Capital gains tax
Other tax issues
Capital gains tax (CGT) is a complicated subject so we provide an introduction only here. We do cover the main issues, though, and signpost you to where you may find extra help.
Capital gains (CGT) tax basics
What is CGT?
CGT is a tax charged if you sell, give away, exchange or otherwise dispose of an asset and make a profit or 'gain'.
It is not the amount of money you receive for the asset but the gain you make that is taxed.
Broadly, to calculate the gain, you compare the sale proceeds (or value of the asset at the time it was disposed of) with the original cost of the asset (or value when it was acquired). This is illustrated below (click to enlarge):
You can find a basic guide to CGT on GOV.UK.
When does CGT apply?
As noted above it applies when you sell, give away, exchange or otherwise dispose of an asset, although gains on some assets are specifically free from CGT.
If you are a UK resident, you may be liable to CGT on disposals of assets located anywhere in the world, not just your UK-located assets.
Non-residents are liable to CGT if they are carrying on a trade in the UK. If you are non-resident (including in the overseas part of a split year), you may also be liable to CGT on the disposal of UK land and property (although private residence relief may apply).
There are special rules for CGT purposes that apply to individuals who are normally resident in the UK but are temporarily resident outside the UK (broadly this means those who are non-resident in the UK for less than five years). We look at these separately.
You may have to pay CGT 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. We do not cover the relief for gifts of business assets here, but you can find more information on GOV.UK.
CGT can also apply if you transfer assets on separation, divorce or dissolution of a civil partnership.
In some cases, you are treated as if you have disposed of an asset. This might happen, for example, if a personal possession, such as an antique, has been destroyed and you have received a capital sum, such as an insurance pay-out, by way of compensation.
What is a capital asset?
It is something that you own such as a house, shares in companies or other possessions.
Do I pay CGT on assets I inherit?
You do not pay CGT when you inherit an asset, but you may have to pay CGT if you sell, give away or exchange an asset you inherited and it has increased in value since the date of death.
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.
Are any assets free from CGT?
Yes. Some of the most common examples are:
- Private motor cars, including vintage cars
- Gifts to UK registered charities
- Some government securities
- Personal belongings (or ‘chattels’) where the sale proceeds (or value when given away) are less than £6,000
- Prizes and betting winnings
- Assets held in ISAs
- Foreign currency held for your own use.
The disposal of your main home is often free of CGT, but this is not always the case. The CGT relief that can be applied on disposal of your main home does not apply to second homes or properties which are rented out, though part of those gain might qualify for relief if the property has previously been your only or main residence. You can read more about relief on selling your home separately.
Shares are not exempt from CGT. If you sell other personal belongings (‘chattels’) then there will be no CGT if your share of the proceeds is less than £6,000. See Selling shares and other assets for more information.
How do I work out the gain on disposal of an asset?
You normally work out your gain like this:
Proceeds or market value
Less: Original cost or market value
Less: Incidental costs of purchase
Less: Costs incurred in improving the asset
Less: Incidental costs of sale
This then gives you the chargeable gain. Look at the example Neil to see how this works.
A few points to note:
In terms of proceeds, if you give away an asset HMRC will treat you as having sold it for what it is worth (that is, the market value).
In terms of costs, unless you bought the asset, you will usually need to consider the market value of the asset when you acquired it (unless, for example, you acquired it from your spouse or civil partner – in which case, you would usually use their purchase cost or value when they acquired it – see our information on gifts of assets.
If you are selling an asset you owned at 31 March 1982, you use the market value as it was on 31 March 1982 – 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 in the calculation (this will reduce the gain), but you can only include improvements, for example, an extension to a house, and not repairs.
Similarly, you can deduct the incidental costs of buying and selling in the calculation. Typical costs include legal expenses and estate agents' fees for property, and broker's commission on the purchase and sale of shares.
We discuss these elements further under Capital gains tax reporting and record-keeping.
What if I only dispose of part of an asset (other than shares)?
Where you dispose of only part of an asset (other than shares – see our separate guidance), 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:
Cost of the part disposed of = overall cost x sale proceeds divided by sale proceeds added to the market value of the unsold part
So, let’s say Razvan owns a house which he rents out. The house cost him £160,000. A neighbour offers to buy part of the garden for £15,000. The value of the house with the smaller garden is £155,000.
When calculating the gain on selling part of the garden, Razvan’s calculation of the cost he can use is as follows:
Cost of the part disposed of = £160,000 [overall cost] x £15,000 [sale proceeds] divided by (£15,000 [sale proceeds] + £155,000 [value of the house with the smaller garden])
So, the cost of the part disposed of is £160,000 x £15,000 / £170,000 = £14,117
You can also see this in the example Jenny and then how the overall gain is calculated.
Small part disposals of land
If you sell part of a holding of land for £20,000 or less and the proceeds are not more than 20% (1/5th) of the value of the whole piece of land, you can elect not to have made a disposal; but the amount of proceeds you receive is taken off your cost which is used to calculate any future disposal.
You cannot make the election if you have other disposals of land in the same year and the total of proceeds for all disposals is more than £20,000. The example Jenny shows how this works.
See HMRC’s Capital Gains Manual CG71870 for more information.
What is the annual exemption?
