This can apply even if you give an asset away, as you pay tax on the gain, not on how much you’ve received, and the rate of tax you’ll pay varies between 10% – 28%.
Unfortunately, with all things tax related, you can’t choose whether you pay CGT or not. But being organised for when you do come to sell helps to avoid any unwanted surprises.
There can be a lot to think about when it comes to CGT, so we’ve asked Christine Wise, Tax Manager for some advice on what it means, how to prepare and if you can reduce your bill.
Let’s hand over to Christine…
CGT can be a forgotten tax sometimes. It’s a tax on transactions where you give away or sell an asset which has increased in value over your period of ownership.
It’s worth being mindful of what you may need to consider, should you sell. Below I’ve listed a more in-depth explanation of CGT, along with pointers to help make the complexity of taxable assets a little bit easier!
A breakdown of Capital Gains Tax
So, we’ve established that CGT is the tax you pay on profit when you sell an asset if the value has increased since it was originally bought.
The rate at which you pay CGT depends partly on what type of chargeable asset you sell, and on the income tax band in which the gain falls when it is added to your taxable income. A gain will always fall into your highest tax bracket.
CGT is charged at the rate of either 10% or 18% for basic rate taxpayers. For taxpayers who pay higher or additional rates of income tax, the rate is either 20% or 28%. The 18% and 28% rates apply only to disposals of residential property.
Who pays Capital Gains Tax?
Everyone who is a tax resident in the UK and who disposes of a chargeable asset is liable to CGT. Additionally, anyone who lives abroad and is a tax resident there but sells land or property in the UK will also be eligible.
There are additional rules for trustees and personal representatives- the rules are broadly similar but the tax is payable by the trust or estate, not the individual.
If you are in business as a sole trader or in partnership with others CGT may still apply, but there are also reliefs available which can reduce or negate the tax payable where the assets are passed on.
Limited companies don’t pay CGT directly, however any gains are calculated on a similar basis to individuals and included as part of the company’s chargeable profits for the year and they pay corporation tax on the gain at their marginal rate. Companies currently pay tax at 19% but the rate increases to 25% from 1 April for all but the smallest.
Examples of chargeable assets
Most assets are chargeable, but there are exemptions for cars, medals of Valor and cash, and a few others.
So, you should expect a tax liability if you sell:
- Land and buildings, whether residential or commercial
- Stocks and shares held outside an ISA or PEP
- Chattels – these are your personal items- anything from a tiara to a set of Chippendale chairs
There are happily some reliefs you can claim too, but bear in mind some do need to be claimed;
- Chattels valued at less than £6,000 are exempt and there is a partial exemption for assets valued over that figure
- Your main or only home is exempt to the extent it isn’t used exclusively for business and hasn’t been wholly let over your ownership period
- Share disposals to Employee Ownership Trust
- Holdover and rollover on business assets which defer the gain either into the same asset gifted to a relative or into the acquisition of a new asset used in the business
Every individual has a CGT annual exemption (AE), which for 2022/23 is £12,300. However from 6 April, it is reducing to £6,000 and £3,000 from April 2024. So if your total gains are below that you have no tax to pay. You may still have to tell HMRC about the gain as there’s a rule that states if sale proceeds are more than four times the AE, even if you make no gain, you have to disclose the transaction. You also have to tell HMRC if you sell at a loss if you want to set off the loss at a later date.
If you give away an asset, usually to someone you’re related to, then tax law says the open market value (OMV) has to be used as the disposal value when calculating the gain. If it’s an asset used in your trading business you can usually claim a relief which effectively means you don’t pay the tax now, but the person you give the asset to pays the tax when they sell the asset. It’s important to remember this has to be claimed, and if you acquired the asset by way of a gift you might have to pay more tax than you’re expecting if you agreed to hold over the gain when you were given it.
You should also bear in mind if you do give away a valuable asset inheritance tax can come into play.
Christine’s Capital Gains Checklist
Ensuring you pay the right tax and don’t incur the stress and cost of an HM Revenue & Customs enquiry is dependent on keeping good records, which brings me to my first point on my Capital Gains Checklist…
Keep records:
It might sound obvious, but you’d be surprised at how many people discard important documents. Keeping records is vital as often, the history of an asset is important so we can claim any relevant exemptions. In an ideal world, you’d know how you acquired the asset, purchase or gift, and when. If it was a gift, its important to know who the gift is from, its value at when you were given it, and crucially whether the donor made a holdover claim.
