, such as ISAs or PEPs, a win on a bet, Premium Bonds, UK government Gilts, or the lottery.

  Overseas assets

  Individuals must pay CGT even if the asset(s) is overseas. There are special rules for overseas assets capital gains.

  Features of capital gains tax

  • Up to 5 April 2016, disposals were taxed at the rate of 18%. This applies to gains where net total taxable gains and income is lower than the income tax basic rate band of £31,785 for 2015/16. Any capital gains above this limit will be charged at 28%.
  • From 6 April 2016, the higher rate of CGT will reduce from 28% to 20% and the basic rate from 18% to 10%. Few exceptions are considered in the Exceptions to the new CGT rates section.
  • Entrepreneurs’ Relief may be granted on certain business disposals.
  • For the year 2017-18, the tax-free allowance became £11,300 for individuals and £5,650 for trusts as opposed to the earlier amounts of £11,100 and £5,550.

  Capital gains tax has to be paid only if your capital gains- your profits from selling or disposing off your assets exceed your minimum tax-free allowance, which is commonly known as the Annual Exempt Amount.

  Capital Gains Tax on Shares

  If you sell off your shares or other investments, thereby making a gain out of the sale, you might have to pay the Capital Gains Tax on the profits made. All your shares that aren’t in an ISA or PEP are taxable. Similarly, all your units in a unit trust and certain bonds, excluding Premium bonds and Qualifying Corporate Bonds, will require you to pay the capital gains tax when disposed off. There are separate rules to work out your gain under different situations, the details of which can either be found on the UK government’s site or proper help and guidance can be taken from consultants to avoid any confusion.

  Exemptions: You, however, do not need to pay the CGT if you give your shares as a gift to your spouse, civil partner or in charity. Similarly, shares put into an ISA or PEP, in the employer Share Incentive Plans (SIPs), UK government gilts, Qualifying Corporate Bonds or employee shareholder shares are also exempted from the Capital Gains Tax.

  Capital Gains Tax on Second Home

  If you own just a single property, only a single home in which you have been residing for some time now, then the gains made on the sale of that home are not taxable. You automatically get entitled to the ‘private residence relief’ and hence, you won’t have to pay any tax on your home. However, if you have another property, a second home- a buy-to-let or a holiday home, you might have to pay the CGT.

  It is up to you to decide which property you want to be tax-free, and it does not necessarily have to be the one in which you reside. Usually, the one expected to make higher gains on sale should be nominated to avoid the larger tax. You need to nominate the property within 30 days of acquiring it. The government allows married couples and civil partners to have only one main home between them, but unmarried couples can each have a different tax-free home.

  It is to be noted that if a home is passed on to you as a gift or inherited by you post the death of a family member, then the home might still qualify for the CGT.

  Capital Gains Tax Rates for the year 2024-25

  Till 2016, a common CGT rate was charged. But now, unlike before, two different rates of Capital Gains Tax are charged, depending on the asset that has been sold off. Also, it is essential to know the tax bracket which you fall under, whether you belong to the basic rate taxpayers’ category or the higher-rate taxpayers’ category.

  Now, if you have made a profit from the sale of a non-property asset, then you’ll be charged a CGT rate of 10% if you belong to the basic-rate taxpayers’ band and 20% if you are a higher-rate taxpayer.

  Alternatively, if the asset disposed off is a property, like your second home or a buy-to-let investment, then you will be charged a CGT rate of 18% if you are a basic rate tax-payer and 28% if you are a higher-rate taxpayer.

  It needs to be noted that if you are a non-UK resident, you still will have to pay the CGT on all the gains made from the disposing off of a UK residential property. This change in laws was brought about in April 2015.

  Working out capital gain or loss

  The amount of CGT payable is computed automatically if an individual files an online self-assessment return. If an individual sends a paper tax return by 31 October, HMRC looks after the computation. Tax is charged on the total taxable gain after considering:

  • Certain costs and reliefs that can decrease the gain;
  • Allowable losses made on assets to which CGT applies;
  • If the gain is below £10,600, no tax is applicable – referred to as the Annual Exempt Amount.

  Working out your capital gains tax rate

  The first and foremost step is determining which tax band you lie in. This determination will include the profits and the earnings from your capital gains too and not just your basic income. So, if your income puts you in a basic taxpaying category but your capital gains are high enough to put you in a higher bracket, you’ll have to pay the corresponding rates for the higher tax slab.

  Here is a stepwise method of determining your tax slab:

  • Calculate your taxable income which accounts for your salary, pension or any other type of income. This can be done by deducting your tax-free personal allowance of £11,500 from your total income.
  • Next, account for your total capital gains. Deduct the tax-free CGT allowance of £11,300 from these gains to get the effective capital gains.
  • Finally, add both the figures- your total taxable income and your effective taxable capital gains.

  Now, if your final amount, the two figures added together is less than £33,500, you’ll lie in the basic rate taxpayers’ category. If the two figures, added together cross £33,500, you’ll lie in the higher- rate taxpayers’ category.

