What is Capital Gains tax & what are the rates?

Chris Andreou

June 9, 2021

capital gains tax in uk guide

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Tax

Introduction

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)

Gifts

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. 

Inheritance

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).

Other circumstances

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
  • Gilts
  • Proceeds from a life insurance policy
  • Lottery winnings
  • Pensions
  • Child trust funds
  • National Savings & Investments (NS&I) products

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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.

Capital Gains tax APR

Entrepreneur's relief: 10%

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: 

  1. 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.  
  2. Sum up the gains from all assets you've disposed of during the tax year.
  3. 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

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Tax Reliefs

  • 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.

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What are Benefits in kind?

Benefits in kind-also commonly referred to as fringe benefits or perks-are benefits provided to a director or employee that aren't included in their salary or wages. These can be assets or services, such as company cars, private health insurance or non-business travel and entertainment expenses.

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When do I pay Corporation Tax?

Your corporation tax bill is due nine months and one day after the end of your accounting period. For example, if the end of your accounting period falls on 31st March, your corporation tax payment will be due on 1st January.

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How do I know how much tax to put aside?

When it comes to setting aside money to pay your tax bill, the general rule of thumb percentage for self-employed individuals is 25% - 30%.

This figure will vary depending on the amount of profit you report. If your profit falls between £50,000 - £100,000, it is recommended that you set aside 40% for tax. And if your profit exceed £100,000, you should be setting aside 45% for tax.

Bear in mind that these are general recommendations, and may not be an accurate estimation depending on your circumstances. HMRC's ready reckoner tool can help you work out an approximate figure you need to set away each month. We recommend consulting our Forma accountants if you need further tax advice.

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What are Tax Periods?

A tax period refers to a period prescribed by a governmental authority for which a tax return is required to be filed, or a tax is required to be paid.

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How to reduce your Corporation Tax bill

As a small business owner, staying on top of your finances can seem overwhelming, particularly when you're just starting out.

One of the key areas you need to keep an eye on is your taxes, and that's tricky subject to navigate. You want to reduce your tax bill wherever possible-and be in the good books of HMRC while doing so.

Below, we'll share a few simple tactics you can implement to reduce your Corporation Tax. Keep in mind that these are tactics that apply to businesses in general, and depending on your situation or industry, there could be other tax reliefs that may apply.

And as your business grows, there may be allowances or deductions that you now qualify for, but missed out on applying for previously. As such, we highly recommend checking in with our accountants at Forma to clarify any tax issues you're unsure about.

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How do I receive trading and property income allowance?

"According to HMRC, you can claim trading allowance if you have trading income from:

  • Self-employment
  • Casual services
  • Hiring personal equipment

You can claim the property allowance if you have income from land or property.

You won't be able to claim the allowances if you have trade or property income from:

- A business that you or an individual connected to you owns or controls
- A partnership where you or individuals connected to you are partners
- Your employer, or your spouse's or civil partner's employer

You can't claim the property allowance if claim:

- Claim the tax reducer for finance costs such as mortgage interest for a residential property
- Deduct expenses from income from letting a room in your own home, instead of using the Rent a Room Scheme"

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What is the UK Corporation Tax rate?

The corporation tax rate for company profits is 19%.

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What is Capital Gains Tax?

Capital gains tax (CGT) is a type of tax applied to 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.

You're required to pay CGT when you sell assets such as personal possessions worth £6,000 or more, 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, as well as business assets.

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How do I submit a tax refund?

As a self-employed person, you're not required to make a separate claim for a tax refund, as you can claim it through your Self Assessment tax return.

If you've overpaid your payments on account, you can request a refund by completing form SA303.

If you've made a mistake on your Self Assessment tax return, you need to amend or correct the return using the Self Assessment portal. You may be asked to show proof of evidence.

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What is Capital Gains tax & what are the rates?

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.

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What are Capital Allowances?

Capital allowance is an expenditure you can claim on assets you purchase for use in your business.

In addition to the purchase of business assets, you can also claim capital allowances for renovating business premises in disadvantaged areas in the UK, extracting minerals, research and development, patents and more. Further information can be found on the HMRC website.

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How much is UK corporation tax?

The corporation tax rate for the 2020/21 financial year is 19%. The corporation tax rates for previous years are listed on the HMRC website.

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What is a Company Tax Return, CT600?

All active limited companies in the UK are required to file a company tax return, otherwise known as the CT600 form.

The CT600, along with supporting documents are submitted to HMRC annually to report a company's spending, profit and corporation tax to HMRC.

