What is Capital Gains Tax?
Capital Gains Tax (CGT) is a tax on the profit you make when you sell or dispose of an asset that has increased in value, including assets like stocks, property, and artwork. Additionally, the tax applies to the gain you make, not the total amount you receive from the sale.
Depending whether you’re a basic-rate taxpayer or a higher-rate taxpayer affects how much CGT you need to pay.
Capital Gains Calculation
You calculate CGT on the profit that exceeds the asset’s original purchase price. For example: If you bought a painting for £5,000 and sold it for £25,000, your taxable gain would be £20,000.
The rates for CGT vary depending on your overall income and the asset type:
- Basic-rate taxpayers pay 10% on gains from non-property assets and 18% on property not considered their main home.
- Higher-rate taxpayers pay 20% on gains from non-property gains and 28% on additional property gains.
What’s the Annual Exempt Amount?
For the tax year 2023/24, each individual has a £6,000 tax-free allowance, known as the Annual Exempt Amount. You only pay CGT on gains that exceed this threshold. For the tax year 2024/25, HMRC have lowered this amount to £3,000.
When and How to Pay CGT?
You must pay CGT through the Self-Assessment tax system and declare any Capital Gains on your tax return by 31st January following the end of the tax year. You can make payment by:
- Direct debit
- Online or telephone banking
- Debit or credit card
- Bank transfer
- Cheque
If you make a capital gain in the tax year, you must report it on your Self-Assessment tax return. For assets disposed of, the report process include detailing the asset sold, purchase and sale prices, and any allowable deductions to calculate the capital gain and the tax owed.
Special Considerations
- UK Residential Property: If you sell a UK residential property, new rules require you to report and pay any CGT owed within 60 days of completion.
- Non-Residents: Non-residents must report the sale of UK property or land, even if the gain is below the tax-free allowance or if they incur a loss.
Exemptions and Reliefs
Several assets are exempt from CGT, such as personal possessions under £6,000, cars, and gains from ISAs or PEPs. Also, no CGT is due on gifts to spouses, civil partners, or charities. Reliefs may reduce the tax if the asset is a business or other specific investment types.
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