Capital Gains Tax (CGT) is a tax on the profit (the gain) made when you ‘dispose’ of an asset you own. The term “disposal” usually refers to the sale of an asset, but it can also refer to giving it away, exchanging it for something else, or receiving compensation for its loss.

Capital Gains Tax is normally only applicable to individuals or situations where there is no legal distinction between you and your business. As an example:

• CGT can be levied on sole proprietors or partners in a partnership.
• A corporation (such as a limited company) must pay Corporation Tax on any profit made from the sale of a business asset.

It can work in a variety of ways depending on the type of asset and why and how it was acquired. Although, in its most basic form, capital gains tax is simply a charge on the increase in value of an asset, the way it operates in the United Kingdom can be extremely complicated.

So, in this post, we’ll go over the fundamentals and provide some simple scenarios to demonstrate how it works.

However, don’t rely solely on this post to calculate your CGT. As previously stated, this is a very complex area of taxation! Before making any decisions, you should always seek the advice of an expert.

Capital Gains Tax for individuals

Most people will not encounter Capital Gains Tax on a daily basis because they are not engaged in activity that generates a significant capital gain.

What assets are exempt from Capital Gains Tax?

The important factor here is what the asset was used for and how much you get when you sell it. Any profit from the sale of your car is exempt from Capital Gains Tax if it was not used for business purposes. Your primary residence is usually exempt, as are personal possessions sold for less than £6,000.

Also exempt are:

• Gifts to a registered charity
• Gifts to a spouse or civil partner
• Investments in PEPs or ISAs
• UK government gilts and Premium Bonds
• Competition, betting, lottery, or pools winnings

But keep in mind that simply giving something away (unless it’s to your spouse or a charity) is treated exactly like selling it, and you’ll need to declare the value at the time of sale.

Sensible CGT planning is fine, but we’d never advise anyone to try to pull the wool over HMRC’s eyes. They’ve seen everything!

A quick overview on Capital Gains Tax for houses

When it comes time to sell their home, most people make a significant capital gain. With property prices rising at a rapid pace for several years, this can be a significant gain.

But even when you come to sell your house you won’t need to pay Capital Gains Tax as long as:

• You only have one home, and you’ve lived in it as your main residence for all the time you’ve owned it
• You haven’t let part of it out (not including having a lodger)
• Part of your home hasn’t been used exclusively for business purposes (using a room as a temporary or occasional office does not count)
• The grounds, including all buildings, are less than 5,000 square metres (just over an acre) in total
• You didn’t buy it with the aim of making a gain

Capital Gains Tax for cars

The second most expensive item that most people purchase is a car. If you are fortunate enough to have made money when selling, you will not have to pay CGT on this as long as it was not used for business purposes.

This also applies to classic cars. So, if you have an E-type sitting in your garage, you can sell it and release the massive gain it has made over the last few years without being stung by tax.

Capital Gains Tax on personal possessions sold for more than £6,000

Unfortunately, it is not all plain sailing. In other cases, Capital Gains Tax is due, particularly if you purchased assets as an investment.

For example, if you invest in paintings, jewellery, or antiques and sell them for £6,000 or more, you may have to pay Capital Gains Tax on the profit.

Capital Gains Tax for businesses

If your company is a limited company, it will not have to pay Capital Gains Tax. Instead, any profits are subject to Corporation Tax.

It’s a little different if you’re a sole proprietor or a partnership. Because there is no legal distinction between you and your business, any profits generated by the business are considered ‘yours.’ As a result, you must include capital gains in your Self Assessment tax return.

Different type of assets in a business

When discussing Capital Gains Tax for businesses, it is critical to understand what the term asset means in a business context. A company may have two types of assets that it employs.

Current assets

The first are assets used for trading. This could include stock that you sell to customers, raw materials used to make products, or working capital.

In accounting terms, these are defined as assets that will be depleted within the next 12 months, so they are considered short-term assets.

These short-term assets are taxable because they are part of the business’s trading. If the company makes a profit when it sells the goods, it will pay taxes as usual.

