The UK tax system is incomplete without Capital Gains Tax (CGT) which is usually overlooked until it’s a problem. That applies to the profit you make when selling or giving away something that has grown in value, and the tax is levied on the gain, not the entire proceeds. Individuals and businesses need to understand and manage CGT to avoid falling foul of tax bills.
In this blog, we will be looking into Capital Gains Tax including what it means to UK individuals and businesses, and how you can effectively work with this tax.
What is Capital Gains Tax?
Capital Gains Tax is a tax levied on the profits made from selling or disposing of particular assets such as property, shares and business assets. But it does not apply to all assets—cars, personal items worth less than £3,000 (before – £6,000) and private residences (which qualify for Private Residence Relief) are normally excluded.
You only pay the tax on the profit and not on the whole amount of resale. For example, say you bought an asset for £20,000, but sold it for £50,000, the taxable gain is £30,000.
Current CGT Rates in the UK
The CGT rates depend upon the type of asset and tax payer’s income level. As of the current tax year, the rates are:
For Individuals:
Basic-rate taxpayers: There is a 18% rate on that apply to all assets (assets sold before 30th Oct, rate was 10% for other than residential property).
Higher and additional-rate taxpayers: 24% (assets sold before 30th Oct, rate was 20% for other than residential property).
For Businesses:
Previously known as Entrepreneurs’ Relief, Business Asset Disposal Relief (BADR) essentially lowers the rate to 14% (disposals made after 30th Oct) on qualifying gains up to a £1 million lifetime cap, even for business owners.
Who Pays Capital Gains Tax?
Individuals
If you are a UK resident you are liable for CGT on gains wherever in the world they are made. But non residents usually only pay CGT on gains made on UK property or land.
Businesses
Rather than CGT, Companies pay Corporation Tax on chargeable gains. Business owners should understand their tax obligations, and this distinction is important.
Common Scenarios Where CGT Applies
Selling a Second Home or Rental Property
Second home or rental property gains are treated at a higher CGT rate, therefore tax planning is required.
Disposing of Business Assets
If you are a business owner selling shares, equipment or goodwill you may be liable for CGT, but relief such as BADR can reduce this liability.
Buying Stocks and Shares
Any profits from the sale of shares, outside a tax advantage account like ISAs, are subject to CGT.
Exemptions and Allowances
Understanding exemptions and allowances is crucial for minimising CGT liability:
Annual Exempt Amount
The first £6,000 of capital gains (2023/24 tax year) are tax exempt for individuals. Now, the allowance is reduced to £3000.
Private Residence Relief
Typically selling your primary residence is exempt from gains, as long as the property was used exclusively as your residence for the entire period of ownership.
Asset Transfer to a Spouse or Civil Partner
Tax-free transfers between spouses or civil partners allow couples to divide up asset ownership and benefit from allowances.
Tax-Advantaged Accounts Investments
However, CGT is not paid on any gains made within ISAs and other similar accounts.
Record-Keeping Requirements
It is a requirement for individuals and businesses to keep accurate records of any taxable assets. These records should include:
- Purchase and sale prices.
- Legal fees or stamp duty for example, incurred in acquiring and selling the asset.
- About any reliefs or allowances claimed.
Keeping records in the digital age is made easy and accurate by digital tools, like accounting software.
How to File and Pay Capital Gains Tax
For Individuals: Residential property sales gains must be reported and paid within 60 days. The Self Assessment Tax Return declares other gains.
For Businesses: The Corporation Tax Return includes chargeable gains.
Penalties and interest charges can be imposed if you do not accurately or on time report gains.
How to Minimise Capital Gains Tax
To reduce CGT liability proactive planning is key. Here are some strategies tailored for UK individuals and businesses:
- Use the Annual Exempt Amount
You can ‘time’ disposals across several tax years to make the most of your annual CGT allowance.
- Offset Losses Against Gains
Taxable gains can be reduced or even eliminated altogether, using the losses arising from other disposals.
- Consider Gifting Assets
The kind of asset being transferred (e.g. to family members, and especially spouses and civil partners) can help spread the tax burden and utilise several allowances.
- Invest in Tax-Efficient Accounts
Investment growth can be protected from CGT using ISAS or Pensions, and is a long term way to preserve wealth.
- Claim Available Reliefs
CGT rates can be significantly lowered for qualifying disposals by reliefs such as Business Asset Disposal Relief or Investor’s Relief.
- Seek Professional Advice
Unlike the rules of CGT, working with a tax accountant will help ensure compliance with the rules and assist with planning for optimal tax.
Implications for Businesses
Capital gains are a must for UK businesses to achieve sustainable growth. The sale of major assets or shares frequently results in tax liabilities that can put a stranglehold on cash flow. Businesses should:
- Plan disposals strategically – e.g. at the right time for any available reliefs.
- Speak with an accountant to understand the Corporation Tax implications.
- Keep complete records that back up claims and decrease risk due to compliance.
Future Changes to CGT
CGT rules are periodically reviewed by the UK government, and the reforms could be very significant to taxpayers. For example, liabilities might rise if the annual exemption limit is reduced or the rate increases. Matters will stay relevant as long as we do, yet it is vital to be informed and flexible enough to avoid the risks of legislative changes.
Conclusion
The UK tax system is a complex one but Capital Gains Tax is an important part of it. Understanding what an allowance and exemption are can help individuals preserve their wealth. Planning and professional advice are imperative for any business to be able to manage liabilities and optimise financial outcomes.
Selling assets and disposing of an investment can be a complicated process, and whether you’re an individual disposing of an investment, or a business owner selling assets, you need to be aware of the CGT rules and plan carefully. You can minimise tax burdens, and stay within UK regulations, by staying proactive and seeking expert guidance.