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 HMRC or not for more help.
This is likely to be the case if you have shares in public (plc) companies such as Shell 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 date do I use as the disposal date?
What if I get some of the sale proceeds at a later date?
What if I make a loss?
Can I claim for assets that are lost or destroyed?
How are disposals of gifts or inherited assets taxed?
What if I only dispose only part of an asset (other than shares)?
How do I work out the gain?
What if I want to sell my own home?
What if I use my home for my business?
How do I work out the tax I will pay?
Will I get a capital gain if I sell some shares?
What if my shares lose all or most of their value?
What is Entrepreneurs' relief on the sale of a business or family company shares?
What records do I need to keep for capital gains tax?
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 are entitled to. For example if husband and wife or civil partners equally own an asset, each will usually have a gain on the sale based on half the proceeds unless there is some other arrangement that they own the item in unequal shares.
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 HMRC for advice.
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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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A chattel is a personal item, a tangible 'thing' such as a piece of furniture.
Any gain is exempt from capital gains tax if the item 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 less £6,000) x 5/3.
- So for example if you sold a chest of drawers for £7,200 in October 2013 having bought the chest for £4,570 in July 2013 - 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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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.
Annual exemption
The first £10,900 of your gains for 2013/14 (£10,600 for 2012/13) 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 HMRC about any capital gains if they are less than the annual exemption of £10,900 and the proceeds after costs are less than £43,400 for 2013/14. 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 £10,900, 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 HMRC if you are unsure what to do.
| Example - Joan - sale of shares - proceeds less than £43,600 and also gain over £10,900 Joan owned some BT shares which she sold for £15,000 during 2013/14. Her gain on the shares before any other deductions was £6,000. As the proceeds are less than £43,600 and the gain is less than the annual exemption of £10,900, 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 £10,900 - her annual exemption. |
Giving an asset to your husband, wife or civil partner
If you give an asset to your husband, wife or civil partner whilst you are legally married or in a civil partnership and living together - you will not pay any CGT at that time.
If and when your husband, 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.
| Example - Ann - gift of asset to husband - later sale Ann bought a cottage in 1996 for £50,000. In August 2003 when the cottage was worth £90,000 she gave it to her husband James. In June 2013 James sold the cottage for £140,000. James's gain on the property before any other deductions will be £140,000 less the original cost of £50,000, i.e. £90,000 and not £60,000 (£140,000-£90,000) |
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When you are working out your capital gains you will need to know what date of disposal to use. Generally this is straightforward but there are some special cases which we explain below.
General rules
Property
The date to use is the date contracts are exchanged and not the date of completion when you take over the property.
Other assets apart from shares
Yet again the time of disposal is the time the contract is made and not if it is different, the date the asset is actually delivered or otherwise transferred to you.
Shares
The date will be the date that you actually sell the shares – the date of the transaction which will be shown on the contract note and not the date that you pay for them.
Exceptions to the rules
There is an exception to the above. The date of disposal will depend on whether the contract is unconditional or conditional on something being done or some delay in the transaction taking place.
Where the contract is unconditional, the date of disposal will be the date of the contract.
However where the contract is conditional, the date of disposal will be the date on which the conditions are satisfied.
A contract is only conditional if certain conditions have to be met before the contract becomes binding. When these conditions are met the contract normally becomes legally binding.
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When you sell an asset sometimes only part of the money is received at the date of sale with further amounts to come later or dependant on future events. This is called deferred consideration.
Depending on the type of deferred consideration involved, it may need to be taken into account immediately when working out your gain or loss for the disposal even if the sale proceeds are not received until sometime later.
Generally if you know the amount of money that you will be receiving, even if it not payable until a later time, then it is included when calculating the gain or loss.
For example, if the deferred amount consists of an immediate payment followed by a number of annual instalments, the figure of total proceeds is known in the year of disposal and should be included in your capital gains tax computation even though the actual money will not be received until later.
We are not going to look here at the situation where the amount of the deferred payment is not known as this is more complicated and may require a valuation of the deferred amounts.
Where the disposal proceeds for an asset are payable by instalments, you may, in certain circumstances, ask HMRC if you can pay any capital gains tax due by instalments.
This relief is available where the instalments as set out in the contract for sale of the asset:
- begin no earlier than the date of disposal of the asset, and
- extend over a period exceeding 18 months, and
- continue beyond the date on which the tax would otherwise be due and payable.
