When you sell an asset in the UK, such as property, shares, or business assets, you may be liable to pay Capital Gains Tax (CGT) on the profit you make. Understanding how CGT works is crucial to managing your tax liability and ensuring compliance with HM Revenue & Customs (HMRC) regulations. This comprehensive guide covers everything you need to know before selling your assets, including how CGT is calculated, exemptions, and strategies to reduce your bill.
What is Capital Gains Tax?
Capital Gains Tax is a tax on the profit you make when you sell or “dispose of” an asset that has increased in value. It’s the gain you make that’s taxed, not the total amount you receive from the sale. CGT applies to individuals, trustees, and personal representatives, but companies pay Corporation Tax on chargeable gains instead.
When Do You Pay CGT?
You may need to pay CGT when you sell or give away an asset, exchange it, or receive compensation for it (such as an insurance payout). Common examples of assets subject to CGT include:
- Second homes and investment properties
- Shares and investments not held in an ISA or pension
- Valuable personal possessions worth more than £6,000 (excluding your car)
- Business assets, such as equipment or goodwill
Your main home is generally exempt from CGT, thanks to Private Residence Relief, provided certain conditions are met.
Calculating Capital Gains
To calculate your capital gain, subtract the cost of acquiring the asset (including purchase price and any associated costs like legal fees) from the amount you sold it for. You can also deduct the cost of improvements that enhance the asset’s value. For example:
- Purchase price: £200,000
- Associated costs: £5,000
- Sale price: £300,000
- Gain: £300,000 – (£200,000 + £5,000) = £95,000
This gain is then reduced by your annual exempt amount and any allowable losses before applying the CGT rate.
Annual Exempt Amount
Every individual is entitled to an annual exempt amount (also called the Annual Exemption), which allows you to make a certain amount of gains tax-free each tax year. For the 2024/25 tax year, this amount is £6,000. Any gains above this threshold are subject to CGT.
Capital Gains Tax Rates
The rate of CGT you pay depends on your total taxable income and the type of asset you’re selling:
- Basic Rate Taxpayers: 10% on most assets and 18% on residential property.
- Higher and Additional Rate Taxpayers: 20% on most assets and 24% on residential property.
Gains from the sale of business assets may qualify for Business Asset Disposal Relief (formerly Entrepreneurs’ Relief), which reduces the CGT rate to 10% on qualifying gains up to a lifetime limit of £1 million.
Reporting and Paying CGT
When you dispose of an asset that results in a taxable gain, you must report it to HMRC and pay the tax owed. For UK residential property sales, you must report and pay CGT within 60 days of completion using HMRC’s online system. For other assets, you can report gains through the Self Assessment tax return, usually by 31 January following the end of the tax year.
Allowable Losses
If you make a loss when disposing of an asset, you can offset this against your gains in the same tax year to reduce your CGT liability. Unused losses can be carried forward to offset gains in future tax years. Remember, you must claim the loss on your tax return to benefit from it.
Common Mistakes to Avoid
Many taxpayers make errors that lead to overpaying or underpaying CGT. Here are some of the most common mistakes and how to avoid them:
- Forgetting to apply the Annual Exempt Amount: Always deduct this allowance before calculating your final CGT liability.
- Not including all allowable costs: Keep records of acquisition costs, legal fees, and improvement expenses to reduce your gain.
- Missing reporting deadlines: Late reporting of gains can result in interest and penalties.
- Misunderstanding Private Residence Relief: Ensure you meet all criteria to claim relief on your main home sale.
Strategies to Reduce Your CGT Liability
Here are some practical tips for reducing your CGT liability:
- Use your annual exempt amount each year: Consider staggering asset disposals across tax years to maximise this relief.
- Transfer assets to a spouse or civil partner: Transfers between spouses are exempt from CGT, allowing you to use both partners’ annual exemptions and potentially reduce the overall tax rate.
- Invest in tax-efficient accounts: Holding investments in ISAs or pensions can shield gains from CGT.
- Claim all allowable expenses: Keep accurate records of any costs that can reduce your taxable gain.
Conclusion
Capital Gains Tax is an important consideration when selling assets in the UK, and understanding how it works can save you money and stress. By calculating your gains carefully, using your allowances effectively, and reporting on time, you can ensure compliance with HMRC and minimise your tax liability. Whether you’re selling a second home, shares, or business assets, being informed and proactive is the key to managing your tax affairs successfully.