  Once, you have determined your tax band; you will pay CGT on your profits as per the rates mentioned above. If you lie in the higher tax rate band, then your capital gains will be charged at the basic tax-rate till the threshold of higher-rate taxpayers’ category and post that, the remaining profit will be charged at the higher rate.

  Here is an example to make things simpler!

  • Take for example that you earn somewhere around £30,000 as salary, and this is your only source of income. Now deducting the tax-free personal allowance of £11,500 from this amount, you get £18,500 as your taxable income. This puts you in the basic rate taxpayers’ category.
  • Now, imagine you gain £30,000 from your capital sales. Your taxable gain here will be £30,000- £11,300= £18,700. Here, we deducted the tax-free CGT allowance of £11,300 from your capital gains.
  • Now, the sum of the two figures gives £18,500 + £18,700= £37,200.

  Now, this final sum puts you in the higher band tax slab. Therefore, your CGT profits, up to the threshold of £33,500, will be charged at 10%. Therefore, the CGT on the first £15,000(£33500- £18500) will be £1500. The remaining £3700(=£37,200- £33,500) will be charged at 20% and therefore will give £740.

  Therefore, your total CGT will finally come down to £1500+ £740= £2240.

  Exemptions from the Capital Gains Tax

  • The first rule which applies to all the assets is that if your total taxable gains are below your Capital Gains Tax allowance, you do not need to pay any Capital Gains Tax.
  • Next, no CGT is applicable on gifts or assets disposed of to a spouse, a civil partner or charity.
  • Gains made from certain assets, including ISAs or PEPs, UK government gilts and premium bonds and lottery winnings, are also not taxable under the CGT.
  • The sale or gifting of private cars is also tax-free
  • The sale of your only home gets you the ‘private property relief,’ thereby exempting you from paying the Capital Gains Tax.
  • Some financial products as mentioned earlier are also tax-free

  Reporting and paying the Capital Gains Tax

  Once you have made capital gains, you need to report them to the HMRC. This can be done either by using the real-time Capital Gains Tax Service or by reporting it in the Self-assessment tax return annually. For reporting your Capital Gains, you will need the following details:

  • Detailed calculations for all the reported capital profits or losses
  • Authenticate information with proof of the transaction amounts- the costs as well as what you received from the sales of the asset
  • Other details like that of relief that you can claim

  Reporting using real-time Capital Gains Service: If you are a UK resident, you can report your gains as soon as you have calculated them. There is no need for you to wait for a specific date or time. While reporting, you will have to upload a PDF or a JPG file of how and what all calculations you have done while determining your capital gains and hence, the tax.

  A tax year runs from 6 April to 5 April the next year, and you must ensure that you report your capital gains by 31 January of the following tax year. Once you have reported your capital gains, you will get a mail from HMRC with further instructions regarding the payment.

  Reporting in a Self Assessment tax Return: In the year, following the tax year in which you disposed off your asset, you will have to report the capital gains while filing for the self-assessment tax return. This must be done by the 31st of January if doing online or by 1st October if sending a paper form. Once you have reported your capital gains, HMRC will get in touch with you with the further details.

  You need to remember that in case you are late in reporting or paying off your Capital Gains Tax or pay a wrong amount, you will be charged heavily by the HMRC.

  Capital Gains Tax on gifts or assets

  If you give away or dispose of your assets in the form of gifts to a spouse, a civil partner or to charity, you might be exempted from paying the CGT. However, if these gifts are given to somebody else, normal rules apply to them.

  However, if the spouses have been separated and didn’t live together at all in the concerned tax year, which is from 6 April to 5 April the next year, then the gifts are taxable. Similarly, if you sell your assets to a civil partner for their business, you again might have to pay the CGT.

  If you happen to be on the receiving end of the gift or asset, you will have to pay the CGT while disposing it off. Your gain or loss will be calculated using the costs incurred by the initial owner. Hence, it is a good idea to keep a record of what he or she paid for it.

  When it comes to charity, you do not need to pay the CGT if you give away your assets. However, if the charity pays you for the asset, you will have to pay the CGT on that entire transaction, based on what the charity pays you.

  Capital Gains Tax on Financial Products

  Whatever financial products you own, be it shares, investments, bonds or anything else, you will have to pay the Capital Gains Tax on them. However, some exceptions to the rule include:

  • Shares in ISAs or PEPs
  • Lottery winnings
  • Government gilts and bonds
  • National Saving and Investment products pensions and child trust funds
  • Life insurance policie’s proceeds
  • Shares held in approved SIPs through employment
  • Building society PIBs
  • Directly owned corporate and local authority bonds
  • Anything else, any other financial product that you leave on death, is also not taxable.

  When to pay the Capital Gains Tax in 2024-25?

  According to the current and the latest rules for the year 2024-25, any Capital Gains Tax, due on the sale of property needs to be cleared by the end of January in the year, following the tax year in which the gains were made. This can get an individual anywhere between 9-18 months for reporting and paying the CGT, depending upon the day of the sale.

  However, the new rules mandate it for every individual to pay the CGT on property transactions within 30 days of the sale.

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  About the author

  

  Sumit Agarwal
  Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.