Capital Gains Tax comes into play when you make a profit from selling something you own. The important point to remember is that the tax is calculated on the profit you make, and not the amount you sold it for. As the name suggests, it’s all about the gain!
So, Capital Gains Tax is essentially a tax on any profit you made on the disposal of an asset and it applies to most assets when they’re sold. There are some exceptions, however – for example, your car, your main place of residence if you own your home, and personal possessions sold for £6,000 or under are all exempt.
You don’t pay Capital Gains Tax when you sell your car, unless you use it for business. There are also some complex rules for assets with an expected life of under 50 years.
Capital Gains Tax also applies to assets received as gifts from other people (though not usually your spouse or civil partner). A valuation needs to be made of how much the asset is valued at when gifted, and if a capital gain arises when you dispose of the asset, tax is applied. There is tax relief available for gifts, so please speak with an accountant for more advice.
If you inherit an asset then you won’t have to pay Capital Gains Tax until you sell it – at which point you will need to know how much it was valued at the time you inherited so that you can calculate and if necessary report the gain on your tax return. It can be a good idea to keep a record of these assets so that if you ever do decide to sell, you’ll have the necessary information to hand. This might also be useful in case you need to let your insurers know if an asset you inherit is particularly valuable.
How much can you currently gain before paying Capital Gains Tax?
For the tax year 2018/19, you were exempt from having to pay Capital Gains Tax on the sale of any assets if the profits made were less than £11,700. In the 2019/20 tax year, the tax-free amount is £12,000. This is known as the annual tax-free allowance or the Annual Exempt Amount.
If you don’t already complete a Self ssessment you will need to register with HMRC by 5th October following the end of the tax year in question to enable you to submit one.
Capital Gains Tax Rate
The following Capital Gains Tax rates apply for the tax years 2018/19 and 2019/20 (the tax rate you use depends on the total amount of your taxable income and your marginal rate of personal tax, so you need to work this out first):
- 10% or 20% tax rates for individuals (not including residential property)
- 18% or 28% tax rates for individuals for residential property and carried interest
- 20% for trustees or for personal representatives of someone who has died (not including residential property)
- 28% for trustees or for personal representatives of someone who has died for disposals of residential property
- 10% for gains qualifying for Entrepreneurs’ Relief.
Other rates and thresholds
The UK has many different tax rates affecting both individuals and businesses – and as a business owner you’ll be affected by all of them. Check out the Tax year 2019-20 changes for more information.
Where can I get more help?
If you’ve got questions about tax and how it affects you or your business, maybe you need support from an accountant?
At Smart Accounting, we offer a complete online accounting service. Get simple online accounting software, unlimited access to advice from expert accountants, and your very own client manager.
We can help with all of your business and personal tax and financial planning needs. For a strategic review of your finances, please contact us.
This guide was written specifically for Smart Accounting clients. Some of the information contained in this guide might not be applicable if you do not have a business managed by Smart Accounting. By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details are correct at time of writing.