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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 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 is indexation allowance?
What is taper relief?
What if I want to sell my own home?
How do I work out the tax I will pay?
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 2007 having bought the chest for £4,570 in July 2007 - 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 £9,200 of your gains for 2007/08 (£8,800 for 2006/07) 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 £9,200 and the proceeds after costs are less than £36,800 for 2007/08. 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 £9,200, 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 £36,800 and also gain over £9,200
Joan owned some ICI shares which she sold for £15,000 during 2007/08. Her gain on the shares before any other deductions was £6,000. As the proceeds are less than £36,800 and the gain is less than the annual exemption of £9,200, 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 £10,000, she would have to complete a tax return as the gain is more than £9,200 - 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 2007 James sold the cottage for £200,000. James's gain on the property before any other deductions will be £200,000 less the original cost of £14,000, i.e. £186,000 and not £140,000 (£200,000-£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 2007 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 2007/08 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 can use the value of the asset on that date instead of cost if the March 1982 value is higher and helps to reduce your capital gain.
- 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 March 1982 value if higher) or for gifts - the market value of the asset when you got it
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 gain before indexation
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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 2007 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 (as this is larger than the cost) |
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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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Gain before indexation |
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What is Indexation allowance?
- Indexation was introduced to ensure that gains caused only by inflation were not taxed. It only applies for assets you held at some point between 01 April 1982 and 5 April 1998.
- For assets sold after 5 April 1998, you will get indexation allowance up to that date and you may also get taper relief from then until you sold it.
- You cannot use indexation to increase a loss or turn a gain into a loss. It will just reduce the gain to nil.
- This can be complicated and if you want some help please contact the Revenue.
- To work out indexation you look at the table below and choose the factor which matches your date of purchase up to 5 April 1998:
| Year |
Jan |
Feb |
Mar |
Apr |
May |
Jun |
Jul |
Aug |
Sep |
Oct |
Nov |
Dec |
| 1982 |
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1.047 |
1.006 |
0.992 |
0.987 |
0.986 |
0.985 |
0.987 |
0.977 |
0.967 |
0.971 |
| 1983 |
0.968 |
0.960 |
0.956 |
0.929 |
0.921 |
0.917 |
0.906 |
0.898 |
0.889 |
0.883 |
0.876 |
0.871 |
| 1984 |
0.872 |
0.865 |
0.859 |
0.834 |
0.828 |
0.823 |
0.825 |
0.808 |
0.804 |
0.793 |
0.788 |
0.789 |
| 1985 |
0.783 |
0.769 |
0.752 |
0.716 |
0.708 |
0.704 |
0.707 |
0.703 |
0.704 |
0.701 |
0.695 |
0.693 |
| 1986 |
0.689 |
0.683 |
0.681 |
0.665 |
0.662 |
0.663 |
0.667 |
0.662 |
0.654 |
0.652 |
0.638 |
0.632 |
| 1987 |
0.626 |
0.620 |
0.616 |
0.597 |
0.596 |
0.596 |
0.597 |
0.593 |
0.588 |
0.580 |
0.573 |
0.574 |
| 1988 |
0.574 |
0.568 |
0.562 |
0.537 |
0.531 |
0.525 |
0.524 |
0.507 |
0.500 |
0.485 |
0.478 |
0.474 |
| 1989 |
0.465 |
0.454 |
0.448 |
0.423 |
0.414 |
0.409 |
0.408 |
0.404 |
0.395 |
0.384 |
0.372 |
0.369 |
| 1990 |
0.361 |
0.353 |
0.339 |
0.300 |
0.288 |
0.283 |
0.282 |
0.269 |
0.258 |
0.248 |
0.251 |
0.252 |
| 1991 |
0.249 |
0.242 |
0.237 |
0.222 |
0.218 |
0.213 |
0.215 |
0.213 |
0.208 |
0.204 |
0.199 |
0.198 |
| 1992 |
0.199 |
0.193 |
0.189 |
0.171 |
0.167 |
0.167 |
0.171 |
0.171 |
0.166 |
0.162 |
0.164 |
0.168 |
| 1993 |
0.179 |
0.171 |
0.167 |
0.156 |
0.152 |
0.153 |
0.156 |
0.151 |
0.146 |
0.147 |
0.148 |
0.146 |
| 1994 |
0.151 |
0.144 |
0.141 |
0.128 |
0.124 |
0.124 |
0.129 |
0.124 |
0.121 |
0.120 |
0.119 |
0.114 |
| 1995 |
0.114 |
0.107 |
0.102 |
0.091 |
0.087 |
0.085 |
0.091 |
0.085 |
0.080 |
0.085 |
0.085 |
0.079 |
| 1996 |
0.083 |
0.078 |
0.073 |
0.066 |
0.063 |
0.063 |
0.067 |
0.062 |
0.057 |
0.057 |
0.057 |
0.053 |
| 1997 |
0.053 |
0.049 |
0.046 |
0.040 |
0.036 |
0.032 |
0.032 |
0.026 |
0.021 |
0.019 |
0.019 |
0.016 |
| 1998 |
0.019 |
0.014 |
0.011 |
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- You then need to multiply your purchase cost (including any costs of purchase) by this factor.
