Capital Gains Tax or ‘CGT’ is a tax which individuals or trustees within the scope of UK tax may have to pay on the disposal of certain assets. A disposal of an asset may be when that asset is sold or given away.
To be within the scope of CGT, the individual or trustees will need to be a UK tax resident in the year the gain is realised. Spending a period not being a UK resident when an asset is sold can prevent CGT arising although and for individuals, broadly, if they return to the UK within a period of five years, there are provisions to bring gains realised within the scope of CGT on return to the UK.
Non-UK residents disposing of UK land and buildings or shares in companies that derive a significant portion of their value from UK land are also subject to CGT.
There are different rules for non-UK domiciled persons depending on how long they have been UK resident.
Companies pay corporation tax on gains. The principles of calculating gains are similar with the main exception that a company may be entitled to a reduction in the gain through an indexation allowance where assets were acquired before 1 January 2018.
Chargeable assets include land and property, tangible and intangible assets excluding cars and chattels sold where the cost and proceeds are £6,000 or less. Certain assets whilst within the scope of CGT are subsequently relieved from part or all of the liability, such as a person’s main residence.
The rate of CGT is dependent on both the type of asset being sold and whether you are a higher rate or basic rate income taxpayer. You calculate your CGT liability by placing on top of your income – the income is subject to the calculation of tax first and then the gains. You therefore have to work out how much taxable income you have after the personal allowance and any income tax reliefs before adding your gain (after the annual exempt amount is deducted from those gains) to your taxable income.
If an amount of the gain is within the basic income tax band, you will pay 10% on that amount. If part of it is above the basic tax rate, you will pay 20% or 28% if the asset is a residential property (other than one which qualifies for relief as your main residence).
The following property sold at a gain may be subject to CGT:
- A personal holiday home or second home
- Rental properties
- Land not within the curtilage of your main residence
- Furnished holiday lettings
- Commercial property
Companies do not pay CGT but instead pay corporation tax on gains realised. The current rate of corporate tax is 19% (2020-21).
If you subsequently receive a salary, dividend, or shareholder loan from the company, you may be subject to income tax on amount or benefit received. Loans given to participators (broadly shareholders) may also give rise to further corporation tax.
CGT on the disposal of assets other than residential property is payable on the 31st of January that follows the tax year in which you made the gain.
Anyone selling UK residential property needs to be aware that CGT due now should be reported and paid within 30 days of completion.
The new obligation applies to UK residential property transactions where:
the date of disposal (usually the date of exchange) is on or after 6 April 2020 and
CGT is due. UK residents do not need to report transactions where no tax is due because of the availability of reliefs (eg, private residence relief, annual exempt amount). Non-UK residents continue to need to report transactions even if no tax is due.
You can broadly find your taxable gain, as follows:
- Sale proceeds, less:
- Cost of acquisition (legal costs, stamp duty, stamp duty land tax, broker and estate agent fees etc.)
- Cost of sale (legal costs, broker and estate agent fees)
- Capital enhancement expenditure (extension, kitchen upgrade etc.)
- Equals potentially taxable gains
In respect of property, you cannot reduce the gain by deducting the cost of maintenance or mortgage interest/payments.
An individual has an annual exempt amount of gains (for 2020-2021 £12,300). The annual exempt amount may be offset against the gains made in a tax year. There is no ability to carry forward (or back) the annual exemption against gains of other years or to accumulate the unused annual exemption. If it is not used in the year, it is lost.
Trustees are entitled to an annual exempt amount half that of an individual (for 2020-2021 £6,150).
If you have made a loss on the sale of an asset that is within the scope of CGT, that loss may be offset against other current year gains or carried forward for future offset against gains. The loss will need to be reported to HMRC.
Although, there are exceptions to this rule, such as where the loss has arisen in respect of the disposal of an asset to a close relative.
Individuals who occupy a property as their main or only residence may be entitled to private residence relief on its disposal preventing it from being subject to CGT. However, many homeowners will buy a property and live there as their main residence ahead of moving into another home and renting the former one. In this situation the tax position is more complicated:
- The amount of relief is calculated on the periods of qualifying and non qualifying periods of occupancy.
- Some of the periods of occupancy are deemed periods within the legislation, for example a period of working overseas etc.
- All main residences receive a period of deemed occupancy (since 6 April 2020 it is reduced from the former 18 months to 9 – it was once 36 months).
- Where a main residence was subsequently let, partial lettings relief was available although it is now restricted (since April 2020) to where the owner and tenant both occupied the property.
- You may elect between properties that qualify as your main residence – for example if you have two residences. The properties, however, have to be occupied by you i.e. you can’t elect for a property you rent out to be a main residence!
- The property and up to 0.5 hectares of land or the curtilage for the reasonable enjoyment of that property are within the scope of relief. HMRC generally challenge land in excess of 0.5 hectares saying it is not required for the proper enjoyment of a property although the property in question should be considered proportionately.
Effectively, CGT is not due on the gain attributable to actual and deemed periods of occupation. In practice the overall gain is time apportioned although the gain may also be calculated with reference to actual valuations. HMRC may also seek to apply actual values for periods.