Fixed assets

The second category are long-term assets. In other words, things that are likely to be around for more than a year, and it is this category that is liable to capital gains tax.

It is also important to remember that a gain doesn’t have to be made on a physical thing. Capital Gains Tax can also be payable on intangible items like brands, trademarks, patents, and shares in other companies.

We do need to reiterate that capital gains tax is a complex area for businesses. For instance, a business set up to invest in fine art will pay tax differently to a business that just happens to have made a gain on some art it had on their office wall.

Working out your gain for Capital Gains Tax

Capital Gains Tax is calculated based on the profit you make rather than the total amount of the sale. It’s the difference between what the asset was worth when you bought it and what you sold it for.

Deducting expenses from your profit

The good news is that you can deduct some of your expenses from the gain, lowering the amount of Capital Gains Tax owed on the gain. For example, if you paid advertising fees to sell the asset or spent money on improvements other than routine repairs.

Sole traders and partners

While a sole trader is responsible for all profits, partners only need to calculate their share of each profit or loss.

Capital Gains Tax allowances, reliefs, and rates

Capital gains are treated differently than personal income, so while you have a personal tax allowance (which is £12,570 in 2022/23), your Capital Gains Tax allowance is different.

The Capital Gains Tax allowance (also known as the Annual Exempt Amount) can be deducted from your total gains for the year.

For 2022/23, the Capital Gains Tax allowance is £12,300 for individuals and £6,150 for trusts.

So, if you’re an individual and your total gain in this tax year is less than £12,300, you won’t have to pay any Capital Gains Tax.

If your total gains for the year are £12,500, you will only pay Capital Gains Tax on the portion of the gain that exceeds the allowance (in this example, £200).

And don’t forget! We’re interested in the profit, not the sale price.

Do I have to report capital gains that are less than the allowance?

No, you must only report and pay Capital Gains Tax on taxable gains in excess of the allowance.

Relief from Capital Gains Tax for Businesses

If you need to pay Capital Gains Tax on gains made through your business, there are CGT relief schemes available, such as Business Asset Disposal Relief. The eligibility criteria and the amount of relief available vary, so it’s always a good idea to seek advice!

What will my Capital Gains Tax be?

The rate of Capital Gains Tax you pay on gains over the allowance is determined by the asset and whether you are a basic or higher rate taxpayer.

For the 22/23 tax year, the basic rate threshold is £37,700.

You are a basic rate taxpayer if your total taxable income for the year is less than this amount. If your net gain exceeds this amount, you must pay Capital Gains Tax at the higher rate on the excess.

Examples of Capital Gains Tax workings

This may all seem a little theoretical so far, so we thought some examples would be useful.

The first step is to calculate your profit. This is simply the selling price less the acquisition cost of the asset. Remember that you can deduct any selling costs, purchase costs, and the value of any improvements you made in the meantime.

CGT example as a basic rate taxpayer

John is a basic rate taxpayer who sold a painting he bought a few years ago for a profit. It is his only profit for the year.

His full-time salary is currently £22,000 per year.

Sally, the basic rate taxpayer

Sally is a basic rate taxpayer who made a profit on jewellery she purchased a few years ago. It is her only profit for the year.

She currently earns £32,000 per year in taxable income from her full-time job and is thus a basic rate taxpayer. Her profit pushes her above the basic rate threshold.

This means she’ll pay Capital Gains Tax at the basic rate (10%) on the portion of the gain below the threshold, and at the higher rate (20%) on the portion above the threshold.

Simon, the higher rate taxpayer

Simon is a basic-rate taxpayer who profitably sold a vacation home he purchased a few years ago. It is his only profit for the year.

He currently earns £92,000 per year in taxable income from his full-time job and is thus a higher rate taxpayer.

Because of his taxable income from his job, Simon’s gain exceeds the basic rate threshold.

Everything above the basic threshold is charged at the higher rate. It is 28 percent in this case because he sold residential property that he had never lived in.

If you require any tax assistance from us here at AWOC Accounting, get in touch!