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.
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.
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—which we'll explain more about 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)
- Property that isn't your main residence
- Your main residence if you've let it out, used it for business or it's very large
- 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 one of our accountants at GoForma.
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.
When does Capital Gains Tax not apply?
CGT doesn't apply in the following instances:
- Gifts made to a spouse or civil partner
- Sale of your main residence
- Gifting of personal possessions (capped at a limit of £6,000 per year)
- Sale or gifting of cars (used for non-business purposes)
- ISAs and Peps
- Proceeds from a life insurance policy
- Lottery winnings
- Child trust funds
- National Savings & Investments (NS&I) products
Capital Gains Tax Rates: 2021/22 & 2020/21
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.
Refer to the HMRC website for the CGT rates for previous tax years.
CGT Allowance: 2021/22 & 2020/21
The CGT allowance for the 2021/22 and 2020/21 tax years is £12,300. Refer to the HMRC website to find out the CGT allowances for previous tax years.
This is the amount of gains you can make from a property or asset, before CGT is applicable.
If your asset is jointly owned with another individual, you can use both your CGT allowances. Instead of £12,300, the total CGT allowance on a joint asset could amount to £24,600. And if the asset isn't jointly owned, you're able to reducey our CGT liability by transferring assets to a spouse or civil partner.
You won't be able to carry forward any unused portion of your CGT allowance to the next tax year.
How to Calculate Capital Gains Tax
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.
Filing & Paying Capital Gains Tax
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.
- Investor's Relief: Investors' Relief applies to the disposal of ordinary shares in an unlisted trading company by an individual investor. It applies to disposals made after 6 april 2019, and were held for at least three years up to the date of disposal.
- Business Asset Disposal Relief: Previously known as Entrepreneur's Relief, BADR reduces the CGT rate you pay on qualifying profits to 10%, if you sell all or part of your business. From 11 March 2020, the lifetime limit is capped at £1m.
- Business Asset Rollover Relief: The Business Asset Rollover Relief allows you to delay paying CGT, if proceeds from the disposal of qualifying business assets are used to purchase a replacement.
- Incorporation Relief: Incorporation Relief is available to individuals or partners (in a business partnership) who are running an unincorporated business, and are transferring the business, along with its assets (except for cash) to a limited company in exchange for shares. The individual can then delay paying CGT until the disposal of the shares. More information is available on HMRC's guidance on Incorporation Relief.
- Gift Hold-Over Relief: When the Hold-Over Relief is applicable, an individual doesn't need to pay CGT when he or she gifts a business asset; the receiver of the gift will pay CGT when they dispose of the item.
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.