Capital Gains Tax (CGT) is a complex area of tax with many different aspects to it, and there are a whole host of reliefs available to offset or reduce any liability. This blog is intended as a gentle introduction and overview of the most common parts of the legislation that may affect you.
CGT is payable when you dispose of an asset and realise a profit. Disposal for these purposes can mean selling, swapping or gifting an asset, or collecting insurance money for an asset that was lost or destroyed.
Exempt Assets
Certain items are exempt from CGT such as:
- Your principle private residence (PPR) i.e. your home
- Stocks and shares within an ISA, and shares within a VCT
- Gains on EIS and SEIS, subject to certain conditions
- UK Premium Bonds
- UK betting or gaming winnings
- Cars (but not vans or lorries)
- Foreign currency held for personal use outside the UK
- Wasting chattels – these are “tangible, movable property” with an expected life of less than 50 years. For example a greyhound or furniture.
Tax Rates
Every individual gets an annual exemption of £11,000 to use against capital gains.
After offsetting your annual exemption the CGT charged is based upon how much other income you have. If you’re within your basic rate band it’s 10%, and then increases to 20% in the higher rate band and above. From 6th April 2016 there is a higher charge for those selling a second home in line with the prior year rates – 18% in the basic rate band and 28% in the higher rate band.
If a company makes a capital gain it is taxed at their usual Corporation Tax rate – there is no such thing as CGT for a company. A company also doesn’t get any annual allowance, which is something to consider when deciding whether an asset is best owned by you personally or your company. The company tax may be lower due to using CT rates, but it will be taxable in full.
Entrepreneur’s Relief
This can be a complex area with a lot of case law, but in brief if a gain qualifies for Entrepreneur’s Relief the tax rate is a flat 10% regardless of the other income a person receives in the year. In order to qualify a gain must be a “material disposal of business assets” such as selling the whole or part of your business, or a material stake in a qualifying company, being at least 5%.
There is an overall lifetime limit of £10 million in gains, and gains prior to 06 April 2008 do not count toward that limit.
Selling Houses
As mentioned above, your own principal private residence (PPR) is exempt from CGT. However, if you sell a second house you own there are now higher rates of tax applicable to that sale, along with increased stamp duty when you buy a second home (that we’ve blogged about before). There are several reliefs available to reduce the CGT due on second homes though, such as lettings relief, PPR if you ever lived there and deemed occupation, and we’ll be covering these in more detail in a later blog.
Capital Losses
If you dispose of an asset that has decreased in value then you have a capital loss. This loss cannot usually be offset against other income, it has to be offset against any gains in the year then carried forward to be used against future capital gains. Losses must be offset at the first available opportunity, but only to bring gains down to the level of the annual exemption.
Capital losses can never be carried back during your own lifetime, only on your death – capital losses in the year of death can be carried back up to 3 tax years, which could be beneficial for your Estate.
It’s worth noting that a loss is only allowable for CGT purposes if it “does not include a loss which arises as a result of arrangements made for the main purpose of securing a tax advantage” – in other words if you try to generate a loss purely for tax purposes it won’t work!
When to Declare to HMRC
If all your gains are covered by your allowance and you have no tax to pay, and your total proceeds were less than 4x the annual exemption (being £44,000 in 2015/16 and 2016/17), you do not need to complete a tax return.
If however you have losses that you want to bank for the future you must submit them on a return. If you don’t inform HMRC they exist, you cannot then use them later to offset any gain. You must tell HMRC by 5th October following the end of the tax year in which the losses arose, and submit the return by the next 31st January.
Planning Point
Transfers between spouses or civil partners are deemed to take place at no gain/no loss, so no CGT will be due on any transfer between them. If an asset is held by one person and will be sold for a gain but they have already used their exemption, you can consider transferring the asset to the other spouse before realising any gain. The same could be considered if one spouse has losses brought forward but the other does not, or one is a higher rate taxpayer and the other is not. Look at your overall position as a couple rather than individual tax positions in isolation.
What should you do?
If you are planning to sell an asset make sure you talk to your adviser before any sale takes place. Tax advice is most effective when it is taken before an event rather than after, as by then it’s too late to take certain mitigating steps (such as transfers between spouses) and you may end up paying considerably more tax than necessary. Also ensure you talk to your adviser before any purchase as there may be some advice to be had then too, for example whether a purchase is best made personally or via a limited company.
Please note that this blog is intended as an overall introduction to the subject matter, and should not be taken to be exhaustive or specific advice. You should discuss your individual personal circumstances with your own professional adviser before taking any action.