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How do I pay Scottish income tax?

When you fill in your Self Assessment tax return online, you can check the tick box to inform HMRC that you pay Scottish income tax.

If you're employed or get a pension, your tax code will start with an ‘S'. This is an indication for your employer or pension provider to deduct tax at the Scottish rate.

See HMRC's resource for more information on Scottish income tax.

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Company car tax: The basics explained (and recent changes you need to know)

The tax implications of providing a company car can be complex-and made even more confusing by HMRC's tax changes.

To help you along, we've put together an article that will guide you through the essentials.

We'll start with the basics, explaining who pays for company car tax and how it is calculated, before we run you through a quick summary of tax rates changes that were announced in July 2019.

Our article will likely answer the key questions that you have surrounding company car tax, but bear in mind that it isn't a substitute for professional advice. If you have further questions about tax and how it affects your business, do reach out our accountants at Forma for personalised advice.

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What are Trivial Benefits?

A staff benefit is deemed to be a 'trivial benefit' when:

  • it costs £50 or less to provide
  • it isn't cash or a cash voucher
  • it isn't a reward for an employee's work or performance
  • it isn't included in the terms of an employee's contract

You're not required to pay tax on, or notify HMRC about trivial benefits.

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How do I receive a tax incentive benefit?

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How do I receive tax free childcare?

To get tax-free childcare, you need to:

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How do I reduce corporation tax?

You can reduce your corporation tax bill by:

  • Claiming your business expenses
  • Paying yourself a salary
  • Taking advantage of HMRC's incentives for early tax payment
  • Taking advantage of tax allowances and reliefs
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When must I pay my corporation tax?

Your corporation tax bill is due nine months and one day after the end of your accounting period. Do note that in the first year of setting up your company, your annual accounts will typically cover more than 12 months-and as such, you'll have two payment deadlines for your corporation tax.

Different payment rules and deadlines will apply if your taxable profits amount to more than £1.5 million.

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How do I find a my tax status?

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Corporation tax basics: What you need to know

Corporation Tax refers to tax you pay on money your company or association makes from trading profits, investments and chargeable gains.

It is calculated and paid on an annual basis, based on your ‘accounting period' for corporation tax. This is typically the same as your company's financial year. Limited companies, foreign companies with a UK branch or office, clubs, co-operatives and unincorporated associations are required to pay corporation tax on profits.

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When is corporation tax due?

Keep in mind that unlike most taxes, the deadline for paying your corporation tax bill is earlier than the deadline for your tax return.

Your corporation tax bill is nine months and one day following the end of your accounting period. If the end of your accounting period falls on 31 March 2019, you'll need to make your payment by 1 January 2020. The payment is made once a year if your profits fall below £1.5 million. Payment is made in instalments for businesses with profits exceeding £1.5 million.


What is the current corporation tax rate?

The current rate is 19% for the 2019/20 tax year. For the tax year starting 1 April 2020, the rate will be reduced to 18%.

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What are Child Benefits?

Child benefit is a series of welfare payments and tax credits made to parents or individuals who are responsible for bringing up a child.

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How do I pay Corporation Tax?

There are various ways you can make your corporation tax payment:

  • Same day or next day payments: CHAPS, online or telephone banking (Faster Payments)
  • Three working days: BACS bank transfers, Direct Debit, debit or credit card payment online, payment at a bank or building society
  • Five working days: Direct Debit (if you haven't set up a Direct Debit previously)
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When is my company tax return due?

The deadline for filing your company tax return is 12 months after the end of the accounting period it covers.

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What is Corporation Tax?

Corporation tax refers to tax you pay on the profits earned by your company. You'll need to register for corporation tax within three months of trading commencing.

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What are the 2020/21 Income Tax & National Insurance rates?

The income tax rates, along with the Class 2 and Class 4 National Insurance rates for 2020/21 are as follows:

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When is corporation tax due?

Your corporation tax bill is due nine months and one day after the end of your accounting period. Do note that in the first year of setting up your company, your annual accounts will typically cover more than 12 months-and as such, you'll have two payment deadlines for your corporation tax.

Different payment rules and deadlines will apply if your taxable profits amount to more than £1.5 million.

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How does tax change as a contractor?

The biggest change when working as a contractor compared with say working as an employee is that you will become a lot more aware of the taxes you are paying. This because contractors have a lot more control over their finances and taxes with the added responsibility of making sure this is paid correctly and on time.

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