You may be subject to Capital Gains Tax (CGT) whenever you sell an additional property, shares, or other assets as Capital Gains Tax must be calculated for any gains you receive. It can be a complicated exercise to determine the right amount of CGT you should be paying.
By reading this guide, we hope to give you a better understanding of capital gains tax. In this way, you can find out how much you might owe and where you can get specific advice from a top-rated CGT advisor.
What is Capital Gains Tax?
Capital gains tax (CGT) is the tax you pay on the gain you make when disposing of an asset. CGT is calculated from the increase in value of the sale price compared to the purchase price of an asset, less any buying and selling costs.
So for example, if you purchased a BTL property for £100,000 and then sold it later for £150,000 you would have made a gain of £50,000. The tax on that gain is called Capital Gains Tax (CGT)
Disposing of an asset can include selling, transferring part of your ownership of an asset to someone else or transferring an asset into your own limited company.
However, not all assets incur capital gains tax. Typically, CGT is chargeable to assets such as:
- Second properties
- Inherited properties
- The sale of a business
- Shares
Capital gains on these assets are currently taxed at different rates than those of income tax. This is because purchasing such assets is seen as taking a risk, so the additional burden of risk carries a greater potential reward.
How much Capital Gains Tax do you pay in the UK?
The CGT rate you are taxed at depends on whether you are a basic rate or higher rate taxpayer and the type of asset you have sold.
For the 2022/23 tax year, the CGT rates are as follows:
| CGT on residential property | CGT on other assets | |
| Basic rate taxpayer | 18% | 10% |
| Higher rate taxpayer | 28% | 20% |
When do you have to pay Capital Gains Tax?
CGT is not as straightforward as declaring your gain and applying the relevant rate. There is a £12,300 annual exempt amount that you will be entitled to. This means that you only pay capital gains tax on any gain that exceeds this amount. If your gains are under this amount in the tax year, then there is no CGT liability.
However, if you do not make use of the annual exempt amount when selling your assets, you cannot carry forward any unused amounts to the following year.
What Capital Gains Tax reliefs can I claim?
There are many CGT reliefs that you may be able to claim. Examples of some CGT reliefs are
- Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ relief
- Principal Private Residence Relief
Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ relief
BADR is a benefit to higher-rate taxpayers as it reduces the CGT rate to a flat rate of 10%, rather than the higher rate of 20%. The first £1 million worth of chargeable gains will be eligible for BADR.
BADR is subject to the following criteria when selling shares:
- The person selling the shares must be an officer or employee of the business that the shares are being sold in
- The person must own at least 5% of the ordinary share capital of the business
- The business must have been trading in the 24 months leading up to the date when the shares are sold
On the sale of properties, it is only properties that qualify as a Furnished Holiday Let that are eligible for BADR and it cannot be claimed against residential properties that have been let on an AST.
Principal Private Residence Relief
Principal Private Residence relief is a tax relief that allows taxpayers to sell their main homes without having to pay CGT. The key to qualifying for this relief is that the property needs to be, or have been, your main residence.
This means that if the property was your main residence for the full period of ownership, then there is no CGT due from the sale. If you sell a property that was not your main residence during the full period of ownership PPR can provide you with relief for the period that you lived in the property but you may have to pay CGT for the period that you did not live in the property.
In addition to the period that you lived in the property, PPR also allows you to claim a 9-month final exemption period. This means that in the last 9 months of ownership, even if the property was rented out, you get PPR relief if you have lived in the property at some point. Subsequently, you don’t have to pay CGT on the gains made during that final 9-month period.
This can be a complex calculation and we strongly advise that you get a CGT appraisal done before you consider selling any property.
How do I report and pay CGT?
You need to report taxable gains and pay what you owe by completing a self-assessment tax return. The CGT will be due by 31st January after the end of the tax year that you made a taxable gain in. You can use the HMRC ‘real time’ capital gains tax service to report a capital gain however, even if this is used, you will still have to report your gains on your self-assessment tax return anyway.
There are new reporting requirements when you sell a property on or after 6th April 2020.
If you are not a UK resident and sell a property in the UK, you must declare the sale and pay any CGT that may be due within 60 days of the sale completion date even if you have in fact made a capital loss.
If you are a UK resident, you only need to complete the online disclosure form if there is any CGT due from the sale.
How can I reduce my CGT liability?
There are a number of valid ways to lower your CGT liability:
- Reporting losses
If you sell an asset for more than you bought it for, a capital loss will be made. Whilst this may not seem to be good news, from a tax perspective, a capital loss can be a great benefit.
The benefit of a capital loss is that the loss can be offset against any capital gains in the same tax year to reduce your total CGT liability. A further advantage is that you can carry forward any unused losses to be offset against any potential future gains.
- Spreading disposals over tax years
If you are looking to sell two chargeable assets, a way to reduce your CGT liability is to make these sales in two different tax years. This is because if you sell your two assets over two tax years you get to use the £12,300 annual exempt amount twice therefore, £24,600 of your gains will be tax-free.
- Sharing and gifting assets
Where you own an asset with another person, such as in a marriage, you can both offset your allowances. For example, if a gain is made on the sale of a jointly owned second home, you can double the £12,300 annual exempt amount to £24,600 before CGT becomes applicable.
You are also allowed to transfer assets to a partner without any CGT implications as transfers between spouses are nil gain nil loss transfers.
- Non Residents
If you are a non-resident and you purchased property before April 2015 you can elect for the base cost of the property to be the April 2015 value. So for example, you purchased a property in 2000 for £125,000. You decide that you now wish to sell it and the current value is £300,000. On that basis the gain is £175,000. However, your estate agent assesses that the property was actually valued at £250,000 in April 2015. By using the April 2015 valuation your actual gain would be reduced to just £50,000.
A word of caution
It is important to consider how CGT can overlap with other taxes. It is common for Stamp Duty, Inheritance Tax, VAT and Income tax to be included in CGT tax planning so you will need to be careful not to deal with CGT in isolation.
Once you have sold an asset the gain or loss has crystalised and there is nothing you can then do to mitigate the gain or loss. It is therefore vital that you get an assessment of the potential capital gain or loss before you sell and explore ways in which you could reduce any capital gains tax.
If you don’t have a tax adviser yet then please feel free to get in touch on 0800 907 8633, viatax@fixedfeetr.comor via ouronline contact form.
If you found this article informative then why not read our guide to tax on rental income or our article about buying property through a limited company next?