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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 HMRC 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.
| Example - Eileen - loss on sale of shares Eileen bought some shares in August 2002 for £22,000. In August 2013 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 2013/14 or she can carry the loss forward against any gains she makes in future years. |
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A similar claim to the Negligible Value Claim for shares can be made for other assets that are lost or destroyed. The asset is treated as being disposed of at that time, even where no compensation is received.
In some cases you are treated as if you have disposed of an asset. For example a personal possession, such as an antique, has been destroyed and you have received a capital sum, such as an insurance payout, by way of compensation.
It is not the amount of money you receive for the asset but the gain you make that is taxed.
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Capital gains tax may apply when you give something away, sell a valuable item or transfer assets in a divorce. When you inherit an asset, it is only liable to capital gains tax if you later sell or dispose of it and make a gain.
If you sell, give away, exchange or otherwise dispose of an asset and make a profit or gain, you may have to pay capital gains tax.
This means you may have to pay capital gains tax when you give an asset as a gift to someone.
The rules are different depending on who you give the gift to and there are special reliefs for gifts of business assets.
Gifts to your husband, wife or civil partner
You do not pay capital gains tax when you make a gift to your husband, wife or civil partner - as long as both of the following apply:
- you lived together for at least part of the tax year in which you made the gift
- the gift is not of ‘trading stock’ (trading goods bought for resale)
However, if your husband, wife or civil partner later sells or otherwise disposes of the asset, they will have to pay the tax on any gain made over the total period of ownership (since the date it was first acquired) falling after 31 March 1982.
It is worth keeping a note of what the asset cost you, as your spouse or civil partner may need this to work out their capital gains tax when they dispose of the asset.
Gifts to other family members and connected people
When you make a gift to a family member or other person you are 'connected' with (as described below) - other than your spouse or civil partner – you will need to work out the gain or loss.
This also applies if you dispose of an asset to them in any other way - eg you sell it to them for less than it is worth.
A connected person in this context could be, for example:
- your husband, wife or civil partner
- your brothers, sisters, parents, grandparents, children, grandchildren and their husbands, wives or civil partners
- the brothers, sisters, parents, grandparents, children, grandchildren of your husband, wife or civil partner - and their husbands, wives or civil partners
- certain trustees
- a company you control
You must get a valuation of the asset at the time you made the gift and use this value in place of any amount you received for the asset (usually nothing, if it is a gift) to work out your gain or loss. You can agree the valuation with HMRC before you submit your tax return.
If you make a loss you can only deduct the loss from gains you make on gifts or other disposals to the same person.
Inherited assets
You may have to pay capital gains tax if you sell, give away or exchange an asset you inherited and it has increased in value since the date of death. (In some cases you may be treated as if you disposed of an asset that you still own - for example, if you receive compensation for a damaged antique.)
If the asset you inherited increases in value between the date of the deceased's death and the date you dispose of it, the increase is a 'capital gain'.
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Where you dispose of only part of an asset, you work out your cost by taking your sale proceeds and dividing them by the total of sale proceeds and the market value of the unsold part. This is then multiplied by your overall cost like this:
Firstly work out this fraction:
Sale proceeds
(Sale proceeds + market value of unsold part)
Then multiply the fraction by your overall cost to get the cost of the part disposed of.
Example
Jenny sells 1 acre of land for £10,000 which is part of a 5 acre field. The other 4 acres are worth £70,000 at the time she makes the disposal (as they are more likely to have development value in future than the acre just sold).
Jenny paid £20,000 for the whole 5 acres 15 years ago.
In working out her capital gain on disposal of the 1 acre, she will deduct a cost figure calculated as follows:
| Cost £20,000 x | £10,000 (sale proceeds) |
| £10,000 (sale proceeds + £70,000 (value of part retained |
This works out to: £20,000 x £10,000/£80,000 which equals £2,500
So, without taking anything else into account, Jenny's gain on the 1 acre sale will be her proceeds of £10,000, less a cost of £2,500 = £7,500
Small part disposals of kind
Where part of a holding of land is sold for £20,000 or less and the proceeds are not more than 20% or 1/5th of the value of the whole piece of land, you can claim not to have made a disposal but the amount of proceeds you receive it taken off your cost for any future disposal. The claim may not be made if you have other disposals of land in the same year and the total proceeds for all disposals is more than £20,000.
