Capital Gains Tax (CGT) not only applies to property but also to any asset which is sold and has increased in value from when it was first purchased. Items such as investments, personal possessions and business assets can all apply. It is important to recognise what assets can influence CGT and how to best manage them effectively during the sales process.
Capital Gains Tax is the levy on the gains made when an asset is sold or disposed of. Charges apply to the difference between the purchase price and the sales price, this is known as the gain.
What assets will CGT apply to?
Typical items include:
- Shares and investments which includes stocks, bonds, and investment funds
- Second homes, buy-to-let properties and land (anything aside from a primary residence)
- Business assets which include both tangible items and goodwill
- Personal possessions such as jewellery, antiques, arts and collectables worth more than £6,0000 when sold.
- Digital currency such as bitcoin
Items such as a main residential home, personal cars and any assets held in ISAs (individual savings accounts) or PEPs (personal equity plans) are exempt from capital gains tax.
How is CGT calculated?
CGT is calculated based on the gain made from the sale of an asset, not the total sales vales of the asset, key points to note are as follows:
- The gain is calculated by subtracting the acquisition cost from the sales price. Items such as legal fees and relevant costs for the purchase can be included. However, if improvements to the asset such as property renovations or bespoke cleaning which improves the price of the asset are made these can be deducted from the gain.
- Currently individuals have a CGT allowance of £6,000 so they can earn up to this amount in gains before any tax is required.
- The actual amount of CGT to be paid will be based on the individual’s taxable income and the type of asset being sold. A basic taxpayer will pay 10% for most assets and 18% for residential property. A higher rate taxpayer will pay 20% for most assets and 28% for residential property.
- HMRC must be kept up to date with any CGT payments required. This can be completed via the self-assessment tax return or using the HMRC’s real time capital gains tax service – https://www.gov.uk/report-and-pay-your-capital-gains-tax.
Do any exemptions or reliefs apply?
There are several exemptions and reliefs which can reduce a CGT liability:
- Annual exemption means that the first £6,000 of capital gains each year will be except from tax.
- If the asset is a main home and certain conditions are met, then the Private Residence Relief (PRR) will apply which means either full or partial exempt from CGT.
- Entrepreneurs’ relief can reduce the amount of CGT by 10% on qualifying business disposals such as the sale of a business or a part of the sale of a business (please note there is a lifetime limit for this relief of £1million).
- A business asset or shares for a personal company can be given away meaning the gain of the value can be deferred, this is classed as gift hold-over relief.
- Investors relief can apply and reduce the CGT to 10% on the gains when selling shares from a trading company (specific conditions must be me).
- Rollover relief allows the deferring of a CGT if an asset is sold and the proceeds are used to reinvest in a new qualifying asset.
In conclusion the CGT on assets can have a significant impact on the profitability of the related item. It is therefore vitally important to fully understand how CGT is calculated and what strategies should be deployed for optimising tax obligations. Consulting with a capital tax specialist is always recommended.
If you have any questions around CGT please call our team on 01173 700 079 or e-mail hello@steppingstonesaccountancy.co.uk.
You can also book a free 20-minute call with Yarka – https://calendly.com/yarka-ssa/20min
