Capital Gains Tax
Capital Gains Tax (CGT) is a tax on the profit made when you sell or dispose of an asset that has increased in value. The tax is only levied on the gain, not the total amount of money received. For example, if you bought an asset for £10,000 and sold it for £15,000, CGT would apply to the £5,000 gain. In the UK, CGT applies to various types of assets, including property, shares, and personal possessions. CGT does not apply to assets like your primary residence (under certain conditions), personal belongings under the relevant threshold for the tax year, ISAs, and UK government bonds.
Calculation and Rates
The amount of CGT you owe depends on your taxable income, the size of your gain, and the asset you sold. There are different tax rates for individuals and businesses. For individuals, the tax rates for the 2023/24 tax year are:
- Basic rate taxpayers: 10% on gains (18% on residential property)
- Higher rate taxpayers: 20% on gains (28% on residential property)
The calculation involves:
- Determining the Gain: Subtract the cost of the asset, any allowable costs (e.g., improvements, selling expenses), and any CGT allowance (the annual exempt amount, which is £6,000 for 2023/24) from the sale price.
- Applying the Tax Rate: Depending on whether you fall into the basic or higher rate tax band, apply the respective CGT rate to your taxable gain.
Exemptions and Reliefs
Several exemptions and reliefs can reduce your CGT liability:
- Annual Exempt Amount: Every individual has an annual tax-free allowance (£6,000 for 2023/24), meaning you only pay CGT on gains above this threshold.
- Private Residence Relief: If you sell your primary home, you may not have to pay CGT, provided you meet certain conditions, such as having lived in the property as your main residence for the entire period of ownership.
- Entrepreneurs' Relief: Now known as Business Asset Disposal Relief, this allows eligible individuals to pay a reduced CGT rate of 10% on gains from the sale of all or part of their business, up to a lifetime limit of £1 million.
- Other Reliefs: Additional reliefs include rollover relief, holdover relief, and investors' relief, which apply in specific circumstances, such as reinvesting gains into qualifying business assets or deferring gains on gifts of business assets.
Understanding these rules and making use of available reliefs can significantly reduce your CGT liability. It is often advisable to seek professional advice to navigate the complexities of CGT and ensure compliance with all regulations.
For more detailed information, you can refer to sources like the UK Government’s Capital Gains Tax page and other financial advisory websites.