Capital Gains Tax may not be the most exciting topic, but it’s an essential aspect of managing your finances, especially if you’re considering selling assets like property, stocks, or investments.
In the UK, understanding when and how Capital Gains Tax applies can save you from unexpected tax bills and help you make informed financial decisions. So, let’s dive into the world of Capital Gains Tax and explore when you need to pay it. For more information, read on!
What Is Capital Gains Tax?
Before we jump into the details, let’s discuss what Capital Gains Tax is. This tax, often abbreviated as CGT, is a tax levied on the profit (or “gain”) you make when you sell an asset or investment. Capital Gains Tax is typically applied to assets like property, stocks, bonds, and even personal items worth £6,000 or more.
When Do I Need to Pay Capital Gains Tax?
One of the most common scenarios where you’ll encounter Capital Gains Tax is when you sell a property. Not only does this include your primary residence but also second homes, buy-to-let properties, and even business premises.
However, there are some exceptions and relief schemes in place for your main residence, so be sure to check those.
If you have investments, such as stocks, shares, or bonds, and you sell them at a profit, you may be liable for Capital Gains Tax. This applies to both individual investors and those who invest through ISAs or other tax-efficient accounts.
Capital Gains Tax isn’t just about property and investments. If you sell other assets, such as valuable artwork, antiques, or even your car, and the proceeds exceed the tax-free allowance, you may owe Capital Gains Tax.
While you generally don’t pay Capital Gains Tax when you inherit assets, you may become liable if you later sell those assets at a profit. In this case, the inheritance tax is calculated based on the asset’s value when you inherited it, not when the deceased person originally acquired it.
Finally, if you give an asset away or sell it for less than its market value, you may still be liable for Capital Gains Tax if the asset’s value is more than the annual tax-free allowance.
Annual Tax-Free Allowance
Now that we’ve covered when Capital Gains Tax may apply, let’s discuss the annual tax-free allowance, also known as the “Annual Exempt Amount.” In the UK, you are allowed to make a certain amount of profit each tax year before you have to pay Capital Gains Tax.
For the tax year 2023/2024, this allowance is around £12,300 for individuals, and for trusts, it’s £6,150. This means that if your total gains fall below these amounts, you won’t owe any Capital Gains Tax.
Residence Status Matters
Your tax residency status can significantly affect your Capital Gains Tax liability. In the UK, there are three main categories:
Firstly, if you’re a UK resident, you’re generally liable for Capital Gains Tax on all your gains, whether they are made in the UK or overseas.
Non-UK residents are typically only liable for Capital Gains Tax on UK residential property. However, this rule now applies to all UK property and land, including commercial properties.
Some individuals may have mixed residence status during a tax year. In such cases, the rules can become more complex, and it’s advisable to seek professional tax advice.
Tax Rates for Capital Gains
The tax rate you pay on your capital gains depends on your overall income and the type of asset you’ve sold. Here are some of the key points to consider:
If you fall within the basic income tax band (currently 20% for the 2023/2024 tax year), you’ll pay 10% on your capital gains for most assets and 18% for residential property.
However, if you’re a higher or additional taxpayer (40% or 45% for the 2023/2024 tax year), your Capital Gains Tax is 20% for most assets and 28% for residential property.
Entrepreneurs’ Relief, now known as Business Asset Disposal Relief, allows you to pay a reduced 10% Capital Gains Tax on qualifying business assets, up to a lifetime limit of £1 million.
Reporting and Payment
Capital Gains Tax is reported and paid through your annual self-assessment tax return. You must report and pay any Capital Gains Tax owed by the self-assessment deadline, which is usually April 5th after the end of the tax year.
If you make a loss on the sale of an asset, you can offset it against any gains you’ve made in the same tax year or carry it forward to offset against future gains.
Failure to report and pay Capital Gains Tax on time (whether accidentally or purposely) can result in penalties and interest charges, so it’s essential to stay organised and meet the deadlines.
How to Stay on Top of Capital Gains Tax
Capital Gains Tax is a crucial aspect of managing your finances in the UK, and understanding when you need to pay it can help you make informed decisions about selling assets and investments.
Remember that the annual tax-free allowance, your residence status, and the type of asset you’re selling all play significant roles in determining your Capital Gains Tax liability.
Be sure to explore exemptions and relief schemes, report and pay your taxes on time, and consider seeking professional advice when needed to navigate this complex area of taxation successfully.
Here at LJS Accounting Services, we work with our clients to ensure they stay on top of their paperwork and taxes to avoid any penalties or fines. We offer a range of different services from corporation tax, CIS tax disputes, VAT along with bookkeeping and much more.
So, if you feel you are struggling to keep on top of all your paperwork, then we at LJS Accounting can help. For more information on the services we offer or to speak to a member of our team, don’t hesitate to contact us today.