In this article
How much is capital gains tax?
How much capital gains tax you pay depends on several factors, in particular the type of asset disposed of and the individual’s income tax bracket.
For individuals who pay basic rate income tax (20%), 10% capital gains tax is currently payable, and for individuals who pay the higher (40%) or additional rate (45%) of income tax then 20% capital gains tax is payable. For trustees and personal representatives during probate, the rate of tax is fixed at 20% regardless of the individual’s income tax bracket.
Upper rate gains relate to gains on residential property accumulated by non-resident individuals (a landlord for example) and carried interest gains are charged at the upper rate of 28%.
What assets require you to pay capital gains tax?
You must pay capital gains tax on the gain when you sell or dispose of:
- Most personal possessions (including jewellery, paintings, antiques etc.) worth £6,000 or more, apart from your car.
- Property that’s not your main home (land, business premises etc.)
Your main home if you’ve let it out, used it for business or it’s substantial (over 5,000 square metres)
- Shares that aren’t an ISA or PEP
- Business assets (land, buildings, machinery etc.)
All of the assets listed above are known as ‘chargeable assets’.
Where you jointly own an asset with someone else, you must pay capital gains tax on your share of the gain.
Furthermore, depending on the assets, you may be able to claim a relief to reduce capital gains tax. It’s beneficial to contact a solicitor to clarify whether you qualify to gain any reductions on the capital gains tax of your asset.
What are the exemptions and reliefs?
There are several potentially applicable exemptions and reliefs to capital gains tax.
Currently, the exemptions include:
- Individuals and personal representatives have an annual exempt amount of £12,300 per year.
- Trustees also have a reduced annual exempt amount of £6,150 per year.
- Certain assets enjoy exemptions from capital gains tax. Examples include personal possessions valued under £6,000 and gilt-edged securities (specific high-grade bonds traded on the capital markets).
There are several reliefs which may potentially be available for capital gains tax including:
- Principal private residence relief (the relief that means individuals do not pay capital gains tax when they sell their primary home).
- Holdover relief (available to gifts to defer the gain on disposal to apply to the next disposal of the asset).
- Entrepreneurs’ relief/business asset disposal relief (a reduced rate of capital gains tax at 10% for individuals who realise gains on the disposal of business assets).
- Investors’ relief (a reduced rate of capital gains tax which is applied to investors in unlisted trading companies who have held the investment for more than three years before disposal).
- The Cultural Gifts Scheme (which gives a tax reduction for gifts of art to the nation).
- The Enterprise Investment Scheme.
- The Seed Enterprise Investment Scheme.
- Venture capital trusts.
- Social investment tax relief.
- Charitable reliefs.
How do you calculate capital gains tax?
Capital gains tax is chargeable on an annual basis which is the same as a standard tax year (6 April one year to 5 April the next year). Additionally, the individual must be resident in the UK for that tax year to receive tax.
Capital gains tax incurs on:
- Sales or exchange of an asset.
- When the taxpayer sells an asset (i.e. exchanges it for financial gain), capital gains tax on the increase in the value of the asset between acquisition and sale may result in a chargeable gain. This will depend on several factors, including whether any exemptions or reliefs apply (see above).
- A gift. When the taxpayer has done everything in their power to transfer an asset, a gift will have been made (for example, signing a stock transfer form for a gift of shares or physically handing over assets into the possession of another person).
How do you calculate capital gains tax?
You must calculate the gain which is potentially chargeable to capital gains tax once disposal or deemed disposal of an asset has been identified. The starting point is to calculate the sum the person disposing of the asset acquired in exchange for the asset. Sometimes this will be very straightforward, say if it is a cash sum.
Then, from the value received by the individual disposing of the asset, specific amounts may be deducted, including:
- The amount initially paid for the asset.
- Incidental costs of the acquisition of the asset (such as estate agent fees or commission) or, if the asset was not acquired, any expenditure incurred in providing the asset.
- The expense incurred by the person disposing of the asset. This cost is only deducted if the person spent money exclusively on maintaining or increasing the value of the asset.
- Incidental costs incurred by the person disposing of the asset which is wholly and exclusively to make the disposal.
The amount left after these deductions will be the chargeable gain or the allowable loss. Where there’s a chargeable gain, a percentage of this amount will be payable to capital gains tax(unless there are any applicable exemptions or reliefs).