Capital Gain Tax
WHAT IS IT?
Capital gains tax (CGT) may be due when you sell, transfer, gift or exchange all, or part of, an asset.
It is paid by UK and non-UK residents, from UK assets such as property and investments. It may also be due when a UK resident disposes of an overseas asset.
WHAT DO YOU PAY CGT ON?
Shares
Funds
Investment trusts
ETFs
Land Investment and second properties
Other possessions, like art, worth at least £6,000
WHAT DON’T YOU PAY CGT ON?
The family home*
Most personal possessions
Possessions that depreciate
UK government bonds (gilts)
ISA investments
Pension investments
Venture capital trusts (VCTS)
Enterprise investment schemes (EIS)
*In most cases your principal private residence is exempt, however there are some exceptions, for example if you rent part, or your property is on land bigger than one acre.
CAN IT BE ELIMINATED?
Every tax year you have a personal CGT allowance. This year it’s £12,300 for individuals (or up to £6,150 for trusts).
This means you can realise gains of up to £12,300 (after taking away any losses and applying any reliefs), and pay no CGT. If you don’t use your allowance in a tax year, it’s lost forever. You can’t carry it forward like some other tax allowances. There are a few circumstances that can reduce the amount of CGT you’ll pay
EXPENDITURE AND COSTS
Sometimes, money you spend on increasing the value of an asset can be deducted. For example, in the case of a property, the cost of improvements such as an extension can be offset against CGT, but not the cost of maintenance such as redecorating. In the case of shares, you can reduce the gain by taking off the costs of buying and selling the shares.
LOSSES
If you sell an asset at a loss, the loss can be offset against any gains made in the same tax year. If there are more losses than gains, these can be carried forward to offset against future gains in later tax years. You must register the loss with HMRC in order to be able to do this.
BUSINESS ASSETS
Business assets can be treated more generously due to Business Asset Disposal Relief (formerly known as entrepreneur’s relief). These are generally a shareholding (or interest) in the company or firm you work for. Generally you have to hold at least 5% of the shares and voting rights to qualify. You must also have an entitlement to at least 5% of the distributable profits (and distributable assets on wind up), or of the proceeds if the company is sold. Entrepreneurs’ relief reduces the CGT rate to 10% for the first £1m of gains in your lifetime. CGT relief can also be available when disposing of a property that was a business asset.
HOW MUCH WILL YOU PAY?
it’s easy to find out in 3 steps:
1.Work out your gain This is the difference between the sale proceeds and initial cost. You need to calculate your total gains in a tax year. For example, if you sold £56,300 worth of shares that you bought for £30,000, your total gain would be £26,300, assuming there are no transaction costs.
2.Take away your allowance Offset your annual CGT allowance against your gains. £26,300 – £12,300 = £14,000 Assuming you haven’t realised a loss on other investments, this is the amount to be taxed.
3.Work out how much tax to pay CGT is normally charged at either 10% or 20% depending on your taxable income in that year. Your gain is added to all other taxable income in that tax year to work out the rate of tax. Gains on residential property are taxed at 18% and 28%, depending on other taxable income. If the gain falls into two bands, by taking income from the basic to the higher rate, you’ll pay CGT at 10% (or in some cases 18%) on the amount which falls into the basic-rate band and at 20% (or in some cases 28%) on the amount which falls into the higher-rate band. Scottish taxpayers should use the UK tax bands for working out how much CGT is due.
WHEN IS IT PAID?
The timing of when you sell, transfer, gift or exchange assets can make a big difference to when CGT must be paid.
If your gains are more than £12,300, you have to declare them on your self-assessment tax return for the same year in which you made the gain. The tax must be settled no later than 31 January in the following tax year. So if you made gains on 5 April 2022, you must pay the CGT by the end of January 2023. But if you made the gains on 6 April 2022, you don’t need to pay the CGT until the end of January 2024. Deferring tax liabilities like this can bring helpful tax planning opportunities. CGT liabilities on the sale of an investment property need to be paid within 30 days of the date of sale. This could be an important consideration if you expect to make large gains from property.
CGT AND INVESTMENTS
It’s usually straightforward to calculate your gain on shares or funds. You just take away the initial cost from the proceeds.
What happens when you’ve topped up your original holdings? You buy 1,000 shares at a price of 80p. The total cost is £800 A year later you buy another 3,000 shares at a price of 120p, costing you £3,600 You’ve now bought 4,000 shares for £4,400 The average initial cost of each share is £4,400/4,000 = 110p You now decide to sell 1,500 shares at 125p. The total proceeds are £1,875 The average initial cost is 1,500 X 110p = £1,650 Meaning the gain is £1,875 – £1,650 = £225
Which shares are being sold first?