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If you give away an asset HMRC 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:
| 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 |
| Neil 1 - sale of house - working out gain |
| Neil bought a house in March 1979 for £10,000. Neil already had another home of his own. By March 1982 the value had increased to £25,000. |
| In July 2013 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 2000. |
| Neil's gain is: | | | £ | |
| Proceeds | | | 200,000 | |
| Less: | March 1982 value | 25,000 | | |
| Cost of extension | 15,000 | | |
| Legal expenses on purchase | 1,000 | | |
| Legal expenses on sale | 2,500 | | |
| | | 43,500 | |
| Chargeable gain | | £ 156,500 | |
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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 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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A lot of people run their businesses from home. If you do, you need to look at how you have used your home when you sell or dispose of it before you can work out if there is any capital gains tax to pay.
Rooms used for business and personal use
If you use a room in your home for both business and private purposes - for example, you use a room as an office, but you also use it as a guest bedroom - your home will probably be exempt from CGT when you sell it - see the above section on selling your own home.
Rooms used solely for business use
If you have used any part of your home exclusively for business purposes - for example part of your home is used as a workshop for your business - that part will not be exempt from tax. But you will still get the relief on the part used as your main home. This means that if you sell your home at a profit, you will have to work out the amount of the relief due and if there's any capital gains tax to pay.
| Ailsa - home used as business premises Ailsa uses 30% of her home exclusively as business premises and the other 70% is used as the area where she lives. When she later sells her home she makes a gain of £120,000. Ailsa is entitled to Private Residence Relief of £84,000 on the part used as her home (70% of £120,000). She will have Capital Gains Tax to pay on the remaining gain of £36,000 (£120,000 less £84,000). |
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There are two main rates of capital gains tax (CGT), 18% and 28%. The rate you pay will depend upon the amount of your total taxable income.
When you take your personal allowances and any other deductions such as allowable work expenses from your income you arrive at a figure we call your total taxable income.
Basic rate taxpayers
Anyone who is taxed at the basic 20% rate on their total taxable income will be taxed at 18% on their capital gains falling within the basic 20% rate band.
Higher and additional rate taxpayers
Those taxable at the higher rate of 40% and the additional rate of 45% will be liable at the 28% rate.
So if your total taxable income and gains after all allowable deductions (including losses, personal allowances and the CGT annual exemption) are less than the upper limit of the basic rate income tax band (£32,010) for 2013/14), the rate of CGT is 18%. For gains (and any parts of gains) above that limit the rate will be 28%.
For the tax year 2013/14, most people will start paying higher rate income tax only on income over £41,450 although this will depend on whether they have any other allowances.
The way you will be taxed will depend on:
- If total taxable income is below that amount, gains up to the unused amount of the band are chargeable at 18%.
- Any amounts that exceed any unused amount of the basic rate band are chargeable at 28%.
- If total taxable income uses up the whole of the basic rate band all capital gains are charged at 28%.
| Jon - calculation of CGT In 2013/14 Jon’s taxable income, after all allowable deductions and the personal allowance, is £22,010. The upper limit of the income tax basic rate band is £32,010. In November 2013, Jon sells an asset, making a gain of £25,900. Jon has no allowable losses to set against these gains, and the annual exemption for 2013/14 is £10,900. Jon’s taxable income is £10,000 less than the upper limit of the basic rate band (£32,010 - £22,010). Jon sets the annual exemption against the gain leaving £15,000 taxable (£25,900– £10,900). The first £10,000 of the £15,000 gain is taxed at 18% and the remaining £5,000 is taxed at 28%. |
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Below we try 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.
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.
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Especially at times where there is an economic downturn, one consequence is that some shares you own may have lost all or most of their value. This happens when the company involved, either just stops trading or goes into liquidation or receivership.
If you own shares that are now of no value and therefore worthless, or almost worthless, you might be able to make what's known as a Negligible Value Claim.
When you make a Negligible Value Claim, if all the conditions are met, you are treated as if you had sold the shares and then bought them back again at their value on the earliest of the following dates:
- the date that HMRC receive the claim
- a date you specify on the claim that may be in either of the two previous tax years (if the shares became worthless or almost worthless at that time or earlier). This is important if you have large gains in one of the two years to help you minimise any capital gains tax bill.
You then work out your capital loss as if you had sold the shares for their negligible value on that date.
There is no requirement to make a claim, so for example you should not do so if it would mean wasting your annual exemption.
