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You might already have heard about Capital Gains tax and wondered what it is and whether you need to be completing a tax return.
So what is Capital Gains tax or CGT as it is often called? To put it simply - you may be liable to CGT on things you own that you sell, give away or transfer wherever in the world these are located. CGT is a tax on profits or gains you make on the disposal of your assets.
There is a lot involved in Capital Gains tax and so the information we include in this section can only be an introduction. However, we have covered the main issues and these might help you decide if you need to contact the Revenue or not for more help. This is likely to be the case if you have shares in public (plc) companies such as Glaxo or Tesco etc. which you have bought over a number of years as there are special rules for working out the cost involved depending on when they were bought.
For more information on Capital Gains tax have a look at the comprehensive section on the HMRC website.
This section looks at:
Who is liable to pay CGT?
Which assets are free from CGT?
What are the rules for assets bought and sold for less than £6,000 - chattels
What reliefs and exemptions am I entitled to?
What if I make a loss?
How do I work out the gain?
What if I want to sell my own home?
How do I work out the tax I will pay? Will I get a capital gain if I sell some shares?
What is Entrepreneurs' relief on the sale of a business or family company shares?
Who is liable to pay CGT?
- You may be liable to CGT on assets you sell, give away or transfer wherever in the world these are located.
- Assets are things you own such as your house, shares or other possessions.
- If you own an asset jointly, your gain will be based on what share of the proceeds you received. For example if husband and wife or civil partners equally own an asset, each will have a gain on the sale based on half the proceeds.
- If you are someone who is not permanently settled in the UK you may be not domiciled here and the CGT rules are different for you. You should contact the Revenue for advice.
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Which assets are free from CGT?
- Some of the more common exempt assets are:
- The sale of your main home is usually free of CGT but see What if I want sell my main home? This tax-free status does not apply to other property such as second homes or let property.
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What are the rules for assets bought and sold for less than £6,000 - chattels
- Any gain is exempt from Capital Gains tax if the asset is bought and sold for less than £6,000.
- If there are joint owners, such as husband and wife or civil partners, each has a separate £6,000 limit to use in connection with their share of the asset in question.
- If the sale proceeds are more than £6,000, the gain cannot be more than:
(Proceeds of sale x 5/3) less £6,000
So for example if you sold a chest of drawers for £7,200 in October 2009 having bought the chest for £4,570 in July 2009 - the gain is £7,200 - 4,570 = £2,630 but it is restricted to (5/3 x (7,200-6,000)) = £2,000
- If the asset is sold at a loss for less than £6,000, you have to treat the sales proceeds as being £6,000 for working out any allowable capital loss.
For example if you have a painting that cost £11,000 and you sell it for £4,000, it would be treated as being sold for £6,000 giving an allowable loss of £5,000 and not £7,000 as might be expected.
- If the assets comprise a set or collection they are treated as separate assets unless they are sold to the same person or someone who is connected with or related to that person in which case the sales are added together for the purposes of the £6,000 exemption.
A set or collection is where the assets are essentially similar or complimentary and their value taken together is higher than if they were look at individually.
If you sell a set to someone you are connected with over more than one tax year the gain is worked out just as for a set or collection but is then a proportion of the gain is allocated to the year of each sale.
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What reliefs and exemptions am I entitled to?
- In very simple terms, your capital gain is the difference between the price you originally paid for the asset (or if it was given to you - what it was worth on that day) and the amount you get when you sell it. However there are a number of special rules to bear in mind and these are listed below.
- The first £10,100 of your gains for 2009/10 (£9,600 for 2008/09) is free from tax - this is called your annual exemption.
- A husband and wife (or civil partners) each receive an annual exemption.
- You may not need to tell the Revenue about any capital gains if they are less than the annual exemption of £10,100 and the proceeds after costs are less than £40,400 for 2009/10. This last figure is always four times the annual exemption and changes from year to year.
- You can see an example of this in Joan
- If your gains are more than £10,100, you will need to complete a tax return to show the capital gain you have made. If you do not normally complete a return you will only be expected to do so for the year of sale. Please contact the Revenue if you are unsure what to do.
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Joan - sale of shares - proceeds less than £40,400 and also gain over £10,100
Joan owned some BT shares which she sold for £15,000 during 2009/10. Her gain on the shares before any other deductions was £6,000. As the proceeds are less than £40,400 and the gain is less than the annual exemption of £10,100, Joan will not need to complete a tax return to include the gain she made.
