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Capital Gains Tax (CGT) was first introduced in 1965 and is a tax on the profit/gain you make from selling assets such as property, shares or other investments e.g. antiques and fine art.
Capital gains are traditionally taxed at lower levels than income.
A charge to CGT usually arises after you sell an asset but can also occur when you:
- give away a chargeable asset;
- transfer a chargeable asset to another person;
- exchange a chargeable asset for something else; or
- receive compensation for the loss or destruction of an asset, e.g. an insurance payout.
At its simplest, a capital gain is calculated by deducting from the sale proceeds of an asset:
- what you originally paid for it (or its market value at the date you inherited it or when it was given to you);
- any costs you incurred when you bought it (e.g.: solicitors fees for buying a property);
- any costs you incurred enhancing or improving it; and
- any costs you incurred when selling it (e.g.: commission to a sales agent or auction house).
There are annual limits that allow taxpayers to make a certain amount of tax-free capital gains each year. To help reduce CGT payable on small gains you could consider crystallising the gains over two separate tax years.
Everyone is allowed to make a certain amount of tax-free capital gains each year. The ‘annual exempt amount’ for the 2020-21 tax year is £12,300. There is a lower rate of £6,150 for most trustees.
CGT is normally charged at a simple flat rate of 20% and this applies to most chargeable gains made by individuals. If basic rate taxpayers only make a small capital gain, they may only be subject to CGT at a reduced rate of 10%. If the basic rate taxpayer makes a chargeable gain that pushes their taxable income into the higher rate threshold, then they will pay some CGT at both 10% and 20% on the relevant amounts. A higher rate of CGT applies (18% and 28%) to gains on the disposal of residential property (apart from a principal private residence).
You can usually offset losses against gains made in the same tax year which will reduce the amount of gain subject to CGT. Where the amount of losses exceeds gains then the losses can usually be carried forward to offset against future gains.
Transfer to Spouse or Civil Partner
Transfers between spouses are currently exempt from CGT unless:
- you separated and did not live together at all in that tax year
- you gave them goods for their business to sell on
This means that if one spouse or civil partner has not made any gains then you can effectively utilise the other person’s CGT allowance and possibly a lower tax rate band of 10% for basic rate taxpayers.
Transfer between spouses is currently exempt from CGT. This means that assets can be transferred between husband and wife or civil partners so that both annual CGT allowances are used. This effectively doubles the CGT allowance for married couples and civil partners. The transfer must be a genuine, outright gift.
Main Home Exemption From CGT
Most people are aware that they do not have to pay CGT when they sell their principle private residence. The exemption does contain some restrictions however, if, for example:
- the house was not used only as a main residence throughout the period of ownership;
- the garden or grounds, including the site of the house are greater than 5,000 square metres;
- part of the home was ever used exclusively for business purposes;
- all or part of the home has been rented out;
- the main reason the home was purchased was to make a profit from a quick sale;
- the owners have moved to another home before selling the old one;
- the occupiers are married or are in a civil partnership and own more than one main residence at a time.
In many of these situations it will be necessary to apportion the capital gain to identify how much qualifies for the main residence exemption. Further exemptions may be available to relieve any part of the gain that is not automatically exempt.
For example, in most cases the final 9 months of ownership will be treated as if occupied by the home owner even if they have moved to live elsewhere. There are also special rules where the owner was not living in the house due to a requirement to live elsewhere for work related reasons. The time limit is extended to 36 months under certain limited circumstances. For example, if the owner of a property lives in a care home or has certain disabilities.
Contrary to a popular myth, if you work from home you will not automatically affect your entitlement to the main residence exemption. The important issue is to ensure that you do not identify any specific room or area in the house as being used exclusively for business reasons. Occasionally, this is unavoidable where your business requires the conversion of a room into something like a surgery, clinic or studio that is used exclusively for business purposes. In such cases, when the house is sold, it will be necessary to compute how much of any capital gain relates to the room or area used exclusively for business purposes.
Other Exemptions From CGT
Apart from the family home, there are other exemptions from CGT and special rules that apply to gains made in relation to certain other assets, such as:
- Assets sold for less than £6,000 (e.g.: antiques and paintings);
- Wasting assets (e.g.: cars and wine);
- Stocks and shares held in an ISA account;
- National savings certificates and premium bonds;
- Winnings from betting, lottery or the pools;
- Compensation for personal injury;
- Qualifying enterprise investment schemes.
None of the above exemptions apply when the gains arise through trading or business activities as distinct from occasional sales and disposals.
Business Asset Disposal Relief
When you sell a business, shares in a trading company or your interest in a trading partnership, you will often be able to claim Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief) so that you only have to pay 10% CGT rather than the normal rate of 20%. Since 11 March 2020, this relief had a limit set at £1 million of lifetime gains.
There are a number of qualifying conditions that you must meet in order to qualify for the relief. The lifetime limit means that you can qualify for the relief more than once, subject only to the fact that 20% tax will be charged once your total qualifying capital gains exceed £1 million.
A variant of Business Asset Disposal Relief, called Investors’ Relief (IR), is available to investors in unlisted trading companies. This relief applies a 10% rate of CGT to gains accruing on the disposal of ordinary shares in an unlisted trading company up to an additional lifetime cap of £10 million. Shares must be held for a minimum period of three years to qualify.
Other Reliefs From CGT Re Business Assets
Business Asset Roll-Over Relief
This relief from CGT is available when you sell a business asset and buy a new asset to replace it. If you satisfy all the necessary conditions you can ‘roll-over’ the capital gain into the new asset. This enables you to postpone your liability to CGT until the replacement asset is sold without itself being replaced by another qualifying replacement.
If you own a business as a sole trader or in partnership with others you may at some point want to convert this into a company. A capital gain will be deemed to arise when you do this by reference to the market value of your business assets including goodwill. A number of options exist in such situations.
One of these involves arranging the incorporation of the business so that it satisfies the conditions necessary to secure ‘Incorporation Relief’. One such condition is that the entire business must be transferred as a going concern in exchange for shares in the new company.
Gift Hold-Over relief
Where a business asset is gifted or sold for less than its market value, CGT is still chargeable by reference to the market value of the asset. This commonly arises within families, for example, where a parent transfers a business or business premises to their children. In such cases the taxable gain can be postponed until the recipient of the gift sells the asset.
Gains on Assets Acquired Before 31 March 1982
Although CGT was introduced in 1965, the rules aim to avoid taxing any gain that arose before 31 March 1982.
If you make a capital gain on an asset you owned on 31 March 1982, special rules apply. You will be deemed to have acquired the asset on that date at its then market value. You should then use that value instead of the actual costs prior to that date when computing your taxable gain. The indexation allowance on corporate Capital Gains for disposals was frozen on 31 December 2017.