This will help you to work out the base cost. You’ll need to work out which shares you’re selling first. They’re treated as being disposed of in this order:
1. Shares bought on the same day as they’re sold – known as the “same day” rule. The base cost is the actual cost of the shares.
2. Shares bought or acquired in the 30 days following the day of sale (the ‘Bed & Breakfasting’ rule). The base cost is the actual cost of the repurchased shares.
3. All other shares. These are known as your “Section 104 holding” or “pooled” shares. The base cost of the Section 104 holding for CGT purposes is the average base cost across all the holdings. You’ll need to work out the average cost of your shares and deduct this from the disposal proceeds to work out your gain, like the above example. Share reorganisations Rights and bonus issues, or the issue of shares on a company takeover, aren’t treated as acquisitions. The HMRC help sheet ‘285’ (HS285) gives some helpful information on share reorganisations, company takeovers and CGT
Expenses
Your gain is reduced by the cost of buying and selling shares. These include stockbroking fees and any Stamp Duty or Stamp Duty Reserve Tax (SDRT) paid when you bought the shares.
Dividends
Dividends (income) are not liable for CGT. However they may be liable for income tax if held outside of an ISA or pension. If reinvested then the new shares should be treated in the same way as any other share purchase.
Funds and collectives
Accumulation units don’t pay out income. Instead, the income is retained and reinvested automatically. You don’t receive any new units, but the value of your existing units is increased. This notional income is usually subject to income tax (unless held within an ISA or pension) but not CGT. If you hold accumulation units within an HL Fund & Share Account, we’ll show you how much income has been reinvested on your consolidated tax certificate which we’ll send you shortly after the end of the tax year. To work out any CGT that you might need to pay when the fund is sold, you need to deduct the value of any notional income from the sale of the fund.
You don’t usually need to pay CGT when:
• You give shares or funds as a gift to your spouse or to a registered charity.
• You sell shares or funds in an ISA or pension.
• You sell the first £50,000 worth of ‘Employee Shareholder’ shares (which you’ll have given up certain employment rights for) or any shares in employer Share Incentive Plans (SIPs).
• You contribute shares from an employer Save As You Earn (SAYE) scheme into an ISA within 90 days of acquiring the shares. CGT might apply if these shares are contributed to a pension.
• You sell UK government gilts, Premium Bonds or qualifying corporate bonds
CGT AND PROPERTY
The rules on CGT and your home can be quite complex.
YOUR FAMILY HOME
If you sell your family home there’s normally no CGT to pay. There are some exceptions to this rule. Properties on more than an acre of land, and those that have been used for rental or business purposes, may be subject to CGT when sold.
INVESTMENT, BUY TO LET AND SECOND PROPERTIES
These are all subject to CGT when sold or transferred. CGT can be charged at either 18% or 28%, depending on your other taxable income that year. It’s not as easy to reduce or manage CGT on a property as it is on shares or funds. It’s not usually possible to dispose of part of a property each year to use up the CGT allowance. But you can deduct the costs of buying, selling or renovating the property from the gain.
RELIEF ON PROPERTIES
You might be able to reduce the CGT if: The property was a business asset. For more details go to www.gov.uk/taxsell-property/businesses
It was your home but you rented part of it out. For more details go to www.gov.uk/ tax-sell-home/let-out-part-of-home
If the property was occupied by a dependent relative. See HMRC Helpsheet 283 (HS283) for more details .
GAIN NOT PAIN There are steps which can minimise CGT:
Use the annual capital gains tax allowance : it’s currently £12,300, which means a married couple or civil partners can make gains of £24,600 a year without a CGT liability.
Offset losses against gains : an investment sold at a loss can be offset against gains. If there are more losses than gains, these can be carried forward to offset against future gains.
Sell when tax is paid at a lower rate – CGT is based on your rate of income tax. If this will fall in the future, perhaps because of retirement, you could think about delaying selling until then.
Transfer to spouse – married couples or civil partners can usually transfer investments without having to pay CGT. This could be beneficial before selling an investment or if one partner has a lower tax rate.
Reduce taxable income – this will lower the amount of CGT. One of the easiest ways to do this is to fully use tax shelters such as an ISA – investment income from an ISA is free from UK tax. Paying pension contributions will reduce your taxable income and potentially reduce the rate of CGT you have to pay.
Gift to charity – gifts of property, land or shares to charity can be highly tax efficient and save CGT as well as other taxes. You can do this as a direct gift which has no tax consequences. Or you can sell the asset and gift the cash which may incur tax consequences. However, Gift Aid should also be available on the value of the money gifted.