When you sell something that’s increased in value, you may have to pay tax on the gain – this is capital gains tax.
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You pay capital gains tax on different types of ‘assets’ when you dispose of them.
‘Disposing’ often refers to selling the asset, but it can include gifting, swapping, or getting compensation for it too.
If you own an asset that’s increased in value, you’ve made a ‘gain’. And when you dispose of the asset, HMRC sees the gain as taxable.
Bear in mind it’s the gain that’s taxed, not the total you get for the asset.
So, if you buy an antique for £6,000 and then sell it later for £20,000, you pay capital gains tax on the £14,000 gain.
Capital gains tax applies when you dispose of different types of assets, including:
There are different capital gains tax rates and allowances to keep in mind, which affect the overall amount you end up paying.
First thing’s first – you get a capital gains tax allowance, which means for 2020-21 you don’t have to pay the tax on the first £12,300 of gains you make (or first £6,150 for trusts).
This figure usually changes each tax year. In 2019-20, the capital gains tax allowance was £12,000.
You have to factor this figure in when working out how much capital gains tax you owe.
There are also different reliefs available, depending on the asset. We discuss the relevant ones for small business owners and landlords in some examples later on.
Confusingly, capital gains tax rates differ depending on the income tax band you fall into (basic, higher, or additional rate).
What’s more, there are different rates when you’re selling property.
Higher and additional rate taxpayers (those who earn over £50,000 in taxable income) pay capital gains tax rates of:
These rates also apply to trustees or representatives of someone who’s died.
Broadly, the basic rates for capital gains tax are:
But the amount you actually pay depends on the size of your gain, because it could push you into higher rates.
There’s yet another rate for sole traders or partnerships whose gains qualify for Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief). This is a 10 per cent capital gains tax rate on selling all or part of a business.
Here are some relevant scenarios for how capital gains tax applies to businesses and landlords.
Sole traders and business partnerships pay capital gains tax when they sell all – or part of – a business asset.
Limited companies pay corporation tax on profits, including income from selling assets, so capital gains tax doesn’t apply.
Gov.uk gives examples of business assets that capital gains tax applies to:
To work out your gain:
Calculate your gain: the difference between how much you paid for the asset and how much you sold it for. You can use the asset’s market value in some situations, for example if it was a gift, or you sold it for less than it’s worth to help the buyer.
Deduct costs: subtract certain costs related to the asset from the gain. These include fees for advertising the asset, money spent on improving the asset, and stamp duty land tax and VAT. There are some costs you can’t deduct, like interest on a loan, or costs you can claim as business expenses.
Consider tax reliefs: tax reliefs can reduce the amount of capital gains tax you need to pay. These include Entrepreneurs’ Relief, Incorporation Relief, Business Asset Rollover Relief, and Gift Hold-Over Relief.
|Tax relief||What is it?||Who can use it?|
|Entrepreneurs’ Relief (Business Asset Disposal Relief)||Reduced 10% rate on qualifying profits||Sole traders, business partners or those with shares in a ‘personal company’|
|Incorporation Relief||Delay paying CGT when transferring your business to a company||Those transferring a business in return for shares (you pay CGT when you sell shares)|
|Business Asset Rollover Relief||Delay paying CGT when disposing of assets you’ll replace||Buy the new asset within three year of disposing the last one, use old and new assets|
|Gift Hold-Over Relief||Pay no CGT if giving an asset to someone – they pay CGT when disposing||You need to have used the asset when trading|
You can report gains in your Self Assessment tax return.
You don’t pay capital gains tax on your main home, unless you’ve rented it out or used it for business.
So capital gains tax mainly applies to buy-to-let landlords, who invest in property to let it to tenants, then eventually sell. Here’s how you work out gains on selling property:
Calculate your gain: the difference between how much you paid for the property and how much you sold it for. You might have to use the property’s market value in some scenarios, for example if it was a gift, you sold it for less than it’s worth to help the buyer, or you inherited it.
Deduct costs: subtract certain costs related to selling or improving the property from your gain. These can include estate agent and solicitor fees, as well as renovations like extensions (but not normal maintenance costs, like decorating).
Consider tax reliefs: if the property was a business asset, some of the business tax reliefs listed above may apply. Otherwise, you could get Private Residence Relief if the property was your main home, or a dependent relative lived in the property.
Gov.uk has a capital gains tax on property calculator that you can use to work out if you need to report and pay.
If you do have to report and pay capital gains tax, you’ll usually need to do this within 30 days of selling the property.
You don’t need to pay capital gains tax if your total gains fall within your £12,300 allowance.
If your gains are more than £12,300, you pay tax on the difference.
Remember that the rate you pay depends on your tax band. If you’re a higher or additional rate taxpayer, you pay the higher capital gains tax rates (20 per cent, or 28 per cent for property).
But if you’re a basic rate taxpayer, you have to work out whether your gains get pushed above the basic tax band. To do this:
With different rates and rules depending on your existing income, as well as the type of asset, capital gains tax can be confusing.
Last year, the Treasury asked the Office of Tax Simplification to review how capital gains tax might be simplified.
In reality, some of the suggestions in the report seem designed more to increase tax revenue – including aligning capital gains tax and income tax rates, as well as removing reliefs.
Nothing has been formally announced yet, so the Treasury is likely still considering the report’s recommendations. But with the Treasury facing big decisions about how to recoup spending during the coronavirus pandemic, capital gains tax looks like it could be the first in line for reform.
We’ll keep you updated – and read more about what the review means for landlords here.
As capital gains tax is complicated, please use this as a guide only and speak to a professional about your individual circumstances.
Is there anything in this guide you’d like to know more about? Let us know in the comments below.
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