If you inherited the asset you will have acquired it at its Probate Value. The solicitor or executor of the estate should be able to tell you this, but passage of time often means records have been lost or destroyed.
If you have a managed share portfolio and you move from one platform to another, do keep the outgoing advisers final pack, as it’s not unusual for the new platform to be missing the acquisition costs.
Note any changes:
Have you made improvements to the asset, or for that matter partial sales? Sometimes people sell part of a garden but retain the main house. Did you have to replace a stone in that ring Aunt Mabel left you in her will? You can note these changes in either paper or electronic format.
Timing of selling:
The familiar saying of timing is everything can even be applied to selling assets. Here are a few examples as to why choosing when to sell is important;
If you sell an asset on the 6th of April instead of the 5th, you’ll have an extra 12 months until you have to pay the tax over to the HMRC. But watch out for the changes to the annual exemption coming over the next couple of years.
Depending on the size of the gain, you can half the tax you pay from 20% to 10% if you can dispose of the asset in a year when you have lower income.
Spread the disposal of assets over a number of years so that you claim your annual tax-free allowance each year rather than wasting it (as it can’t be carried forward). But bear in mind there are special rules if you’re selling a set- back to those Chippendale chairs!
Know the rules:
Usually transferring assets between you and your spouse or civil partner doesn’t give rise to any tax charges – they’re considered done on a no gain no loss basis. Gifting to other family members or unmarried partners are deemed at open market value.
Transferring on separation or divorce however has its own rules and is an area which can be tricky, so you’d be best advised to take professional advice.
Can I reduce my Capital Gains Tax bill?
The short answer is yes. You can put plans in place to reduce the amount on your CGT bill. These include:
Using your CGT allowance:
If you’ve made a variety of disposals in a year including residential property, your annual exemption should be set against the asset with the highest rate of tax. Don’t forget you now only have 60 days after the completion of a residential sale to notify HMRC of the gain and pay any CGT due. We’re seeing a lot of cases where this deadline has been missed and penalties incurred.
Spousal sharing:
If you’re married or have a civil partner then assets pass tax free between you. This means if one of you owns a valuable asset and you’re thinking of selling it can make sense to transfer a share to your other half. Seems simple but sometimes it isn’t- land needs to be property registered so there can be costs and time involved. If you have significant land in one name and you’re thinking of transferring to your spouse, we can chat in detail with you about the pros and cons.
Qualifying investments:
There are some investment products that allow you to defer a gain into the purchase of shares. An example of this is new start ups looking to raise funding. These aren’t appropriate for everyone as they carry a higher level of risk and you may lose your money, or, you might defer or even eliminate a gain entirely and make a profit in a new innovative business. Our wealth experts can guide you every step of the way if this is something you’re interested in.
Contributing to a pension:
Paying into a pension can also help to reduce CGT liability. Contributing to a pension effectively can increase the upper limit of your Income Tax band, which helps to reduce the amount you may need to pay on any gains you do make, keeping you in a lower rate band. Remember you have to make the pension contribution in the same year as the gain, and you have to have sufficient income, so professional advice is imperative.
Spread gains over tax years:
If you’re selling shares you can sell in tranches and utilise two or more exemptions and rate bands, so do consider if you are able to sell over a period of time. The same applies to a property portfolio.
Trading Business Assets:
If you sell something used in your trade, for example your premises because you want to move somewhere bigger or maybe even smaller, you have a window during which you can reinvest the sale proceeds into a new qualifying business asset and in effect, defer the gain until that asset is sold. It doesn’t have to be another building so you could rent new premises and roll the gain into the purchase of a new machine. This applies to individuals, partnerships and companies.
Selling your business:
This is definitely an area where your first inking of a sale should make you reach for the phone. Whether you’re a sole trader, a partner or an owner manager of a limited company there are valuable CGT reliefs available to you and the structure and timing of the deal can further minimise your taxes.
We’re here to help
The timing and structure of selling assets is extremely important in order to help keep the tax due to a minimum. If you are looking for advice on Capital Gains Tax, you can speak to one of our friendly Senior Tax Advisors by emailing [email protected]