If the shares that have become worthless are not in a company quoted on the stock exchange - for example a family trading company - you may be able to set off your loss against income of the same tax year in which the loss is made or the previous one. For more detailed information have a look at HMRC helpsheet 286 using the link below.
For more information you can use the following links:
HMRC helpsheet 286 on Negligible Value Claims
HMRC list of companies where the shares are of negligible value - a claim is accepted automatically for shares on the list
Claiming your loss
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This can be a complicated area so if you think the relief applies to you, you should contact HMRC or a tax adviser for further advice.
Basically, 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. It can also apply to the disposal of assets which were used in a business after you have ceased trading.
You 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.
We do not explain the relief further here, but you might wish to read HMRC's Helpsheet 275 for more information.
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What records do I need to keep for capital gains tax?
If you make a capital gain, you will generally need to complete a Self Assessment tax return, so you need to keep relevant documents in connection with the gain or any claim for losses or other reliefs and if necessary to enable you to answer any queries from HMRC.
When referring to market value in the following guidance, this means the price your asset might reasonably be expected to fetch on the open market.
You usually acquire an asset when you buy it, but you might also have inherited it, received it as by gift or some other way.
In all cases you will need to keep records of the original cost, additional costs associated with acquiring the asset and sometimes records showing the value of the asset on a specific date.
To help you keep check, you may need to keep a record of some or all of the following:
The original cost
If you bought the asset after 31 March 1982 you will need to keep records showing the original cost of the asset - such as receipts for purchase. If these are not available you may need to get a valuation of the asset at that date.
If you received the asset some other way - for example by inheritance or gift – you will need to find out the market value on the date you acquired it. If you inherited the asset, the executors of the deceased should have provided you with this information.
The market value at 31 March 1982
If you owned the asset on 31 March 1982, you will need to work out the market value of the asset at 31 March 1982 and use this in your capital gains tax calculations instead of the your actual costs up to that date. You need to keep any records that will help you do this.
You may need to get a valuation of the assets at 31 March 1982 from for example an estate agent or an auctioneer and you need to keep any such valuations safe for future use.
There are other times when you need to use the market value of the asset on a specific date in your capital gains tax calculations instead of the cost.
For example, if you dispose of an asset left to you in a will by a relative who died on 23 January 2014, you would use the market value on the date of death instead of any actual cost in your calculations or if you gave an asset to your child on 18 September 2013, you would use the market value on 18 September 2013 (the date of the gift) instead of any amount received.
You may need to get a valuation of the asset from an estate agent or auctioneer. If you want you can get HMRC to check your valuation so that you have an agreed figure for your tax return. In that case you should complete and send form CG34 Post Transaction Valuation Check to HMRC after you have disposed of the property.
Additional records you may need to keep
If you incurred other allowable costs when acquiring the asset - such as Stamp Duty and any fees paid for professional advice, estate agents costs, valuation fees or other costs of transfer including advertising - you will need to keep a record of the amounts involved and any documents relating to that expenditure.
These sums will be added to your original cost when working out any capital gain.
You can also deduct any VAT on the costs unless you are VAT registered and can reclaim the VAT.
There are other costs during your ownership of an asset which can be added to the original cost for capital gains tax purposes:
Improvement costs
If you have spent money improving the value of your asset you may be able to deduct these costs, as long as the improvement is still reflected in the value of the asset when you dispose of it. For example, if you build a garage to add value to your property - and it's still part of the property when you sell or dispose of it - you can deduct the cost of the garage.
You cannot however include maintenance costs, such as decorating or any repairs.
You can also deduct any VAT paid out on improvements unless you are VAT registered and can reclaim the VAT.
Confirming you own the asset
If you spent money proving that you own or have rights over an asset you may be able to deduct this cost.
When you dispose of your asset
You usually dispose of an asset when you sell it, but you may also have given it away, exchanged it for another asset, transferred it to someone else or it may have been lost or destroyed.
In all cases you will need to keep records of the 'disposal proceeds' (usually the amount you received) and sometimes records showing its value on a specific date.
You also should keep records of the amount you received if you otherwise disposed of the asset (this may include, for example, a sum received as compensation for a damaged asset).
Any extra costs
If you spent money selling or otherwise disposing of an asset - such as legal fees, valuation fees or advertising costs to find a buyer - and you are deducting these in your capital gains tax calculation, you need to keep records of these costs. They will be deducted from your sale proceeds or market value when working out any capital gain on disposal.
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