On the face of it, capital gains tax (CGT) is pretty easy to understand: it’s the tax you have to pay when you sell an asset that has grown in value. You will only pay CGT on any profit you made from the sale and not on the overall sum you received.
Assets may include a business, shares, a second property (including overseas property, if you’re registered to pay tax in the UK), and even a family heirloom. As usual with tax matters, the devil’s in the detail. So how does CGT work in practice, are there any assets that are tax-free, and just how much tax will you have to pay?
How much CGT will you pay?
How much CGT you pay depends on the asset and your income. If you’re a basic rate income taxpayer, you’ll pay 10% CGT on any gains you make from the sale of an asset; higher income rate taxpayers face a 20% CGT charge.
There are also higher rates for gains on the sale of residential investment properties, namely, 18% and 28% for basic rate and higher rate payers respectively.
Capital gains below the current level of £11,700 (annual exempt amount in 2018/19) per year are tax-free. Pensions and investments such as an ISA or PEP accounts are CGT-free, although you will have to pay capital gains on shares and any assets you inherit and dispose of at a later date.
Some more CGT-free disposals and exemptions
Some gifts may also be considered CGT-free, such as those exchanged by a husband and wife and/or civil partners in a given tax year. This only applies if you are living together and intend keeping the gift. If you split up or the item was sold, CGT may be applicable. Gifts made to charities are also CGT-free and you won’t pay tax on lottery winnings, premium bonds, betting wins, or government gilts.
What’s my CGT liability?
Let’s take a look at some typical examples of where CGT is payable:
• Selling a property – if you sell a property other than you own home, such as a holiday home or a buy-to-let property, you’ll have to pay CGT on the profit. You can include any legal fees, stamp duty, estate agent’s fees incurred in the purchase and sale, add your annual exemption (£11,700), and deduct the total amount from the gain made on the asset. You pay CGT on the balance at either 18 or 28%, depending on your income tax status.
• Shares – If you buy shares in a quoted company and then sell them, you will pay CGT on your gain. For example, if you buy £10,000 worth of shares and sell them from £100,000, you’d pay CGT on £90,000, less the annual exemption of £11,700 and factoring in your income tax status of 10 or 20%.
• Selling a business – if you sell a part or all of a business you own, you’ll have to pay tax on your gain. However, if your shareholding is 5% or more and you are a higher-rate taxpayer, you may qualify for entrepreneurs’ relief (see below) at 10%.
• Selling valuables and heirlooms –with the exception of gains made from the sale of your car, which is CGT-free, you have to pay tax on items valued at more than £6,000. This could include artwork, jewellery, stamps, and coins. Once you calculate any gain you’ve made on the sale and subtracted your annual allowance, you’ll be able to see if any CGT is payable.
What is entrepreneur’s relief on CGT?
Under HMRC rules, you may be able to get entrepreneurs’ relief and reduce the amount you pay in CGT. Entrepreneurs’ relief means you only have to pay tax at 10%. You may qualify if you dispose of all or part of your business, including the assets; if you dispose of securities or shares and your shareholding is at least 5%; if you
lent assets to your business, or received shares through the Enterprise Management Incentive scheme. You may also be able to claim entrepreneurs’ relief on CGT if you are closing down your company or taking a long sabbatical and want to take out a cash sum. If you are planning to do so, seek out the advice of a tax expert first. Meanwhile, read our fuller explanation of entrepreneurs’ relief.