Navigating capital gains tax

AN OVERVIEW OF CAPITAL GAINS TAX

CGT is typically payable when you sell or dispose of an asset for
more than you purchased it for. The tax is levied on the profit (gain)
made from the sale, not the total sale price. For instance, if you
purchase artwork for £10,000 and sell it for £50,000, CGT is
calculated based on the £40,000 gain, not the full £50,000.
Disposal includes selling the asset, giving it away as a gift,
transferring it, exchanging it, or receiving compensation for it,
such as an insurance payout. Understanding what constitutes a
disposal is essential to ensure compliance with CGT regulations.

CURRENT CGT ALLOWANCES

You only pay CGT on gains exceeding your Annual Exempt Amount
(AEA). For the 2024/25 tax year, this threshold is set at £3,000. This
means that if your total gains within a tax year are below £3,000, you
won’t have to pay CGT. This threshold was reduced from £6,000 in April
2024, making it more likely that individuals will incur CGT on their gains.
It’s also worth noting that these allowances are not transferable
between spouses or civil partners. Each individual has their own
allowance, and any unused allowance cannot be carried forward
to future tax years. However, assets can be transferred between
spouses/civil partners with no CGT implications, thus allowing a
couple to utilise one another’s allowances.

CGT RATES

The rate of CGT you pay depends on your
overall taxable income and the type of
asset sold. Here’s a detailed look at how
the rates apply:

Basic Rate Taxpayers: If your annual
income is under £50,270, you will pay
10% on most gains and 18% on gains
from residential property.

Higher Rate Taxpayers: If your
annual income exceeds £50,270,
the rates increase to 20% on most
gains and 24% on gains from
residential property.

The rates are structured to align with
income tax bands, ensuring that those
with higher incomes pay a higher rate
on their capital gains. This progressive
structure aims to provide a fair tax system
where the wealthier contribute more.

ASSETS THAT FALL UNDER CGT PERSONAL POSSESSIONS

Personal possessions such as artwork,
jewellery, and antiques are subject to
CGT if their value exceeds £6,000.
Therefore, if you plan to sell a valuable
heirloom or an art piece that has
appreciated in value, it’s crucial to
consider the potential tax implications.
However, some personal possessions
are exempt from CGT, such as:

Cars: Almost all cars are exempt from
CGT, regardless of their value.

Wasting assets: Items with a useful
life of 50 years or less, such as
certain machinery and equipment, are
not subject to CGT as long as they are
not used for business purposes.
Understanding which items are taxable
and which are not can help you make
informed decisions when selling
personal possessions.

PROPERTY

CGT primarily applies to properties that
are not your main home. This includes:

Second homes: Properties used
as holiday homes or secondary
residences.

Rental properties: Real estate held
for rental income.

Business premises: Properties used
for business purposes.

Your primary residence is generally
exempt from CGT due to Private
Residence Relief (PRR). Jointly owned
properties are taxed only on your share of
the gain, so it’s important to understand
your ownership percentage.

SHARES

Share investments are usually subject
to CGT when sold for a profit. However,
shares held in tax-efficient accounts such
as Individual Savings Accounts (ISAs) or
Personal Equity Plans (PEPs) are exempt.
Specific employee share schemes, like
the Enterprise Management Incentive
(EMI), also offer exemptions.

BUSINESS ASSETS

If you own a business, certain business
assets are liable for CGT. This includes:

Machinery: Equipment used in
business operations.

Intellectual property: Patents,
trademarks, and other intangible assets.
When selling a business or restructuring,
understanding the CGT implications is
crucial for effective financial planning.

CGT EXEMPTIONS MAIN RESIDENCE

Private Residence Relief (PRR)
exempts your primary home from CGT.
To qualify, the property must be your
main residence for the entire period of
ownership. However, there are specific
rules and conditions:

Letting Relief: If part of the property
was let out, you might still qualify for
partial relief.

Periods of absence: Certain periods
when you were not living in the home
may be exempt, provided specific
criteria are met.

GIFTS

Gifts to your spouse or civil partner and
gifts to charities are exempt from CGT.
This can be a strategic way to transfer
assets without incurring tax liabilities.

TAX-EFFICIENT INVESTMENTS

Interest from ISAs, PEPs, and specific
share sales are outside the scope of CGT.
These tax-efficient investment vehicles
can help grow your wealth without
triggering CGT.

