What is Capital Gains Tax? UK Capital Gains Tax explained.
What is capital Gains Tax? UK Capital Gains Tax explained.
Introduction
Capital Gains Tax (often referred to as CGT) is a tax on the profit when you sell (or 'dispose of') something (an 'asset') that has increased in value. Understanding how Capital Gains Tax (CGT) works is essential to ensure you remain compliant with tax regulations and optimise your financial planning.
What is Capital Gains Tax (CGT)?
Capital Gains Tax (CGT) is imposed on the profit made from the sale of assets, such as property, shares, and other investments. The tax is not on the amount of money received from the sale but on the gain made from the original purchase price.
The simple way to work out the gain is to take the price you sold an asset for and subtract the original purchase price as follows:
Sale Price – Purchase Price = Capital Gain.
To give you a simple example, if you bought 1,000 shares in a basic share dealing account (outside of an ISA or other tax-efficient wrapper) for £10 each, your purchase price is £10,000. If you sold them later on for £12.50 per share, your total sale proceeds would be £12,500. Therefore:
£12,500 - £10,000 = £2,500 Capital Gain.
Remember, it's the capital gain that you pay tax on, NOT the total sales price.
How does Capital Gains Tax (CGT) work?
Capital Gains Tax (CGT) taxes the profit made from selling an asset that has increased in value. Taxpayers must report their gains to HMRC via their self-assessment tax return, apply any reliefs, deduct the annual allowance, and pay the appropriate tax rate on the remaining profit.
You can find the latest rates of Capital Gains Tax on Gov.uk.
When did Capital Gains Tax (CGT) start?
Capital Gains Tax was introduced in the UK in 1965 as part of a broader tax reform. It was designed to ensure that all forms of income, including profits from the sale of assets, were subject to taxation.
How much is Capital Gains Tax (CGT) in the UK?
The rate of Capital Gains Tax (CGT) in the UK depends on your taxable income and the type of asset sold. In the UK, higher-rate and basic-rate taxpayers will pay different Capital Gains Tax (CGT) rates. These rates can change, so it's best to get the latest information directly from the UK Government.
You can find the latest rates of Capital Gains Tax on Gov.uk.
How is Capital Gains Tax (CGT) paid?
Capital Gains Tax (CGT) is typically reported and paid through the Self-Assessment tax return process. For most assets you must include details of your capital gains on your tax return and pay any tax due by the deadline, which is 31 January following the end of the tax year in which the gain was made. However, if the gain is on residential property, this must be reported and paid within 60 days of selling the property if the completion date was on or after 27 October 2021.
What is Capital Gains Tax (CGT) allowance?
Each individual in the UK has an annual Capital Gains Tax (CGT) allowance, which is the amount of profit you can make from the sale of assets before any Capital Gains Tax (CGT) is due. This allowance is deducted from your total gains before calculating the tax owed.
However, the Capital Gains Tax (CGT) allowance is being phased out rather quickly. You can see the latest Capital Gains Tax (CGT) allowance on Gov.uk.
How much Capital Gains Tax (CGT) do I pay?
The amount of Capital Gains Tax (CGT) you pay depends on your taxable income, the size of the gain, and the type of asset sold. To calculate the amount, subtract your annual allowance and any other applicable reliefs from the total gain, and then apply the appropriate tax rate.
You can find the latest rates of Capital Gains Tax on Gov.uk.
How much Capital Gains Tax (CGT) on property?
The CGT rates on property are higher than those on other assets, and the rates differ for basic-rate taxpayers and higher-rate taxpayers. Note that there is a potential for Capital Gains Tax (CGT) relief on your primary residence if you meet specific criteria.
You can find the latest Capital Gains Tax (CGT) rates for property on Gov.uk.
When must I pay Capital Gains Tax (CGT) by?
Capital Gains Tax (CGT) must be paid by 31st January following the end of the tax year in which the gain was made. For UK residential property, you must report and pay any tax due within 60 days of selling the property.
Who pays Capital Gains Tax (CGT) in the UK?
Anyone who sells an asset that has increased in value may be liable to pay Capital Gains Tax (CGT). This includes individuals, trustees, and personal representatives of deceased persons.
You can find the latest rates of Capital Gains Tax on Gov.uk.
When does Capital Gains Tax (CGT) apply?
Capital Gains Tax (CGT) applies when you sell or dispose of assets that have increased in value. Disposals include selling, gifting, transferring ownership, exchanging, or receiving compensation for the asset.
You can find the latest rates of Capital Gains Tax on Gov.uk.
Who pays Capital Gains Tax (CGT) on a deceased estate?
The personal representatives of a deceased person are responsible for paying CGT on any gains made from the sale of assets within the estate. Beneficiaries may also be liable for CGT if they sell inherited assets that have increased in value.
You can find the latest rates of Capital Gains Tax on Gov.uk.
The importance of record-keeping for Capital Gains Tax (CGT) purposes.
To calculate and report CGT correctly, it's essential to maintain accurate records of your asset purchases and sales, including dates, costs, and any associated expenses.
You can find the latest rates of Capital Gains Tax on Gov.uk.
The importance of seeking professional advice in relation to Capital Gains Tax (CGT).
Capital Gains Tax (CGT) can be complicated, particularly considering the different reliefs, exemptions and tax rates. As such, it is essential to seek advice from a qualified professional to ensure you are taking advantage of all available allowances and reliefs and, in complex situations, such as disposing of assets received through inheritance or as gifts.
Conclusion.
Understanding Capital Gains Tax (CGT) is essential for anyone involved in the sale or disposal of assets in the UK. This tax applies to the profit made from such transactions and varies based on factors like your taxable income and the type of asset sold.
Capital Gains Tax (CGT) rates differ for basic-rate and higher-rate taxpayers, with specific rates for certain assets. Capital Gains Tax (CGT) is reported and paid through the Self-Assessment tax return process, with deadlines that must be adhered to to avoid penalties.
Certain assets, such as your primary residence and personal belongings, may be exempt from CGT, providing they meet specific criteria, so it's crucial to maintain accurate records of your transactions.
What’s next?
If you need assistance with your personal finances, particularly in the context of Capital Gains Tax, our advisers are here to help. You can get in touch with one of our advisors for independent financial advice and we offer a free initial consultation. Based in Royal Tunbridge Wells, we advise clients across the UK.
Don’t forget, this article offers general financial information and should not be taken as personal advice. Remember that investments and pensions can go up and down in value, so you could get back less than you put in. Tax rules can change and will depend on your individual circumstances.