Capital Gains Tax (CGT) applies when chargeable assets are disposed of and is applicable to individuals and trustees but not to limited companies, although Limited Companies do pay Corporation Tax on the gains that they make.
Chargeable assets include all forms of property unless it is specifically exempt. The main assets it tends to apply to are land and buildings, shares and business assets including goodwill. CGT can be very complex and the rules are far more detailed that can be explained in this brief summary.
A capital gain occurs when the value of an asset at the date it is disposed of is higher than when it was acquired. An asset can be disposed of either by sale or by gift. If you give away an asset away in an uncommercial transaction, the market value will replace any actual consideration paid.
For assets acquired before 31 March 1982 the cost is usually taken to be the value on that day, although actual cost can be used in some circumstances.
The following also reduce the amount of the chargeable gain…
CGT is charged at the rate of 20% where the total taxable gains and income are above the income tax basic rate band. Below that limit, the rate is 10%. For residential property (that does not qualify for private residence relief), and carried interest, CGT is charged at 28% for gains above the basic rate band and at 18% below this limit. For trustees and personal representatives of deceased persons, the rate is 20% (28% for the disposal of residential property).
Business asset disposal relief (BADR) (formerly known as entrepreneurs’ relief (ER)) can apply when you sell part or all of your business, or shares in your own company after 5th April 2008. Broadly, providing certain conditions are met, BADR allows the capital gain to be taxed at the rate of just 10%.
There are some tight restrictions to BADR. It applies to gains made after 6 April 2008. For disposals on or after 11 March 2020, the relief applies to the first £1 million of qualifying lifetime gains. Gains in excess of this limit or which do not qualify for other reasons will be taxed at 10% or 20% (18% or 28% for residential property and carried interest).
There are certain types of investment which have been designed with preferential tax treatments for Capital Gains Tax and Income Tax, mainly to encourage investment in new companies and also to encourage employees to own shares in the companies they work for.
Schemes include the Enterprise Investments Scheme (EIS) which gives income tax and capital gains tax relief on investments made in companies with assets worth less than £15million. A similar scheme Seed Enterprise Investments Scheme (SEIS) with similar reliefs for smaller companies.The Enterprise Management Incentive Scheme is a share option scheme which can be used to provide tax efficient targeted incentives to key employees or employee groups.
See our helpsheets that deal with EIS, SEIS and EMI in more detail.
CGT is generally paid through the self-assessment system and gains and losses must be declared on your self-assessment return. The gains after all reliefs and exemptions are added to your taxable income and then taxed at your top marginal rate. The tax is usually payable by 31 January following the tax year in which the gain arose.
There are special rules for paying capital gains tax arising on disposals of UK land and property. From 6 April 2019 non-UK residents directly or indirectly disposing of UK land, and from 6 April 2020 UK residents directly disposing of UK residential property, must report disposals to HMRC and pay any tax due, within 30-days of the completion of the disposal.
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