What is Capital Gains Tax in the UK?

Do you have a property and you sold it for profit? If it’s not your primary residence then you have to pay Capital Gains Tax. In General, if you sell certain assets and generate a profit in the United Kingdom, you must pay capital gains tax (CGT) on those profits. CGT is the way through which the government collects tax on the appreciation of assets. It is charged on earnings made from the sale of assets held for an extended length of time. In this article, we will go over the specifics of capital gains tax in the UK, including its purpose, rates, exemptions, and for people and businesses.

What is Capital Gains Tax?

CGT is the tax which you have to pay on the profits from the sale of assets. These assets include property, stocks, shares or other valuable possessions. It is vital to remember that it is not a separate tax, but it is part of the overall income tax system. In short, when you sell an asset for more than its original price, the difference is considered a capital gain, and tax may be due.

What is the Purpose of Capital Gains ?

So, when it comes to capital gains tax, the main idea is to tax the growth of your assets over a good amount of time. It’s like the government’s way of saying, “Hey, we want a piece of that action too!” So, when you sell those assets and make some nice gains, they swoop in to collect their share. It’s all part of their strategy to maintain a healthy financial system.

Assets that are taxed under Capital Gain Tax?

Here are some of the examples of assets that you need to pay CGT.

Assets that are not taxed under Capital Gains Tax?

  • Personal possessions disposed of for £6,000 or less
  • Your car
  • Stocks and shares held in an ISA
  • UK government gilts and Premium Bonds
  • Betting, lottery or pools winnings
  • Foreign currency for personal use

Additionally, there is an exemption for selling a primary residence that allows up to £250,000 of profit to be exempt from capital gains taxes, but this can only be used once every two years.

Capital Gains tax rate 2022/23

In the UK, the rates are determined by the individual’s income tax band. The rate applied depends on the individual’s total taxable income, which includes both earned income and capital gains. The below table indicates the rates at which some of the assets are taxed.

Type of Asset Basic Rate Higher Rate
Shares 10% 20%
Residential Property 18% 28%
Bitcoin/Cryptocurrency 10% 20%
Other 10% 20%

Tax-free allowance:

  • Individuals: Annual exempt amount of £6,000
  • Trusts: Annual exempt amount of £3,000

Example of CGT

To understand the application of capital gains tax, let’s consider a couple of examples:

  • John purchased a property five years ago for £150,000 and recently sold it for £250,000. That is a £100,000 profit. He will need to calculate the capital gains tax based on the difference between the selling price and the original purchase price, taking into account any allowable deductions.

Let’s now look at some of the common exemptions and techniques used to reduce capital gains tax.

Strategies to Minimize Tax

There are legitimate strategies that individuals and businesses can employ to minimize their long-term capital gains tax liability. These include:

  1. Utilizing tax-efficient investment vehicles such as Individual Savings Accounts (ISAs) or pensions.
  2. Utilizing annual exemptions and allowances effectively to reduce taxable gains.
  3. Opting for tax-efficient asset transfers, such as gifting assets to family members.
  4. Utilizing capital losses to offset gains and reduce the overall tax liability.
  5. Seeking professional advice from tax experts to explore additional strategies tailored to specific circumstances.

Exemptions for Capital Gains Tax

Here are some of the common ones people are aware of.

  1. Private residence relief – brings an individual’s principal residence out of scope of the tax.
  2. The annual exemption amount of £6,000.
  3. Holdings in ISAs or gilts.

Let’s look at some of the other exemptions which can be used it detail below.

Capital loss

Capital loss refers to the situation where an individual sells an asset at a lower price than its original purchase cost, resulting in a financial loss. When such losses occur, individuals have the opportunity to report them to HMRC for potential tax relief. This provision, known as allowable losses, allows individuals to offset their taxable gains with the losses incurred. However, there are certain circumstances in which allowable losses cannot be claimed. These include:

  • Selling or giving an asset to a spouse
  • Selling or giving an asset to a family member
  • Selling or giving an asset to a connected person, such as a business partner or in-laws
  • Selling a non-chargeable asset, which is exempt from capital gains tax due to specific tax reliefs or falling under the tax-free allowance threshold. It is essential to be aware of these restrictions to ensure compliance with tax laws and regulations.

Wasting Assets

Wasting assets refer to assets that have a limited lifespan and are less likely to generate a significant profit upon sale. When it comes to Capital Gains Tax, these assets are exempt from taxation. Some examples of wasting assets include:

It’s important to note that wasting assets are generally excluded from Capital Gains Tax calculations due to their nature of diminishing value over time.

Business Asset Disposal Relief

Business asset disposal relief, also known as Entrepreneur’s Relief, is a fantastic tax incentive designed to give entrepreneurs a well-deserved break when they sell their business or a portion of it. To qualify for the business asset disposal relief, and potentially benefit from a fixed Capital Gains Tax (CGT) rate of 10% when selling your business or a percentage of it, you must meet the following requirements:

  • Be a sole trader.
  • Have owned your business for at least two years.

Ready to navigate the complexities of Capital Gains Tax with confidence? Take the next step towards maximizing your financial gains by booking a personalized consultation with our expert tax advisors. We’ll help you understand the ins and outs of capital gains tax, explore tailored strategies to minimize your tax liability, and provide valuable insights specific to your unique situation. Don’t miss out on the opportunity to optimize your financial journey. Book your session today and take control of your capital gains!

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