- Improvements or additions on later dates will have their own separate factors to be applied to those specific costs.
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Neil 2 - working out indexation
Looking again at Neil, we can now work out the indexation allowance he is entitled to.
There is no indexation due on the extension as the work was carried out after 5 April 1998.
We will base the indexation on the March 1982 value that we used in working out the gain.
From the table the factor is 1.047
We then multiply this by Neil's March 1982 value of £25,000 giving indexation allowance of £26,175.
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£ |
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| Gain before indexation |
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| Less: indexation |
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| Gain before taper relief |
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Damian - sale of house - indexation
Damian sold a house he had bought in June 1990 for £50,000. When he sold the house in June 2007 he received net proceeds after costs of £120,000.
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£ |
| Proceeds |
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| Less: Cost |
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| Net gain before indexation |
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| From the table the factor is 0.283 |
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| We then multiply this by Damian's cost of £50,000 giving indexation allowance of £14,150. |
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£ |
| Gain before indexation |
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| Less: indexation |
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| Gain before taper relief |
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What is taper relief?
- Taper relief is a further amount to come off, if all your capital gains less any allowable losses are more than your annual exemption for that year. It is given after all other reliefs and losses.
- Taper relief reduces a gain in proportion to the length of time you have held the asset in question. The longer you hold the asset the more taper relief you get.
- Taper relief for assets used in a business is different. We do not cover these rules here.
- The qualifying holding period begins on the date you first bought or were given the asset or 6 April 1998 if this is later and ends on the date of disposal. You need to work out how many 'whole' years are in the period.
- If you acquired your asset before 17 March 1998 and still held it at 6 April 1998 you will get a bonus year's taper relief.
- A 'whole' year is any continuous period of 12 months but this does not have to be a tax year.
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Looking at how to work out a 'whole' year
If you buy some shares on 1 August 2002 and sell them on 1 September 2007, you have held the asset for 5 years and 31 days and so there are 5 'whole' years in the qualifying period.
If you are given a house on 1 June 2007 and sell it on 10 April 2008, you will have sold the asset before the first anniversary of the purchase. There is no 'whole' year in the qualifying holding period and no taper relief will be available.
If you buy some land in February 1998 and sell it on 6 April 2008, you will start the clock at 6 April 1998 and so you have 8 'whole' years and a bonus year.
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- You set losses against your gains so as to set each loss against the gain with the least taper relief available. This will usually be where you have held the asset for the shortest period but not always. If this applies we suggest you ask the Revenue for help.
- Once you have worked out how many 'whole' years you have, you apply the taper relief % (see the table below) to see what part of the gain will still be chargeable to tax.
- The gain remaining chargeable to tax after taking off taper relief is as follows:
Number of whole years
in qualifying holding period |
Gain remaining
chargeable (%) |
| Less than 1 |
100 |
| 1 |
100 |
| 2 |
100 |
| 3 |
95 |
| 4 |
90 |
| 5 |
85 |
| 6 |
80 |
| 7 |
75 |
| 8 |
70 |
| 9 |
65 |
| 10 or more |
60 |
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Neil 3 - working out the amount of gain remaining chargeable after taper relief
Neil's gain after indexation is £130,325. He has held the house since 17 March 1998 and so he will receive a bonus year. The number of whole years since 6 April 1998 that Neil has held the asset will be from 6 April 1998 to 6 April 2007, i.e. 9 whole years plus one bonus year making 10 whole years in total.
Looking at the table we can see that 60% of the gain will remain chargeable so this will be 60% x £130,325 or £78,195.
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Mick- working out the amount of gain remaining chargeable after taper relief
Mick made a gain on the sale of some shares after setting off his losses of £31,500. He has held the shares for 5 whole years, but they were bought after 6 April 1998 so he does not receive the bonus year. Looking at the table, 85% or £26,775 of the gain will be chargeable to CGT.
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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?
You need to add your capital gains to your taxable income. The rate of CGT you will pay depends on the level of your other income with your gains being taxed at your top rate of tax. You cannot utilise any unused personal tax allowances against your capital gains to reduce the amount of tax due.
The rates of tax on capital gains for 2007/08 are:
- 10% up to £2,230 where this has not already been used against your income first
- 20% from £2,231 to £34,600 where this has not already been used against your income first
- 40% above £34,600
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Neil 4 - working out the CGT payable
From example 43 we can see that Neil has a gain of £78,195 for 2007/08. From this we take off Neil's annual exemption of £9,200 leaving £68,995 taxable. Neil's only other ordinary income is his salary after allowances of £20,000.
We look first at the tax on Neil's ordinary income, then we add his capital gain on top.
| Tax on income: |
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£ |
| £ 2,230 @10% |
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| £ 17,770 @22% |
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| £20,000 |
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| Capital Gains tax on £68,995 |
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| £14,600 (34,600 - 20,000) @ 20% |
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| £54,395 @ 40% |
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