However, if the proceeds were still £15,000 but Joan made a gain of £11,000, she would have to complete a tax return as the gain is more than £10,100 - her annual exemption.
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- If you give an asset to your husband or wife whilst you are legally married and living together - you will not pay any CGT at that time. The same rules apply to a civil partnership.
- If and when your husband or wife (or civil partner) disposes of the asset, he or she will work out their gain by looking at what it cost you and not the value at the date you gave it to them.
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Ann - gift of asset to husband - later sale
Ann bought a cottage in 1996 for £14,000. In August 2001 when the cottage was worth £60,000 she gave it to her husband James. In June 2009 James sold the cottage for £300,000. James's gain on the property before any other deductions will be £300,000 less the original cost of £14,000, i.e. £286,000 and not £240,000 (£300,000-£60,000)
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What if I make a loss?
- You first set any loss against any gains in the same year even if the gains are covered by your annual exemption.
- When you take your gains from your losses for the year, if you still have losses remaining you should let the Revenue know so that you can use the loss in a later year.
- A loss made on an asset that is free of CGT cannot be claimed.
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Eileen - loss on sale of shares
Eileen bought some shares in August 2001 for £22,000. In August 2009 she sold them for £5,000. Eileen has made a loss of £17,000, which she could use against any gains she makes in the same tax year 2009/10 or she can carry the loss forward against any gains she makes in future years.
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How do I work out the gain?
- If you give away an asset the Revenue will treat you as having sold it for what it is worth.
- If you are selling an asset you owned at 31 March 1982, you use the market value (the amount you could have sold it for on the open market) instead of your original cost
- When you improve or add to your asset, you can deduct this cost from the sale proceeds, but you can only include improvements - e.g. an extension to a house and not repairs.
- You can deduct the costs of buying and selling from the gain. Typical costs will include legal expenses and estate agents' fees for property, and broker's commission on the purchase and sale of shares.
- Your gain will normally be worked out like this:
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Proceeds or market value
Less: Original cost or for gifts - the market value at the date of the gift. You will need to use market value at 31 March 1982 value if the asset was acquired before this date
Less: Any additions to the asset
Less: Any costs of purchase
Less: Any costs incurred in adding to the asset
Less: Any costs of sale
This then gives you the chargeable gain
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Neil 1 - sale of house - working out gain
Neil bought a house in March 1978 for £10,000. Neil already had another home of his own. By March 1982 the value had increased to £25,000.
In July 2009 Neil sold the house for £200,000. He had legal costs of £1000 on the purchase of the house and £2,500 legal and estate agents costs on the sale. Neil had improved the house by building an extension costing £15,000 in May 1999.
Neil's gain is: |
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March 1982 value |
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Cost of extension |
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Legal expenses on purchase |
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Legal expenses on sale |
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Chargeable gain |
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What if I want to sell my own home?
- There is no CGT on the sale of your own home provided you have lived there throughout the time you owned it. This also applies if your home is a fixed caravan or houseboat.
- If you rented out a room in your house, there will be no capital gain if the lodger shares your living rooms and eats with you even though they also have a room of their own.
- Otherwise, there are special rules if you lived elsewhere or you let your home for part of the time before you sold it. Please contact HMRC for more information.
- If you have more than one house, you have up to 2 years from purchase of the second home to decide which one you want to be your main residence for CGT purposes. You will need to let HMRC know what you decide within those two years, otherwise they will decide which one is your main residence based on the facts.
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Tax Tip
If you want to sell part of your garden you should make sure that this is sold before the house and the remaining garden.
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How do I work out the tax I will pay?
For disposals of non-business assets - the rate of tax due on the chargeable gain you work out will be a straight 18%.
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Neil 2 - working out the CGT payable
From example Neil 1 we can see that Neil has a gain of £156,500 for 2009/10. From this we take off Neil's annual exemption of £10,100 leaving £146,400 taxable.
Capital gains tax due @18% comes to £26,352.
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Will I get a capital gain if I sell some shares?
- In this part of the website we have tried to explain as simply as possible the rules that apply to the purchase and disposal of your shares in public companies such as BT or Tesco plc. It is intended to help you work out the capital gain or loss if you have disposed of shares.
- We normally refer to purchases and sales as these will be the most common events.
- If your circumstances are more complicated - for example if there has been a reorganisation of your shareholding by the company involved or if you got some free shares – you should seek further advice from your tax office.
- Shares of the same class in the same company are identical. Suppose you have a holding of 10,000 Albatross plc 25p ordinary shares acquired at different times for different prices. You then sell 2,000 shares. To calculate the gain you need to know firstly, which shares you have sold and secondly, how much they cost.