Investing in the Enterprise Investment
Scheme (EIS), Seed Enterprise
Investment Scheme (SEIS), and Venture
Capital Trusts (VCTs) can also provide
significant CGT exemptions. These
schemes offer attractive tax reliefs,
including the potential for CGT exemption
on gains from investments held for a
specified period, making them highly
beneficial for investors looking to
minimise their CGT liabilities.

CAPITAL LOSSES AND RELIEFS

If you incur a loss on the sale of an asset, you can offset this loss
against any gains, reducing your overall CGT liability. Here are some
key points to consider:

Claiming losses: You must claim the loss in your tax return to
offset it against gains.

Carry forward: Unused losses can be carried forward to future
tax years, providing flexibility in tax planning.
Professional advice can help ensure you maximise the benefit of
these reliefs.

WHEN MUST CGT BE REPORTED AND PAID?

Reporting and paying CGT must be done by specific deadlines,
which vary depending on the type of asset and the nature of the
disposal. Adhering to these deadlines is crucial to avoid penalties
and interest charges.

REPORTING AND PAYMENT DEADLINES FOR UK RESIDENTIAL PROPERTY

For disposals of UK residential property,
the reporting and payment deadlines
have been updated recently to ensure
timely compliance. The key deadlines are:

• For disposals completed on or after
  27 October 2021: You must report
  the sale and pay any CGT due within
  60 days of the completion date. This
  applies to the sale, gift, or transfer of
  the property.

• For disposals completed between
  6 April 2020 and 26 October 2021:
  The reporting and payment deadline
  was 30 days from completion.
  These tighter deadlines aim to ensure
  that tax liabilities are settled promptly and
  reduce the risk of non-compliance .

REPORTING AND PAYMENT DEADLINES FOR OTHER ASSETS

For other types of assets, such as shares,
personal possessions, and business
assets, the CGT reporting and payment
process is slightly different:

• Self assessment tax return: If you are
  already filing a self assessment tax
  return, you should include your CGT
  calculations in your annual return.
  The deadline for submitting your self
  assessment tax return online is 31
  January, following the end of the tax
  year in which the disposal occurred. If
  you file a paper return, the deadline is
  31 October of the same year.

• Real-time capital gains tax service:
  HMRC offers a ‘real-time’ CGT service
  for more immediate reporting. This
  allows you to report gains and pay
  any CGT due before the end of the tax
  year, providing a convenient option for
  those who prefer not to wait until their
  annual tax return.

REPORTING USING THE ‘REAL-TIME’ CAPITAL GAINS TAX SERVICE

The ‘real-time’ Capital Gains Tax
service allows individuals to report
and pay CGT liabilities promptly.
This service is particularly useful for
those who prefer not to wait until the
end of the tax year to include their CGT
calculations in their self assessment
tax return. By using the real-time
service, you can ensure that your
CGT obligations are met efficiently,
reducing the risk of penalties and
interest charges for late payment.
This service also simplifies the
process, allowing for immediate
reporting and payment, which can be
advantageous in managing your tax
affairs effectively.

HOW ACCOUNTANTS CAN ASSIST WITH
CAPITAL GAINS TAX

CGT can be daunting, but professional
accountants can provide invaluable
assistance in managing and mitigating
your CGT liability. Here are some key
ways accountants can help:

Accurate calculation of gains:
Accountants ensure precise calculation
of capital gains by identifying deductible
expenses and applying all available reliefs
and allowances. This minimises your
taxable gain and maximises the benefits
of tax exemptions.

Strategic tax planning: Professional
accountants offer strategic advice on
the timing of asset sales to maximise
tax allowances and offset losses against
gains. They also help utilise specific
reliefs like Entrepreneurs’ Relief to reduce
CGT rates on qualifying business assets.

Compliance and reporting:
Accountants ensure compliance
with HMRC regulations by preparing
and submitting accurate tax returns
and reports. They help maintain
comprehensive records, meet all
reporting deadlines, and avoid
penalties and interest charges.

Advice on complex transactions:
For complex transactions such as
business asset sales, mixed-use
properties, and jointly held assets,
accountants provide expert guidance
on accurately calculating CGT liability
and applying for relevant reliefs.

Estate planning and inheritance:
In estate planning, accountants develop
strategies to minimise CGT on inherited
assets. They advise on gifting strategies
and using trusts to reduce tax liabilities
for heirs.