Every business owner, or any individual who sells a capital asset should be aware that a Capital Gains Tax (CGT) may apply. Therefore, it’s important that you have a basic understanding of the rules surrounding CGT—and we’ll explain more about the essentials in our article below.
What is Capital Gains Tax?
Capital Gains Tax (CGT) is a tax paid on profits made when you sell or dispose of an asset. As its name suggests, it’s the gain you make that is taxed—and not the amount you receive for the asset.
When is Capital Gains Tax applicable?
You’re required to pay CGT when you sell assets such as:
Personal possessions worth £6,000 or more (note: this doesn’t include your car)
Business assets (plant and machinery, shares, registered trademarks, etc)
You may need to pay CGT when you make a gift of assets to someone, and the rules will vary depending on who you’re giving the gift to. CGT also applies to assets that you’ve received as gifts; if there is a capital gain when you dispose of the asset, tax is applied. There are tax reliefs for gifts, and you can find out more about it on Gov.uk or by speaking with an accountant.
You don’t need to pay CGT when you inherit an asset. However, you pay have to pay CGT if you sell the asset, and the value of the asset has increased (relative to its value at the time you inherited the asset).
There may be certain instances where you’re considered to have disposed of an asset. One example would be when a valuable antique that you own becomes damaged, and you received an insurance payout as compensation. This may be considered a capital gain.
What are current Capital Gains Tax rates?
The rate that you pay depends on your total taxable income, so you’ll need to work this out before you refer to the rates below.
Here’s a step-by-step process for calculating your total taxable gains:
Calculate the gain for each asset (or calculate your share of the asset if you’re in a business partnership). Do this for all assets that you’ve disposed of during the tax year, and are required to pay CGT on. These include personal possessions, shares, property and business assets.
Sum up the gains from all assets you’ve disposed of during the tax year.
Deduct any allowable losses.
If your taxable gains are above your annual allowance, you’ll need to report and pay CGT. This can be done through one of the following ways:
Using HMRC’s ‘real time’ Capital Gains Tax service: Through the service, you’ll be able to report any gains and make your payment straight away, rather than wait until the end of the tax year. You need to report by 31 December after the relevant tax year. Keep in mind not to make any payment until HMRC sends you a payment reference number.
Filing a Self Assessment tax return: You can also file a Self Assessment tax return (you’ll need to register for Self Assessment before you can do so). This must be sent in by 31st October for paper returns, or 31st January for electronic submissions. After you’ve submitted your tax return, you’ll be notified by HMRC on the amount that you owe. You’re required to make your payment before HMRC’s payment deadlines.
Record keeping for Capital Gains Tax
You’ll need to keep receipts, invoices or bills that show the date and the amount of:
The original cost of the asset
Market value of the asset on other dates: If you’ve used the market value of the asset on specific dates (as opposed to its original cost) in your CGT calculation, you may need to get an asset valuation or appraisal.
Improvement costs paid: This refers to money that you spent on improving the value of the asset.
Additional costs paid: Legal fees, valuation fees, Stamp Duty, costs you’ve incurred to prove your ownership of the asset or fees paid for professional advice are some examples of additional costs that you may have spent to sell or dispose of an asset. These may be deducted in your CGT calculation.
Money you received for the asset: This includes instalment payments, or compensation such as insurance payouts.