Capital Gains Tax

Capital Gains Tax Explained

Capital Gains Tax (CGT) is a tax on the profit made from selling, transferring or disposing of assets. The amount of CGT incurred depends on your tax bracket: basic or higher-rate payer. In addition, there are many tax reliefs, exemptions, and allowances. In fact, the legislation for CGT is an extremely complex matter. We would always recommend any individual to speak with one of our tax specialists before any transactions are made in order to advise you on potential tax savings.

If you, as an individual, are a UK resident and you sell or dispose of certain possessions or assets worth £6000 or more, you will need to pay Capital Gains Tax to HMRC on the increase in the value of those items.  

Bear in mind that disposing of an asset or possession doesn’t necessarily mean that you have sold. You might have given it away, but it would still incur Capital Gains tax unless it was gifted to your spouse or civil partner.

The liability for Capital Gains tax only arises when you have made a certain amount of profit.

This amount will vary depending on whether you are paying a basic rate of tax, or a higher rate, and whatever your tax-free allowance is for the current tax year.

The tax is due when the sale or disposal takes place. You can report this to HMRC online, but if you would normally send them a tax return, you should include it on this whether or not you have already used the online reporting system.

On your tax return, you would also have to show how you calculated your capital gain or gains.

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What might attract Capital Gains?

There is a very long, and sometimes surprising list of what HMRC does and does not regard as an asset on which Capital Gains tax would be payable.

For example, you would not need to pay Capital Gains Tax if you sell your vehicle, or if you make a profit from selling your own home, or even if you have won a large sum of money on gambling or winning the lottery. You don’t have to pay CGT on your main home if you have rented it out.

You would, however, have a Capital Gains liability if you sell a second home, or when you sell or dispose of items classed as high worth jewellery, paintings, objets d’art or valuable antiques, or even collectables such as rare and valuable coins and stamps. The rules apply if you sell these items for more than £6000, but the amount you pay will be affected by your personal tax-free allowance.

The list also includes household furniture, crockery, silverware, books, bicycles and motorbikes, and even ornaments.

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How to minimise Capital Gains Tax

Make sure you discuss your proposed sale or disposal with us in advance as we can inform you on the best approach to take and the best way to structure your finances, to ensure you only pay the amount of Capital Gains tax which is absolutely necessary.  

We can also deal with all the necessary documentation relating to Capital Gains tax and liaise with HMRC on your behalf.

As well as making the most of your personal tax allowance, there are several ways of mitigating your Capital Gains tax liability, for example:

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Calculate your liability accurately‍

Don’t forget to include any costs which were incurred when you sold your asset or possession. This may well include a professional valuation fee and even an auction fee. Any work you have done on improving it can be deducted, e.g. adding a conservatory to your home. If you sell a set of furniture, e.g. a dining table and chairs, the calculation relates to the whole collection, not each individual item.

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Invest in savings‍

Any money you put into an ISA or use to purchase a Government Premium Bond will be exempt from Capital Gains tax.‍

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Invest the asset in another name‍

If the asset is currently held in your name, you could invest the asset in the name of your spouse or civil partner, without incurring Capital Gains tax liability. However, you do need to consider both of your tax affairs and allowances and current and future income, especially if you are coming up to the age of retirement. You don’t want to be in a position where one of you is paying a higher rate of tax, but the other person has unused allowances.

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Transfer to a child or a Trust

‍If a transfer of the asset is made to a Trust or as a gift to a child, the Trust would have annual tax exemptions of its own, and the child would also have its own tax exemptions.

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Check the list of exemptions‍

Some items are defined by HMRC as ‘Wasting assets’. These would be items of value which have a limited life expectancy of 50 years or less.

Some categories of wine and some other alcoholic drinks would fall into this category as would yachts, caravans and even antique clocks. Alcoholic drinks, including some wines which would have a longer life, would not be exempt.

Understanding the HMRC mindset when it comes to exemptions for Capital Gains Tax is a complex business, so it pays to take advice well in advance of any sale or disposal.

Our capital gains tax advisers can help guide you through the process of disposing of your asset and ensure the appropriate filings are made. The above guidance is only a brief summary of the Capital Gains Tax system. However, if you are in the process of disposing of an asset, please speak with our team, and we can ensure your disposal is dealt with correctly and you are paying the appropriate level of Capital Gains Tax.