Each tax year, most individuals who are resident in the UK are allowed to make a certain amount of capital gains before they have to pay CGT. This is because they are entitled to an annual tax-free allowance, called the annual exemption or annual exempt amount.
For 2020/21 you may make gains of £12,300 tax free. Any unused exemption cannot be carried forward or back. Each spouse or civil partner gets their own annual CGT exemption.
Individuals who are resident in the UK, but not domiciled here, and who use the remittance basis of taxation (other than in the case where the remittance basis applies automatically because unremitted foreign income and gains are less than £2,000) are not entitled to the annual CGT exemption.
Individuals who are non-resident who may be liable to CGT on the disposal of UK land and property are entitled to the annual CGT exemption.
What rate is CGT charged at?
The rate of CGT you pay depends partly on what type of chargeable asset you have disposed of and partly on the tax band into which the gain falls when it is added to your taxable income.
From April 2017, CGT is charged at the rate of either 10% or 18% for basic rate taxpayers. For higher or additional rate taxpayers, the rate is either 20% or 28%. If you are normally a basic-rate taxpayer but when you add the gain to your taxable income you are pushed into the higher-rate threshold, then you will pay some CGT at both rates.
Gains on most chargeable assets are subject to the 10% or 20% rate, depending on whether the taxpayer is a basic rate or higher/additional rate taxpayer. Chargeable gains on disposals of residential property that do not qualify for, or are not fully covered by, private residence relief are subject to the 18% or 28% rate.
There is a special rate of 10% that applies on the sale of certain business assets. This is called business asset disposal relief (before 6 April 2020, it was called entrepreneurs' relief). You can find more information on GOV.UK.
If you live in Scotland and are a Scottish taxpayer, or if you live in Wales and you are a Welsh taxpayer, the same rules as explained above apply to you. You must use the UK rates and bands to work out your CGT, even if you pay income tax at the Scottish or Welsh rates and bands on your salary, self-employed profits, rental income or pension.
How do I work out the tax I will pay?
As noted above there are two main sets of rates of CGT, 10%/18% and 20%/28%. The rate you pay depends upon the amount of your total taxable income and the type of asset disposed of.
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.
If you are taxed at the basic rate of tax on your total taxable income, you pay CGT at 10% (or 18% if the asset disposed of is a residential property) on any capital gains falling within the basic rate band.
If you have income taxable at the higher rate of 40% and/or the additional rate of 45% your capital gains are taxed at 20% (or 28% if the asset disposed of is a residential property).
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 (£37,500 for 2020/21), the rate of CGT is 10% or 18%. For gains (and any parts of gains) above that limit the rate is 20% or 28%.
Look at the example Hasan part one to see how this works.
If you live in Scotland and are a Scottish taxpayer, or in Wales and are a Welsh taxpayer, the same rules as explained above apply to you. You must consider your total income and gains in relation to the UK rates and bands to work out your CGT, even if you pay income tax at the Scottish or Welsh rates and bands on your salary, self-employed profits, rental income or pension.
Look at the example Hasan part two to see how this works.
What if I dispose of assets I own jointly?
Each of you is usually liable to tax on your half of any gain arising, assuming the asset is owned equally. If it is not, you are each assessed to tax based on your share of the underlying asset.
What is the date of disposal?
The date of disposal for CGT is the date that you enter into an unconditional contract.
This means that for property, this is the date that contracts are exchanged and not the date of completion when possession of the property is actually taken.
However, note that the 30-day window for reporting any capital gains tax due on disposals of UK residential property (or, if you are non-resident, for reporting all disposals of UK land or property) begins from the date of completion.
For shares, it is the date the bargain actually took place and not the date of the contract note or the date of settlement.
If, instead, you enter a conditional contract, the relevant date is the date when the conditions are satisfied. Let’s say, for example, someone agreed to buy a house that you own on the condition that the broken-down central heating boiler is replaced. The terms of that work might be set out in an agreed contract. The disposal date for the house for CGT purposes would be when the work was agreed to have been completed to the terms of the contract, not the date the contract was agreed.
What if I get some sale proceeds at a later date?
When you sell an asset, sometimes you receive only part of the money at the date of sale. You may receive further amounts later and some may be dependent on future events. This is called deferred consideration.
Depending on the type of deferred consideration involved, you may need to take it into account immediately when working out your gain or loss for the disposal even though you do not receive it until sometime later.
Generally, if you know the amount of money that you will be receiving, even if it is not payable until a later time, then you include it when calculating the gain or loss.
For example, if the deferred amount consists of an immediate payment followed by a number of instalments, the figure of total proceeds is known in the year of disposal and should be included in your CGT 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 to you by instalments, you may, in certain circumstances, ask HMRC if you can pay any CGT due by instalments (in recognition that you may not have the money to pay the CGT otherwise).
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.
Where can I find more information?
You can find a collection of information on CGT on GOV.UK.
For HMRC’s detailed and technical CGT information see the CGT manual.
For information on rates and allowances for CGT, look at our useful tools section.
You may need professional advice when disposing of assets, as CGT can be complicated. Other taxes, such as Stamp Duty, Stamp Duty Land Tax (and similar taxes in the devolved parts of the UK) might also apply on the transfer of property. Giving assets away can also have inheritance tax consequences. Our Getting Help page gives guidance on finding a tax adviser.
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