What is Capital Gains Tax (CGT)?
CGT is a tax that is charged on assets that you sell, give away, exchange or dispose of to make a profit or ‘gain’. The main examples are properties that aren’t your main home, disposals of shares, business assets, and personal possessions like jewellery or paintings. You will not be charged CGT on the total sale amount of the asset, only the profit you have made on the sale, for example:
You purchased a house for £100k and subsequently sold it for £120k, while incurring £5k in legal and solicitor fees. This results in a gain of £15k, which is the amount subject to taxation.
It’s important to note that the transfer of assets during a divorce or separation could trigger Capital Gains Tax (CGT) if the assets have appreciated in value. On the other hand, inheriting assets, such as a house or valuable items, doesn’t incur CGT at the time of inheritance. However, these inherited assets may be liable for inheritance tax. If you later decide to sell the inherited assets and their value has increased between the time you received them and the sale date, you may become subject to CGT.
Not every asset is subject to capital gains tax, the below is exempt:
- Private motor cars, including vintage cars
- Gifts to UK registered charities
- Some government securities (government bonds)
- Prizes and betting winnings (lottery is tax free, income tax is charged on the interest received in the bank)
- Cash
- Stocks and shares held in an ISA
- Foreign currency held for your own use
When calculating the capital gains tax, various rates come into play depending on the type of asset disposed of and the individual’s tax band. Here’s a more active rendition:
The calculation of capital gains tax involves considering different rates based on the type of asset sold and the individual’s tax bracket.
If the gains fall within the basic rate band, they are subject to a 10% tax rate, or 18% if the asset is property. For gains falling within the higher rate band, the tax rates are 20% or 28% if it’s a property.
Let’s break down how to compute CGT on shares for the tax year 2023/24:
In 2023/24, after accounting for expenses and personal allowance deductions, Michael’s taxable income amounts to £24,500. He has realized a gain of £25,000 from selling an asset.
First, we calculate the remaining amount within the basic tax band: £24,500 + £12,570 (personal allowance) = £37,070 £50,270 (basic tax threshold) – £37,070 = £13,200 remaining in the basic tax band.
For the tax year 2023/24, there is a capital gains tax-free allowance of £6,000: £25,000 – £6,000 = £19,000
Michael will be subject to a 10% CGT rate on the first £13,200 of the gain and then a 20% rate on the remaining £5,800.
Calculating the tax owed: (10% x £13,200 = £1,320) + (20% x £5,800 = £1,160) = £2,480
Therefore, Michael needs to include £2,480 as his Capital Gain Tax liability on his personal tax return, in addition to any other personal income tax obligations.
Let’s break down Michael’s tax liability in the case of gains from a second property. He’ll be subject to an 18% tax rate on the initial £13,200, which falls within the basic tax rate band. Additionally, he’ll face a 28% tax rate on the subsequent £5,800, which exceeds the £50,270 basic threshold. This results in a total Capital Gains Tax (CGT) liability of £4,000 that Michael must report on his personal tax return.
When you make a gain from the disposal of residential property, it’s crucial to report the gain to HMRC within 60 days of the completion date.
It’s important to note that Capital Gains Tax does not apply to Limited companies. Instead, any profit or gain from asset sales is incorporated into the company’s taxable turnover, and corporation tax is applied accordingly.
Capital Gains Tax is a multifaceted tax with various allowances, tax rates, and exemptions. Additionally, there are specific reliefs available for certain transactions, such as the sale of an individual’s primary residence or the disposal of shares owned in one’s own Limited company.
If you think you are liable to this type of tax, please get in contact with a member of #TeamSAS so we can discuss this further and provide the relevant advice.
