Capital gains tax is the tax charged on the increase in value of an asset that you sell, which you have held for more than one year. The amount of tax due, is calculated on the amount of gain made. This is the increase in value of the sale price, compared to the purchase price.
What is Capital Gains Tax Charged On?
This guide will help you understand capital gains tax and how it works. It’s important to understand how it applies, to avoid triggering a tax enquiry. There are also various rules to help you navigate your tax bill. Talk to Prestige Business Management for comprehensive guidance and tax planning.
Typically capital gains tax applies to:
- Investment funds
- Second properties
- Inherited properties
- The sale of a business
- Valuables including art, jewellery, and antiques
- Assets transferred at below their market value
How Does Capital Gains Tax Work?
Capital gains on such assets are currently taxed at different rates to income tax. The reason for this is because purchasing assets is considered taking a risk. Whether entrepreneurial or an investment, the additional risk carries the potential for greater reward. The rate of capital gains tax you are charged depends on two factors. Firstly which type of taxpayer category you fall into, be it basic rate, higher rate, or additional rate tax. Plus the type of asset you have sold. HMRC publishes the current capital gains tax rates.
Annual Capital Gains Tax Threshold
The annual capital gains tax allowance is £12,300. This is the amount of profit you can make before capital gains tax is applied. If your capital gains are below this amount within the tax year, then there will be no tax liability. It is important to note however that you can’t carry this forward to the following year if you don’t make use of the allowance when selling your assets. When your gains are over the annual allowance, you have to apply the appropriate rate to the gain you have made on the asset(s) you have sold. This means that when selling an applicable asset, if your gain is under the threshold, you will not owe any tax on it. However if your gain is over threshold, you will owe tax on the full amount of the gain, at the rate which is relevant to the band in which you currently pay tax.
Partner Owned Assets
If you own an asset with another person, such as in a marriage, you can apply both your allowance, doubling the threshold. This means that in the sale of a second home for example, you can make a gain of up to £24,600 before capital gains tax becomes applicable. You are also able to transfer assets between partners in a marriage or civil partnership to help reduce your capital gains tax liability. If you do transfer an asset to a partner and later make a gain on selling it, the amount of capital gains tax due will be based on the total time you owned the asset as a couple, as opposed from the date when it was transferred to your partner. Good record keeping will help you keep your financial affairs in order. It’s important to note here that you should always take specific advice on this from your accountant because other reliefs may apply.
If an asset you own was inherited, capital gains tax is not liable until you sell it. You need to know the value of the asset when it was passed down to you as this then acts as the effective purchase price. This is usually the probate value on the date of death. If you sell the asset during the period of estate, there could be a gain and capital gains tax is then due. The period of estate is the length of time between the date of death to the completion of the administration of the estate. When you are the beneficiary in a will, keep notes on the value of assets because the amount of capital gains tax you will then owe will be based on the gain from the sale price compared to the price at the time you inherited it.
Capital Gains Tax Relief
There are a number of tax reliefs introduced by various governments over the years that you can potentially access, depending on your circumstances and with good guidance from your accountant.
Some of these include:
- Principal Private Residence
- Investor relief
- Roll over relief
- Hold over relief for gifts
Business Asset Disposal Relief (BADR)
Formerly known as Entrepreneurs’ relief, BADR is designed to incentivise people to grow a business. It does this by reducing capital gains tax to a flat rate of 10%, rather than the higher rate of 20%. BADR applies to the first £1m of gains from selling a business. The 10% rate applies no matter what your level of income. Also, there is no limit to how many times you can claim within the £1m lifetime allowance. BADR is available on the disposal of partnership assets and gains subject to additional conditions. There are a number of conditions to meet for BADR to apply:
- The seller of shares has to be an officer or employee of the organisation
- The person making the gain needs to own at least 5% of the ordinary share capital of the business
- The business has to have been trading in the 24 months preceding the date that the shares are sold
- These are subject to a number of anti-avoidance restrictions that must be considered when reviewing your tax position.
Principal Private Residence
This is a tax relief that permits taxpayers to sell their main homes without liability to pay capital gains tax. To qualify for this relief the property needs to be (or have been) your main residence. If the property was your main residence for the entire period of ownership, then there is no tax liability. If you sell a property other than your main residence during the period of ownership, then capital gains tax may apply. PPR can provide you with a period of exemption for 9 months. This is known as the final period exemption. What this means is that even if the property was rented out, you will get PPR relief if you have lived in the property at some point the last 9 months of ownership. In which instance you will not owe capital gains tax on gains made during that final 9 month period. This type of tax relief has been useful for couples getting a divorce whereby a property needs to be sold and assets divided. The date of separation is really important in this instance and a capital gains tax bill could be due if not properly executed. It’s important to note that if you are disposing of a second property, you only have 60 days after completion to declare the capital gain and make any potential payment to HMRC.
