Unlike Income Tax and Corporation Tax, which are taxes on income and profits, Capital Gains Tax (CGT) is based on the profit or “chargeable gain” you make when sell or dispose of something for more than you paid for it. In this article we’ll look at what business owners need to know about CGT.
When is CGT payable?
CGT may be payable when you dispose of a “chargeable asset”, which could mean:
When you sell a chargeable asset
When you give away a chargeable asset
When you exchange a chargeable asset for something else
When you receive compensation for the loss or destruction of a chargeable asset.
At its simplest, a capital gain is calculated by deducting the cost (including legal and improvement costs) from the sale proceeds of an asset disposal.
What counts as a “chargeable asset”?
Capital gains tax is only payable if the asset in question is a “chargeable asset”. Chargeable assets include personal possessions which are worth more than £6,000, any property which is not your main home, shares (other than those held in a tax-free scheme or investment), and business assets.
How much CGT is payable on chargeable gains?
Everyone is allowed to make a certain amount of tax-free capital gains each year. This ‘annual exempt amount’ is currently £6,000, cut from £12,300 in 2022/23.
The amount of tax you're charged depends on which income tax band you fall into. Basic-rate taxpayers are charged 10% on their realised profits, while higher-rate (and additional rate) taxpayers must pay 20%.
Not widely understood is the interaction of CGT with income tax bands. If you're a basic-rate taxpayer, any gain over the allowance you make, when added to your income, could push you into the higher-rate bracket. If so, you'd pay 20% on however much of the gain falls into the higher income tax band and 10% on the portion below it. If you are a Scottish taxpayer your CGT rate depends on the rest of UK income tax bands and not the Scottish tax bands.
There is an additional 8% to pay on gains on secondary residential property such as a buy-to-let or holiday property, making the CGT rates 18% and 28% respectively. A lower rate of 10% also applies to capital gains that qualify for Business Asset Disposal Relief or Investors’ Relief.
When is CGT due to be paid?
For individuals with a CGT tax bill to pay, the actual payment deadline would be the 31 January following the end of the tax year during which the chargeable gain was made.
For example, for the tax year ending 5 April 2023, any CGT due must be paid by 31 January 2024 to avoid penalties and interest.
Any chargeable gains on the sale of residential property have to be submitted to HMRC within 60 days of the sale completing. Any CGT due must also be paid in the same 60-day period.
Other factors to consider
Married couples and civil partners: All transfers or gifts to your spouse or civil partner are free of CGT.
Losses: If you sell an asset for less that you paid for it, you make a “capital loss”. You can typically deduct capital losses from capital gains made in the same or future years. As a general rule, if the asset would have been liable to CGT had a gain taken place, then the loss should be an allowable deduction.
Selling your home: Usually you would not pay any CGT when selling your “principle private residence”, but this exemption does come with some restrictions. You may have to pay some CGT if:
The house was not used only as a main residence throughout the period of ownership.
You sell part of the garden or grounds, and the overall area of land and buildings are greater than 5,000 square metres.
Part of the home was used exclusively for business purposes.
All or part of the home has been rented out at some point during your period of ownership.
CGT may be charged on the sale of UK residential property by non-UK residents. Only the amount of the overall gain relating to the period after 5 April 2015 is chargeable to tax. Private residence relief where a property is the owner’s only or main residence applies under certain circumstances.
Other exemptions from CGT
CGT is not usually due on:
Assets sold for less than £6,000
Wasting assets (eg. cars and wine)
Stocks and shares held in an ISA account
National savings certificates and premium bond prizes
Winnings from betting, lottery or the pools
Compensation for personal injury
Qualifying enterprise investment schemes.
None of the above exemptions apply when the gains arise through trading or business activities as distinct from occasional sales and disposals.
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