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Capital Gains Tax Calculations and Advice

What is Capital Gains Tax?

Capital Gains Tax is wide ranging tax on the profit you make when you sell, transfer or give away significant personal assets such as

  • Personal possessions worth more than £6,000 such as antiques or paintings
  • Second homes, including rental property
  • Shares (unless they are in an ISA)

Capital gains tax is also charged on the profit made on business assets by sole traders & partnerships.

Business assets include

  • Land and buildings
  • Shares in your limited company
  • Registered trademarks
  • Goodwill

Companies pay corporation tax on profits from selling their assets. You can read more about how companies pay tax on our Corporation Tax page.

Calculating a Capital Gain

At its simplest, a capital gain is calculated by deducting from the sale proceeds of an asset:

  • what you originally paid for it (or its market value at the date you inherited it or when it was given to you);
  • any costs you incurred when you bought it (e.g.: solicitors fees for buying a property);
  • any costs you incurred enhancing or improving it; and
  • any costs you incurred when selling it (e.g.: commission to a sales agent or auction house).

Gains are potentially subject to Capital Gains Tax but there are a wide range of tax reliefs (see below) that can be used to reduce or defer the tax that you pay.

This is an area where expert advice can result in significant tax savings. If you are planning on disposing of any personal and business assets we will be able to calculate your capital gain and advise if there are any ways you can minimise your capital gains tax bill.

If you would like a free no obligation meeting to discuss how we can help with capital gains tax planning and calculations just get in touch.

Capital Gains Tax Rates

Individuals can make a certain amount of tax free capital gains each year. This ‘annual exempt amount’ is currently £11,700 for individuals and £5,850 for trusts.

CGT is charged at a simple flat rate of 20% (2017-18: 20%) and this applies to most chargeable gains made by individuals. If taxpayers only pay basic rate tax and make a small capital gain they may only be subject to a reduced rate of 10% (2017-18: 10%). Once the total of taxable income and gains exceed the higher rate threshold, the excess will be subject to 20% CGT.

An 8% surcharge applies to the sale of chargeable residential property such as rental properties and second homes.

A lower rate of 10% applies to capital gains that qualify for entrepreneurs’ relief (ER) or investors’ relief (IR).

Limited companies do not pay CGT. Instead they pay Corporation Tax on their chargeable gains which qualify for fewer reliefs and exemptions than those available to individual taxpayers.

Payment of Capital Gains Tax

Capital Gains Tax is due for payment on 31 January following the end of the tax year.  For example, for the tax year ending 5 April 2018, any Capital Gains Tax due must be paid by 31 January 2019 to avoid penalties and interest.

If you complete a self-assessment tax return, you are required to notify HMRC of any taxable gains on the capital gains pages of the return. If you are claiming any reliefs or allowances you will need to provide full details in the tax return.

If we are completing your tax return, we will ensure that it contains full details of any capital gains and reliefs claimed.

If you don’t usually complete a self-assessment tax return you must notify HMRC that you have a Capital Gains Tax liability by 5 October following the end of the relevant tax year. HMRC will then issue a tax return and this must be completed, and any tax paid by the usual deadline.

You can read more about self-assessment tax returns, including the deadlines and penalties for late filing on our Self-Assessment Tax Return Page.

You are only required to report capital gains as and when you have a liability to pay Capital Gains Tax.  In most cases therefore no return is required where total gains in a tax year are less than the annual tax-free allowance. Of course, someone needs to prepare the calculations to establish whether there is a liability to Capital Gains Tax.

Capital Gains Tax Planning

Careful planning can reduce or eliminate Capital Gains Tax. Disposals of capital assets should be timed to ensure that you utilise your allowance each year. Planning can also involve making good use of capital losses and transferring assets between spouses.

Losses

Sometimes you may sell an asset for less than paid for it. In such circumstances you would make a capital loss. You can typically deduct capital losses from capital gains made in the same or future years.

