Our guide to Capital Gains Tax
What is Capital Gains Tax (CGT)?
CGT is paid on any profit made from the sale of a non-inventory asset that was originally purchased at a price lower than the sale price.
In this guide we will look at what assets CGT is applied to, the rate at which it is paid and how you can manage the CGT you have to pay.
Which assets is Capital Gains Tax applied to?
The most common type of asset that CGT is applied to is property. While your main residence is not subject to CGT if you have a second home, holiday home or any buy to let properties then they will be subject to CGT if they sell for more than the price the property was originally purchased for.
Other assets that are subject to CGT include:
- any shares that are not in an ISA or Personal Equity Plan (PEP)
- most possessions such as antiques or artwork
- any business assets, such as a building or fixtures and fittings from a business that you own or have owned.
These are most commonly known as ‘chargeable assets’.
Which assets do you not need to pay Capital Gains Tax on?
As previously mentioned you are not required to pay CGT on the sale of your main residence. Other assets that are also exempt from CGT are:
- private motor vehicles
- any chargeable assets that are gifted to your spouse or charity
- UK Government Gilts, National Saving Certificates and Premium Bonds
- any winnings from bets or the lottery
It is important to note that if you do gift a chargeable asset to your spouse and then sell it on, CGT will be payable as if they had originally owned it.
What is the rate of Capital Gains Tax?
Every individual is allowed a tax free allowance of £11,100, so if the profit on the sale of your chargeable asset is below £11,100 CGT will not be applied. This is the allowance for the 2016-2017 tax year and any amendments to this will be announced in the next budget.
The rate at which you will be charged CGT will be dependent on if you are a basic or higher rate tax payer. The rate was reduced in the March 2016 budget so that a higher rate tax payer will be charged at a rate of 20% instead of 28% whilst basic rate tax payers will be charged at a rate of 10% instead of 18%. However if you are selling a residential investment property the higher rates of 28% and 18% still apply.
These rates will be applied to all chargeable gains from 6th April 2016.
How are capital gains calculated?
It is down to you to declare any capital gains that you have made. Failure to submit a declaration or sending an inaccurate declaration could result in a penalty. You will need to submit your return by 31st January of the tax year after you have disposed of your chargeable assets.
To work out how much CGT you need to pay you will need to work out the gain for each chargeable asset that you have disposed of throughout the tax year. Next you will need to add together all the gains made throughout the year. If you made a loss on the disposal of any of your chargeable assets this can be deducted from your overall gain.
Factors such as how long you have owned the asset can have an impact on the amount of CGT that you have to pay. If you need help working out the amount of CGT that you owe to HMRC then please contact us for help.
Can Capital Gains Tax be avoided?
You are able to defer paying CGT on any gains you make by reinvesting the gain into Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) shares. EIS is designed to support small, higher-risk trading companies to raise finance. Investors who purchase shares through EIS are offered a range of tax reliefs. SEIS is similar in that it offers investors a variety of tax reliefs in return for investing in small and early stage start ups. For more information on how EIS and SEIS work and to discuss if they are the right option for you then please do not hesitate to contact us.
The gain is then deferred until the disposal of the EIS or SEIS shares; therefore it is possible if you do not withdraw your shares, to defer paying CGT until you die and CGT is not payable on death.
Capital Gains Tax and Inheritance Tax (IHT)
CGT is only payable whilst you are alive, once you pass away the capital gain dies with you. Therefore any chargeable assets that are left to your loved ones would be subject to IHT (if the estate is worth over £325,000) and not CGT. You inherit the asset at the probate value and so any previous CGT falls away – the asset is ‘rebased’.
Is there a Capital Gains Tax for business owners?
Directors who own 5% or more of a company are only subject to a tax rate of 10% on any capital gains and will have a lifetime limit of £10m. This tax rate for business owners is known as Entrepreneurs Relief (ER).
If you are selling any of the following you should qualify for ER:
- all or part of your business as a sole trader or business partner, this includes the assets of the business after it has closed
- shares or securities from a company where you have at least 5% of shares and voting rights
- any assets that you lent to your business or personal company
- any shares that were acquired after 5th April 2013 through an Enterprise Management Incentive (EMI)
If you are a trustee and are selling assets that are held in trust you may also qualify.
Please note that if you are selling all or part of your business then the following must apply:
- if you are a sole trader
- if you are a business partner
- you have owned the business for at least 12 months before the date you sell it
If you are selling shares and securities then both of the following must apply for at least 12 months before you sell your shares:
- if you are an employee or office holder of the company
- the company must be a trading company or if it is the holding company of a trading group
In addition one of the following needs to apply for at least 12 months before you sell your shares:
- • you own at least 5% of shares and voting rights in the company (as long as they are not EMI shares)
- • if they are EMI shares then you must have been given the option to buy them at least one year before selling them
If you sell your shares within 3 years of the company becoming a non trading company then you can still qualify for ER relief.
Both of the following must apply if you are selling assets that you lent to the business:
- at least 5% of your part of the business or shares have been sold
- if you owned the assets but let your business, partnership or personal company used them for at least 12 months before the date you sold the business and its shares or the date the business closed.
We hope that our guide to Capital Gains Tax has answered any questions you had, if there is anything you would like to discuss please do not hesitate to contact us.
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