Capital gains tax becomes payable on the profit that you make when you sell (dispose) of an assets whose value has increased in the time that you’ve owned it. You can claim capital gains allowances as you can find out in this article.
Just as with your income tax annual personal allowance, there’s a capital gains tax annual allowance which means you’re able to make up to a certain amount in profit every year before any capital gains tax becomes payable on it.
What are the capital gains tax rates and capital gains tax allowances?
For the tax year 2017/2018, the current capital gains tax rates and allowances are:
|Standard Capital Gains Tax disposals|
|Basic rate tax payers||10%|
|Higher rate tax payers||20%|
|Capital Gains Tax on non-primary residential
|Basic rate tax payers||18%|
|Higher rate tax payers||28%|
|Capital Gains Tax on the sale of businesses|
|Rate of first £10,000,000 of gain (life-time)||10%|
|Rate after first £10,000,000 of gain (life-time)||20%|
|Executors or personal representatives of a deceased
|Trustees for disabled people||£11,300|
What you can sell that doesn’t attract capital gains tax?
There are a number of different assets which are exempt from capital gains tax.
Your primary residence, where you live, doesn’t attract capital gains tax (in most cases). Neither does a car that you use regularly for travel.
Wise Accountant tip – HMRC are particular about what counts as your primary residence. It must be or have been your only or main place to live at some point during the time you’ve owned it. If you are a married couple or in a civil partnership, you’re only allowed to call one home your primary residence at any given time.
There’s no capital gains tax payable on any items you own that sell for less than £6,000.
The following monetary assets also attract no capital gains tax:
- your ISA and PEP savings accounts,
- interest on any government gilts you own,
- interest and winnings you’ve made on the Premium Bonds, and
- any money you’ve won betting, playing the pools, or on lottery games.
If you give something to your spouse or civil partner, or if you have received something from a charity, you don’t need to worry about paying capital gains tax on the gift.
What does attract capital gains tax?
All of the following must be considered for capital gains tax if you sell them for a profit:
- any personal possession with a value of £6,000 or more
- any property (residential or commercial) that is not your primary residence
- any shares in companies that you own that don’t form part of an ISA or a PEP
- businesses in which you hold 5% or more of the shares (this is to cover the sale of any business you own – this attracts a capital gains tax discount called Capital Gains Tax Entrepreneurs’ Relief – more on this later in the article)
Virtually every primary residence does not attract a capital gains tax bill on sale. However, if your primary residence does not tick all of the following boxes, you will need to consult with HMRC about a potential capital gains tax liability:
- this is your own home and it’s been your main home for significant periods of the time you’ve owned it
- no part of it has been let out (except for a single lodger)
- part of your primary residence has not been used exclusively for business
- the grounds of your home are less than 5,000 square metres in size (including all the buildings contained within your grounds)
- your main reason was not to profit from the accumulation of value through house price inflation.
Capital gains tax tax-free allowance
There are two levels of capital gains tax tax-free allowance currently in operation.
For most UK citizens, for the trustees of disabled people, and for the executors or personal representatives of a deceased person’s estate, the capital gains tax tax-free allowance (otherwise known and the Annual Exempt Amount) is £11,300 for 2017/2018.
The Annual Exempt Amount for trustees is half that amount – £5,650
Capital gains tax on chattels
A chattel is something which you can touch and can move that isn’t cash.
Some chattels, like a private car, are called “wasting assets” in that their predicted lifespan is less than fifty years. No capital gains tax is due on the sale of any wasting assets.
For assets with a potential lifespan of fifty years of more, like furniture, books, painting, antiques, and jewellery are types of chattel that can attract capital gains tax.
You can give a chattel as a gift to someone and the value of the chattel for capital gains tax purposes is set on the date you gave that gift to that person.
If you sell a chattel for less than £6,000, no capital gains tax is due.
If you sell a chattel for between £6,000 and £15,000, the amount of profit you declare for capital gains tax is dependent on the sale price you achieved and the actual level of profit or gain you made.
To work out capital gains tax on the sale of chattel where the price was between £6,000 and £15,000, this is the calculation.
- Work out the difference between the sale price and £6,000
- Take this amount, multiply it by five, and then divide it by three
- The amount you’re left with is the “maximum chargeable gain”.
Let’s say you bought an expensive and rare item of jewellery for £1,500. You have recently sold it for £13,000 and you paid the auctioneer £1,300.
- The difference between £13,000 and £6,000 is £7,000
- £7,000 multiplied by five is £35,000
- £35,000 divided by 3 is £11,666
£11,666 is your maximum chargeable gain on the jewellery.
If you want to work out the actual gain:
- Sale price of the jewellery is £13,000
- You bought the jewellery for £1,500
- You paid the auctioneer £1,300 to sell the item
- Take away the cost of the jewellery and the expense you incurred in disposing of it via the auctioneer from the sale price – £13,000 minus £1,500 minus £1,800 equals £9,700
You have two figures – £11,666 as the maximum chargeable gain and £9,700 as the actual gain. You use the lower figure as the one you enter onto your SA108 capital gains tax form.
For chattel sales where the sale price was £1,500 or more, you need to work out what the chargeable gain was and enter it from page 9 onwards on the SA108 capital gains notes form.
Capital gains tax on sets of chattels
A set of chattels are items that, in HMRC’s words are “similar and complementary to each other” and “worth more together than separately”. HMRC use the example of books by the same author.
For this example, let’s say you have an author’s complete set of 10 novels as first-print-run books and each book was valued at £1,000.
