Understanding the Basics of UK Capital Gains Tax

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Capital Gains Tax (CGT) is a key component of the United Kingdom’s taxation system. It is a tax on the profit or gain made when you sell, gift, exchange, or otherwise dispose of something that has increased in value. CGT is a complex topic with many nuances, but understanding the basics is essential for anyone dealing with assets in the UK.

What is Capital Gains Tax?

Capital Gains Tax is levied on the gain or profit made from the sale or disposal of an asset. The tax does not apply to the total amount received from the sale, but rather the increase in value of the asset from the time of acquisition to the time of disposal. Importantly, the tax only becomes payable once the asset is disposed of – there is no ongoing tax liability while you own the asset.

Who is liable to pay Capital Gains Tax?

In the UK, both individuals and companies may be liable to pay CGT, depending on their circumstances. For individuals, residence status plays a key role in determining liability. UK residents are generally subject to CGT on gains made from the disposal of assets worldwide. However, non-residents are only liable for CGT on certain UK assets, such as residential property.

Companies, on the other hand, do not pay CGT per se. Instead, they pay Corporation Tax on capital gains, also known as ‘chargeable gains’. The principles of calculating the gain are largely the same, although different rates and reliefs apply.

What assets are subject to Capital Gains Tax?

A wide range of assets are subject to CGT, including but not limited to:

  • Property that isn’t your main home
  • Shares not held in an ISA or PEP
  • Business assets
  • Personal possessions worth £6,000 or more, excluding your car

Note that some assets are tax-free, and you don’t have to pay CGT when disposing of them. Examples include any car owned personally, assets held in tax-free savings accounts like ISAs and PEPs, and the sale of your main home, provided it has been used solely as your private residence throughout the period of ownership.

How is Capital Gains Tax calculated?

Calculating CGT involves several steps:

  1. Calculate the gain: This is done by subtracting the purchase price (and any costs associated with acquiring, improving, or selling the asset) from the sale price.

  2. Deduct the Annual Exempt Amount: Every tax year, each individual has an annual tax-free allowance, known as the Annual Exempt Amount. For the 2021/22 tax year, this is £12,300. Any gains up to this amount in a tax year are free from CGT.

  3. Apply the appropriate tax rate: The remaining gain is taxed at a rate that depends on your overall taxable income. There are two rates for individuals – the basic rate of 18% and the higher rate of 28% for residential property, and 10% and 20% respectively for other assets. The rate that applies to you depends on the level of your taxable income.

Reporting and Paying Capital Gains Tax

Finally, it’s important to know when and how to report and pay CGT. If you’re a UK resident, you’ll normally report and pay the tax through the Self Assessment tax return system. However, if you’ve sold a residential property in the UK, you may need to report and pay the tax within 30 days of the sale.

Understanding the basics of Capital Gains Tax in the UK is the first step towards effective tax planning. However, given the complexity of the tax system, seeking professional advice is always recommended to ensure you are optimally managing your capital gains tax liability.

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