When you dispose of an asset for more than you paid for it then the profit you make is known as a capital gain. Here in the UK these gains are not taxed under the income tax system that most of us are more familiar with. Instead capital gains tax in the UK has it’s own tax system and rules.
In todays article we will cover when a capital gain arises, how to calculate a gain, the rates of tax that apply and right the way through to how capital gains tax in the UK is reported to HMRC.
When Do We Pay Capital Gains Tax In The UK?
You may need to consider capital gains tax in the UK when a chargeable person makes a chargeable disposal of a chargeable asset.
In plain English, most of us will be a chargeable person because we are resident in the UK. A chargeable disposal most commonly takes place when you sell an asset but also when you gift it to someone else, lose it or damage it and finally a chargeable asset is typically any asset that isn’t otherwise exempt.
Exemptions to capital gains tax in the UK exist for certain assets with the most common being for:
Your principle private residence which is usually the home that you live in permanently
Motor cars (this specific exemption doesn’t include vans, lorries, bikes etc but these assets can sometimes be covered via another exemption
Tangible moveable items (known as chattels) that are disposed of for £6,000 or less
Chattels with a useful life of 50 years or less unless used in a business and qualifying for capital allowances
Individual savings accounts (ISA’s)
Winnings from betting & gambling
If an asset does not benefit from a specific exemption then it will be considered a chargeable asset but it should be noted that where an asset falls into one of these exempt categories then any capital loss that is made would not be allowable under capital gains tax in the UK either.
How To Calculate A Gain
In order to determine any liability to capital gains tax in the UK you must first work through each chargeable event and calculate the gain or loss on disposal. The calculation will look something like this:
Disposal Value – Incidental Costs On Disposal – Allowable Expenditure = Chargeable Gain/Loss
Disposal value – will often be the proceeds of a sale however where an item is not sold or possibly not sold on an arms length basis then the market value is used instead.
Incidental costs on disposal – will usually relate to legal fees, having an asset valued, auctioneers fees, agency fees etc
Allowable expenditure – will include the acquisition cost of the asset (or possibly the market value on acquisition as above). It will also include any incidental costs on acquisition, enhancement expenditure, valuation fees and costs relating to defending the owners title to the asset.
This calculation needs to be applied to all chargeable disposals. The next steps would be to consider the overall gain/loss in a tax year by following these steps:
Deduct allowable losses from chargeable gains in the same period to leave you with the net gain. Where a net loss occurs this can be carried forward to set against future gains
If there is a net gain for the year then any losses being carried forward from previous tax years would be set against the gain (see treatment of losses below)
The capital gains allowance can then be applied. If the allowance does not alleviate the full gain then the balance that remains will be the taxable gain. If the allowance alleviates the full gain then the taxable gain is nil and any unused allowance is lost as it cannot be carried forward
After applying the above if you are left with a gain then this will represent the taxable gain and will be subject to capital gains tax in the UK.
To learn more about CGT and how to reduce a liability via tax planning don’t forget to check out the full course from The Accounting & Tax Academy.
Where allowable losses in a tax year exceed chargeable gains then the loss can be carried forward and must be set against the first available gain but this should only be done to the extent that the gain is reduced to an amount equal to the capital gains allowance. This ensures maximum efficiency and makes the best possible use of those losses.
Remember though this does not apply in the year that a loss is incurred as in that first year a loss must be set against gains from the same period until the net gain reaches nil (where possible) this means the year the loss is incurred you cannot preserve the capital gains allowance.
In the year of an individuals death the situation is complicated by the fact that any losses can no longer be carried forward. Any disposals made in the year prior to death are still chargeable to capital gains tax in the UK and the individual will benefit from a full years capital gains allowance irrelevant of the date they died.
If the individual incurred a net loss in the year of death then that loss can be carried back for up to 3 tax years and set against previous gains in order of most recent first. Again the gain only needs to offset to the extent that any remaining amount is covered by the CGT allowance.
Rates Of CGT
|CGT Rate On Assets
|CGT Rate On Property
|Higher & Additional Rate