Understanding Capital Gains Tax
The United Kingdom's Capital Gains Tax (CGT) is a tax applied to the profit earned when you dispose of an asset that has increased in value. Whether you're selling shares, property, or even a valuable painting, understanding CGT is crucial to ensure you're compliant with tax regulations. As we approach April 2024, the important thing to remember is that the annual allowances are changing.
This article delves into the intricacies of UK CGT, exploring the upcoming modifications, and explaining the tax rates associated with different types of assets.
The Basics of Capital Gains Tax
In essence, CGT is a tax on the gain you make, not the total sale price of an asset. For example, if you bought a piece of land for £50,000 and sold it five years later for £75,000, your taxable gain would be £25,000 (selling price - purchase price). However, you wouldn't necessarily pay tax on the entire £25,000.
Here are some key aspects to remember:
Annual Exempt Amount: Each year, individuals benefit from an annual exempt amount, which is currently set at £6,000, however this is set to reduce from 6th April 2024 to £3,000. This means that if your total taxable gains for the year fall below this threshold, you won't pay any CGT.
Tax Rates: The rate you pay on your CGT depends on your tax band and the type of asset you're selling. We'll explore this further in the upcoming section.
Reporting and Payment: If your taxable gains exceed the annual exempt amount, you'll need to report and pay the tax due by the self-assessment deadline, typically January 31st following the tax year.
While the core principles of CGT remain the same, some significant changes have been introduced by HMRC in recent years and you should be aware of the following
Compulsory reporting for residential property: Previously, individuals selling UK residential property that wasn't their main residence had the option to report and pay CGT within 30 days of completion, this has now been increased to 60 days.
Capital Gains Tax on UK Property account: To streamline the reporting process for residential property disposals, a new online service called the Capital Gains Tax on UK Property account This platform will allow taxpayers to report the sale and calculate the CGT liability, simplifying the process, if you are able to navigate HMRCs website and login.
Capital Gains Tax Rates: What You Need to Know
The tax rate you pay on your CGT depends on two main factors:
Your tax band: This is determined by your overall taxable income for the year. The UK currently operates a tiered income tax system, with different rates applicable to different income bands.
The type of asset you're selling: Different asset classes are subject to varying CGT rates.
Here's a breakdown of the current CGT rates as of February 2024:
Basic Rate Taxpayer (Up to £50,270)
Higher Rate Taxpayer (£50,271 - £125,140)
Additional Rate Taxpayer (Over £125,140)
Residential Property
Basic Rate Taxpayer 18%
Higher Rate Taxpayer 28%
Additional Rate Taxpayer 28%
Other Chargeable Assets
Basic Rate Taxpayer 10%
Higher Rate Taxpayer 20%
Additional Rate Taxpayer 20%
Important Points to Consider:
Main residence exemption: Your main home is generally exempt from CGT, meaning you won't pay any tax on the gain when you sell it. However, there are exceptions, such as if you let out a portion of the property or use it for business purposes.
Entrepreneurs' Relief: This relief offers a reduced CGT rate of 10% on up to £1 million of lifetime gains from qualifying business assets.
Losses: If you make a loss on an asset sale, you can offset this against any capital gains you've made in the same tax year or carry the loss forward to future tax years.
If you think you need some help in this confusing area of CGT liabilities or need help reporting your gains? Contact jreeves@taxmatters.tax to arrange a call to find out how the Tax Matters team can help you.