If you sold the 10 books separately to different and unconnected people, it would count as ten separate sales for capital gains tax purposes at £1,000. At £1,000, they are under the £6,000 limit and therefore no capital gains tax would be payable.
However, if you sold all 10 books to a dealer for £10,000, it would count as one sale to the value of £10,000 and not 10 sales to the value of £1,000 each. As the £10,000 amount is above the £6,000 limit, subject to your annual allowance, you would have to declare the sale as qualifying for capital gains tax consideration.
Capital gains tax on gifts & transfers and inheritance tax considerations
Anything that you transfer to your spouse of civil partner that has value is tax free.
Different rules apply if you gift something of value to a connected person. Under HMRC connected persons rules, this will include:
- relatives and their spouses/civil partners, and
- relatives of a spouse/civil partner and the spouse/civil partner of those relatives
When gifted to a connection person, the capital gains tax value of the gift is its market value. If you sell something to a connected person for less than it’s worth, the difference between what the person you sold it to paid you for it and the actual worth at the time is the value of the gift for capital gains tax purposes.
Capital gains tax, on occasions like these, can come into conflict with inheritance tax. If you give someone (or sell at below market value) a gift, you die, and your estate becomes subject to inheritance tax, the connected person will have to pay inheritance tax at 40% if you die within three years of giving the gift.
In years 4, 5, 6, and 7, inheritance tax taper relief is available to the connected person to whom you made the gift. Here is how the inheritance tax taper relief works:
|Years between gift and death||Tax paid|
|3 to 4||32%|
|4 to 5||24%|
|5 to 6||16%|
|6 to 7||8%|
|7 or more||0%|
Seven years after your death, no inheritance tax is payable on your gift because HMRC consider that the asset is now part of your estate.
Wise Accountant note – you can give £3,000 a year worth of gifts to a person and those gifts will not be liable for either capital gains tax or inheritance tax. The £3,000 a year limit is referred to as the “annual exemption per person rule”.
Wise Accountant note – if you end up paying inheritance tax on a gift, no future capital gains tax will become payable when you sell it.
A special capital gains tax break is available for people who are selling their companies
To qualify, you need to have owned your shares for more than 1 year and hold more than 5% of the available company shares. The relief is called Capital Gains Tax Entrepreneurs’ Relief.
You only pay Capital Gains Tax Entrepreneurs’ Relief on the actual gain you make.
You work out that gain by subtracting any professional fees like for solicitors and accountants from the cash amount your received for your shareholding.
That gain is then taxed at 10% and you need to make payment of the capital gains tax at your next Self Assessment. So, if you disposed of your shares in the business in November 2017, this is part of the 2017/2018 tax year. Your Self Assessment form and payment would be due on the 31st January 31st 2019 and it’s by this date that you must make your Capital Gains Tax Entrepreneurs’ Relief payment.
Over your lifetime, you can claim up to £10m worth of relief under Capital Gains Tax Entrepreneurs’ Relief. Above that rate, you pay 20% on further business sales.
Wise Accountant note – Capital Gains Tax Entrepreneurs’ Relief only applies to share sales and not to asset-and-goodwill sales. Asset-and-goodwill sales will attract corporation tax.
Wise Accountant note – many company owners receive staged payments when they sell their share of the business. Please note that, if for whatever reason, you do not receive all the money promised in the sale and purchase agreement, Capital Gains Tax Entrepreneurs’ Relief is only due on the money you actually are paid.
Income tax trade losses
Sole traders and businesspeople in unincorporated partnerships are allowed to carry back or forward any trading losses you make against profits you’ve made in the same line of business.
You also have an additional benefit in that you can use any income tax losses you’ve accrued to offset capital gains tax in the year you made the loss or the year prior to that.
Wise Accountant tip – please note that while income losses you incur in the first four years of your trading can be carried back against the income you made in the prior three years, this cannot be used to reduce capital gains tax.
SEIS and EIS
If you invest in an EIS scheme, you can benefit from capital gains tax deferral relief. You qualify for this if you invest into an EIS scheme in a period of time that spans one year before and three years after you derive benefit from your gain.
Wise Accountant note – please refer to your accountant if this describes your situation as it is not always clear cut that you will get the maximum benefit if you defer.
SEIS investors can defer 50% of their capital gains tax to the value of their investment. If you invest £30,000 into an SEIS scheme and you’re an additional rate tax payer, your exemption will save you £4,200. How this is worked out is that 28% of £30,000 is £8,400 and 50% of this figure is £4,200.
If you’re a basic rate tax payer, your CGT rate is 10% meaning you’ll save £1,500 on an SEIS investment. For higher rate taxpayers whose CGT is 20%, the saving is £3,000.
As investors in SEIS and ESIS schemes, you will also benefit from income tax relief.
On an EIS scheme, you receive 50% income tax relief against your EIS investment. So, if you put £30,000 into an EIS scheme, you can legitimately deduct £15,000 (50%) of the investment against your income tax bill. With SEIS, the income tax relief is 30% meaning that a £30,000 SEIS investment would entitle you to claim back £10,000.
To qualify for this income tax relief on both SEIS and EIS schemes, you need to hold onto your shareholding for a minimum of three years.
If you do choose to sell up before the three years, SEIS and EIS investors can claim exemption from capital gains tax on the investments you claimed income tax relief on earlier.
Capital gains tax is a big subject and working with your accountants means you’ll be able to minimise your exposure to it as much as possible.