- For historical reasons, shares of the same class in the same company may be
grouped in different ways:
- purchases on the same day as the sale or disposal;
- purchases within 30 days after the day of sale or disposal
- the rest of the shares you hold
- purchases more than 30 days after the day of sale or disposal
- Note (i) Any shares held before 31 March 1982 are treated as if you bought them at what they would have cost on that date – we call this the market value.
- Have a look at Jon Sparrow for an example showing how you work out your capital gains or losses.
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What is Entrepreneurs' relief on the sale of a business or family company shares?
- This can be a complicated area so if you think the relief applies to you after reading the following – you should contact your tax office for further advice.
- Entrepreneurs' Relief will apply to you if you dispose of the whole or part of a trading business, or shares in a trading company in which you have a qualifying interest. We'll explain what this means a little later.
- You will have to make a specific claim for Entrepreneurs' relief. The claim for relief in respect of a qualifying business disposal must be made on or before the first anniversary of the 31 January following the tax year in which the qualifying business disposal is made on your self assessment tax return.
Entrepreneurs' relief and businesses
- Entrepreneurs' relief may be available in respect of gains you make on the disposal of the following qualifying interests:
- all or part of a trading business you carry on alone or in partnership;
- assets of your business or your partnership's trading business following the cessation of the business;
- Shares in (and securities of) your family trading company (or holding company of a trading group);
- assets owned by you and used by your family trading company (or group) or trading partnership.
Working out your gain
- The first £1 million of gains will qualify for the relief which effectively taxes qualifying gains at 10%. Gains in excess of £1 million will be charged to CGT at the normal rate of 18%.
- The relief works as follows:
- Where a claim is made in respect of a qualifying business disposal the relevant business gains are to be added together, with any relevant business capital losses being deducted.
- The resulting amount is to be reduced by 4/9ths.
- But if the total of current gains less losses and the amounts means that your tally of business capital gains exceeds £1 million, the reduction is to be made in respect of only so much (if any) of the amount resulting as (when added to that total) does not exceed £1 million.
- The resulting gain is then taxed at 18%. This gives an effective tax rate of 10% once you have reduced the gain by 4/9 (18% x 5/9 = 10%)
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Robin Finch sells her trading business in 2009/10 and makes a gain of £55,000 on her office building and a loss of £10,000 on her shop giving her net gains of £45,000 (before entrepreneurs' relief). She has made no other claims to the relief and the whole of the gains are eligible for relief.
If Robin claims entrepreneurs' relief, the gains of £45,000 will be reduced by 4/9ths (so reduced by £20,000, resulting in a chargeable gain of £25,000). She has no allowable losses and no other gains in that year so Robin takes off the annual exempt amount of £10,100 giving an amount chargeable to CGT of £14,900. This amount is taxed at 18% giving tax payable of £2,682.
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- You can make claims for relief on qualifying disposals made on or after 6 April 2008. Claims may be made on more than one occasion up to a 'lifetime' limit of £1 million.
- Disposals on or before 5 April 2008 do not affect the lifetime limit. The £1 million limit will only begin to reduce when the relief is claimed.
- There are some further useful examples on the HMRC website setting out how Entrepreneurs' relief works
Entrepreneurs' relief and family company shares
- The relief will have effect for gains on disposals of shares in a trading company provided that throughout a one-year qualifying period before you sell your shares you:
- are an officer or employee of the company, or of a company in the same group of companies;
- own at least 5% of the ordinary share capital of the company and that holding enables you to exercise at least 5% of the voting rights in that company.
- Where the company (or group) does not cease to trade, the one-year qualifying period is the year ending on the date the shares or securities are disposed of.
- Where the company (or group) ceases to trade before the disposal of the shares or securities, the one-year qualifying period ends on the date trading ceased, and the disposal must be made within three years of the date of cessation.
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Mr Wren sells his shares in a trading company in 2009/10 and makes a gain of £36,000. He has owned 10% of the ordinary shares of the company, which gave him 10% of the voting rights, for several years, during which time he has been an employee of the company. He therefore qualifies for Entrepreneurs' relief on the disposal of his shares.
On making a claim, Mr Wren's gain is reduced by 4/9ths, resulting in a chargeable gain of £20,000. He has no allowable losses or other chargeable gains, so after deduction of the annual exempt amount £10,100 he has an amount chargeable to CGT of £9,900. This amount is taxed at 18%, giving tax payable of £1,782.
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