This provides individual investors with relief from capital gains tax to individual investors on the disposal of investments in ordinary shares. The relief reduces the tax rate on gains to 10% for higher rate taxpayers. Disposals have to have been made after 6 April 2019 and the investments have to have been held for 3 years and made on or after 17 March 2016. The relief is subject to a lifetime cap of £10m. Shares have to be subscribed for in cash and the business being invested in must be trading or the holding company of a trading group.
Roll Over Relief
Where trading assets are sold and replaced with new assets, roll over relief is applied using the proceeds from the sale. The capital gain from selling a trading asset can be deferred against the cost of purchasing another asset for the business. The chargeable gain is then deducted from the cost of the new asset. To qualify for roll over relief the assets must be used for the purposes of trading. Additionally the new asset(s) must be purchased from 12 months before the disposal and no more than 3 years after. In instances when you only use part of the sale proceeds to purchase the new asset, the relief is restricted. And finally, the new asset must be used for trading purposes as soon as it’s purchased.
Hold Over Relief for Gifts
capital gains tax applies to gifts you might receive, from people who aren’t your spouse or civil partner. Hold over relief is applicable if you are gifted an asset. They won’t have to pay any tax on the effective sale of the asset. Just as with capital gains tax and inheritance, you need to conduct a valuation at the point when you’re given the asset. When you sell the asset, any gain will be calculated from the price on the date it was gifted to you.
If you make a profit from the sale of one asset but lose money on the sale of another in the same tax year, your capital gains tax bill can take account of both profit and loss. This means that you can subtract the loss from the profit to calculate your total capital gains tax liability where conditions are met. Additionally you can carry forward any losses that you haven’t used to offset your gains. You should state specific losses when you file your tax return, even if you haven’t made any gains and capital gains tax isn’t due. This means it will be easier to offset the loss against any potential future gains.
When Capital Gains Tax Does Not Apply
Some assets and conditions are exempt from capital gains tax such as the following:
- The sale of your main home
- Gifts between married and civil partners
- The sale or gifting of cars that aren’t used for business purposes
- The gifting of personal possessions to a limit of £6,000 per year
- Wasting assets, namely those with a useful lifespan of 50 years or less
- ISAS and Peps
- Gold, silver, and platinum coins
- Gifts to charities
- Betting and lottery winnings
- UK government gilts
- The proceeds of life insurance policies
- National Savings & Investments products, child trust funds, and pensions
- Employee shares held in approved share incentive schemes
- Gains on some tax efficient investments
What About Cryptocurrency Gains?
Interestingly the government does not treat cryptocurrencies the same as money. If you are UK based and you have made gains by investing in cryptocurrencies then you will be taxed on the related profits. So you will be taxed on the gains from crypto assets in the same way as capital gains tax is applied to the gains generated from selling shares. Capital gains tax doesn’t apply to the paper (unrealised) gains of cryptocurrencies, your gains are realised when you trade it for other cryptocurrency, or convert it into pounds sterling. Your annual capital gains tax allowance is applied and your profits are calculated based on the difference between how much your cryptocurrency cost you versus how much you sold it for, as with your other assets. Cryptocurrencies can be traded rapidly which then makes working out the capital gains tax liability a bit tricky. This is why you will need to take into account the 30 day rule which prevents people from using the capital gains tax allowance each year by selling shares and then buying them back the next day. This can increase the purchase price and therefore potentially help minimise capital gains tax exposure. If you sell shares, you will have to wait 30 days before re-investing in those very shares. If you do not wait for 30 days then ‘matching’ rules apply which stop the base cost being reset. Whilst you may purchase assets using cryptocurrency, this in itself can trigger a capital gains tax liability. For instance, if you purchased an asset for £100,000 using Bitcoin, and your bitcoin cost you £90,000 then capital gains tax will apply to the difference of £10,000. Cryptocurrency forms part of your estate as an asset which means it is potentially subject to inheritance tax, if you pass it down to beneficiaries after you pass away.
Capital Gains Tax Planning
With a number of taxes including capital gains tax, it is important to consider how they interact. It is common for Stampy Duty, VAT, Income tax and Inheritance Tax to be included in your tax planning, so take care not to treat your capital gains tax planning in isolation from these other taxes.
At Prestige Business Management we can help your Business
At Prestige Business Management we can help you understand and manage your tax planning. Find out what we can do for you. Call us today on 0203 773 2927.