Inter spouse transfers

You and your spouse or civil partner are treated as separate individuals for Capital Gains Tax purposes. Each of you will pay tax only on your own gains and you will get relief only for your own losses. However, although you are taxed separately, you can transfer assets between you without generating a capital gain or loss (providing you are living together).

Normally the transfer of an asset (for example a gift) would be deemed to be at market value and a capital gain (or loss) would arise even if no money was involved. This is a useful tax planning tool as if one partner is a lower rate tax paper and the other pays higher rate tax it makes sense to transfer assets to the lower rate partner and pay less capital gains tax when they are sold.

If you would like a free no obligation meeting to discuss how we can help with capital gains tax planning and calculations just get in touch.

Capital Gains Tax Reliefs

There are numerous Capital Gains Tax reliefs and obtaining advice to ensure that you make full use of them could save you a significant amount of tax. This is a complex area and one in which we are fully qualified to provide advice.

The most common reliefs are listed below. Please note that this is not intended as a full guide to each relief. The rules for each are complex and cannot be covered in full on this page.

Principal Private Residence Relief (PPR)

When you sell your home, the profit is tax free – most of us know that.

The formal name for this tax relief is the Principal Private Residence exemption, also known as PPR. It applies providing you have one home and you’ve lived in it as your main home for all the time you’ve owned it.

This important relief can also be used by buy-to-let property investors because there is a special PPR rule that applies to all properties that have been your main residence at some time during your ownership.

What this rule says is that in addition to the time that you lived in a property the last eighteen months you own the property are always exempt from Capital Gains Tax.

To give an example if you owned a property for 10 years and lived in it for 5 years, when you sold it after 5 years only a proportion of the capital gain would be chargeable to Capital Gains Tax due to Principal Private Residence Relief. The proportion chargeable would be 35%.

If you’ve lived in the property as your main residence at some point in the past (and during your ownership), you qualify for this tax break.

Letting Relief

Lettings relief may reduce the Capital Gains Tax payable on the sale of a property, which was at some point used as the taxpayer’s only or main residence, and which has also been let as residential accommodation. Letting relief can reduce the amount of the capital gain chargeable to Capital Gains Tax after the application of Principal Private Residence Relief.

Entrepreneurs Relief

This valuable relief usually applies if you dispose of:

  • all or part of your business as a sole trader or business partner – including the business’s assets after it closed
  • shares or securities in a company where you have at least 5% of shares and voting rights (known as a ‘personal company’)
  • shares you got through an Enterprise Management Incentive(EMI) scheme after 5 April 2013
  • assets you lent to your business or personal company

providing certain qualifying conditions are met. It reduces the rate of Capital Gains Tax to 10% on the entire chargeable gain.

Investors Relief

Investors’ relief was introduced under the Finance Act 2016 for investors in unlisted trading companies who hold their shares for a minimum of three years. The relief is intended to incentivise individual investors to acquire shares in such companies whereby a reduced rate of capital gains tax of 10% is charged on disposal.

Business Asset Rollover Relief

You may be able to delay paying Capital Gains Tax if you:

  • sell some business assets
  • use all or part of the proceeds to buy new assets

Business Asset Rollover Relief means you won’t pay any tax until you sell the new asset. You may then need to pay tax on the gain from the original asset

As usual there are various qualifying criteria and the full tax rules are much more complex than this simple outline.

Gift Holdover Relief

You may be able to claim Gift Hold-Over Relief if you give away business assets (including certain shares) or sell them for less than they’re worth to help the buyer.

Gift Hold-Over Relief means:

  • you don’t pay Capital Gains Tax when you give away the assets
  • the person you give them to pays Capital Gains tax (if any is due) when they sell the asset

Tax isn’t usually payable on gifts to your husband, wife, civil partner or a charity.

If you would like a free no obligation meeting to discuss how we can help with capital gains tax planning and calculations just get in touch.