Capital Gains Tax for Individuals in the UK
Capital Gains Tax is imposed when an asset that increased in value is sold. Let us look at cases when you do and do pay this tax, the rates and how they apply to you.
Capital Gains Tax is imposed by HMRC when you sell an asset that increased in value. However, not all the sum is taxed, only the profit that you make: when a piece of art is bought for £1 million but then sold for £1.5 million, only half a million is taxable.
In this article, we cover CPT tax that individuals pay. To learn more about the rules and the rates for companies, consult your accounting services provider.
Let us look at cases when you do and do pay this tax, the rates and how they apply to you.
What is a Personal Capital Gains Tax?
The capital gains tax (CGT) in the UK is a tax which is levied on the profits you make when selling a certain type of assets, like:
- most personal possessions that are worth over £6,000, except the car;
- property that’s not the main place of residence;
- main home if it was made available for let, used for business or is very large;
- shares that are not in an Individual Savings Accounts (ISA) or personal equity plan (PEP);
- any business assets.
When you can avoid paying Capital Gains Tax
Here are exceptions where the capital gains tax is not applied:
- A car — unless it is used for business;
- Any personal item with an expected limited lifespan of 50 years, unless used for business;
- Gifts to relatives, spouses, civil partners or charities;
- Main place of residence (if all clauses are met);
- Things you give away to charity.
UK citizens may also benefit from an annual tax-free allowance, or the Annual Exempt Amount (AEA). Most individuals who live in the UK are eligible for the AEA for capital gains tax allowance.
Capital gains tax is only payable if the total gain for a given tax year exceeds the AEA, which for the 2019/20 tax year is set at £12,000 for individuals, trustees for disabled people and personal representatives. For other types of trusts, it’s £6,000. Any unused AEA cannot be carried over to cover the gains obtained the next tax year.
Special Circumstances: Gifts and Inheritance
When figuring out how much tax needs to be paid on a gift, it gets tricky. Regardless of what possession is sold, an ancient Min dynasty vase that was a gift or a nice sports car from a spouse, the government wants its cut when the asset is later sold.
In such cases, it should be evaluated how much the item was worth at the time it was gifted. Likewise, if an asset is inherited, the beneficiary would not have to pay any capital gains tax until they choose to sell it.
How to submit tax information?
Mind that either way, the onus is on you to calculate the gains and the tax you must pay on them. To figure out how much tax you are to pay, you need to know how much an asset was worth at the time of purchase will determine if any taxes need to be paid and how much.
Thus, you need records indicating the price you bought something for and the price your buyer paid when you “disposed of the asset”. Keep a record of the value of assets and recreate them if they are lost or stolen. However, if the exact value is hard to determine, HMRC advises using the appropriate market value.
HMRC gives you two options to report your Capital Gains Tax obligations:
- Straight away via Capital Gains Tax service (for UK residents only);
- Annually when submitting your Self Assessment (SA) tax return in the tax year after you made your deal and had some gains. If you aren’t registered for SA, you can do it after you dispose of the valuable item. For the tax year (2019/20), the Self Assessment Form is to be submitted by 31st of January 2021.
Heavy penalties are imposed by HMRC on those submitting tax returns late, starting with £100. For any additional day taken, a £10 penalty will be added and the longer the delay, the bigger the fines become.
By the way, you can get in touch with us if you want to register your company in the UK.
What is the rate for capital gains tax?
The rate of capital gains tax in the UK is determined by the total amount of taxable income the person has. Individuals that are deemed to be basic-rate taxpayers, who have an annual income of £50,000 or lower, pay 10% less than the higher-rate taxpayers. Here is the full breakdown of the rates that have been in place since the 6 April 2017 onwards:
| Tax brackets | CGT on assets | CGT for property |
|---|---|---|
| Basic-rate | 10% | 18% |
| Higher or additional-rate | 20% | 28% |
Other rates include the following:
- 20% for trustees or personal representatives of someone who has died (apart from the residential property)
- 28% for trustees or personal representatives of someone who has died for disposals of residential property
- 10% for gains qualifying for Entrepreneurs’ Relief
- 28% for Capital Gains Tax on the property where the Annual Tax on Enveloped Dwellings is paid, the Annual Exempt Amount is not applicable
- 20% for companies (non-resident Capital Gains Tax on the disposal of UK residential property)
Profiting from a capital loss
Sometimes something can be sold at a loss, so what happens then? For example, a motorcycle that was £26,400 brand new may depreciate in price to around £16,400 in three years time. If sold, it would result in a capital loss of £10,000.
In that case, losses can be reported to the HM Revenue and Customs to reduce the amount of tax charged by the government of the capital gains that you made from selling other assets. You can claim your capital losses even if the tax year is already over — if fact, you have 4 more years after that to claim your tax reduction on those capital gains that you do make.
Jenna sold a motorcycle in 2016. Back then, the buyer talked her into a serious discount saying her Kawasaki was worn out. So Jenna sold the motorcycle £10,000 cheaper than she had bought it. The silver lining is that now, in 2019, Jenna can still claim a £10,000 deduction on capital gains tax and use it when selling her motorcycle garage.
