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Capital Gains Tax (CGT) applies when chargeable assets are disposed of and is applicable to individuals and trustees but not to limited companies, although Limited Companies do pay Corporation Tax on the gains that they make.

Chargeable assets include all forms of property unless it is specifically exempt. The main assets it tends to apply to are land and buildings, shares and business assets including goodwill. CGT can be very complex and the rules are far more detailed that can be explained in this brief summary.

How a Capital Gain occurs

A capital gain occurs when the value of an asset at the date it is disposed of is higher than when it was acquired. An asset can be disposed of either by sale or by gift. If you give away an asset away in an uncommercial transaction, the market value will replace any actual consideration paid.

For assets acquired before 31 March 1982 the cost is usually taken to be the value on that day, although actual cost can be used in some circumstances.

The following also reduce the amount of the chargeable gain…

• Incidental costs of acquisition;
• Expenditure to enhance the value of the asset;
• Incidental costs of disposal; and
• Tax reliefs and allowances (see below).

Rate of Tax

CGT is charged at the rate of 20% where the total taxable gains and income are above the income tax basic rate band. Below that limit, the rate is 10%. For residential property (that does not qualify for private residence relief), and carried interest, CGT is charged at 28% for gains above the basic rate band and at 18% below this limit. For trustees and personal representatives of deceased persons, the rate is 20% (24% for the disposal of residential property).

Tax Reliefs

There are several different tax reliefs which can reduce the chargeable gain, including…

• Rollover/holdover relief on replacement of business assets – allowing you to defer the CGT on a gain of a business asset where this is matched with a replacement of a new business asset in the period commencing one year before and ending three years after the disposal.
• Business incorporation relief – available when you transfer your business into a limited company in exchange for shares.
• Holdover gift relief – on some gifts of business assets, or gifts made into trusts mean the tax does not become payable until the person, or trustee who receives the gift disposes of it.
• Business asset disposal relief (formerly known as Entrepreneurs’ relief) - allows disposal of a material part or all of your business to have the CGT rate reduced to 10%. There is a lifetime limit which is £1 million in relation to disposals from 11 March 2020 (previously £10 million from 2011 to 2022).

Capital Losses

Any capital losses made on a chargeable transaction are netted off against any capital gains made in of the same tax year. They are applied before the annual exemption. Unused capital losses are carried forward against future capital gains, they cannot normally be carried back. To make use of a capital losses it must be reported to HMRC within five years and ten months of the end of the tax year in which it arose.

Business asset disposal relief (formerly Entrepreneurs’ relief)

Business asset disposal relief (BADR) (formerly known as entrepreneurs’ relief (ER)) can apply when you sell part or all of your business, or shares in your own company after 5th April 2008. Broadly, providing certain conditions are met, BADR allows the capital gain to be taxed at the rate of just 10%.

There are some tight restrictions to BADR. It applies to gains made after 6 April 2008. For disposals on or after 11 March 2020, the relief applies to the first £1 million of qualifying lifetime gains. Gains in excess of this limit or which do not qualify for other reasons will be taxed at 10% or 20% (18% or 24% for carried interest and 18% or 24% for residential property).

Annual Exemption

An annual exemption of £3,000 for 2024/25 is available to individuals so total gains made in the tax year up to this amount are exempt. Any unused annual exemption is lost and cannot be carried forward or transferred to another person.

CGT Exemptions

These are the main exemptions from (CGT)…

• Normally the sale of your only or main residence is exempt, although it can become partly chargeable in some circumstances such as if it is let out or used for business purposes;
• Transfers of assets between husband and wife or civil partners. Such transfers are treated as being made at no gain/no loss;
• Most chattels whose value decreases over time (called wasting assets);
• Non wasting and business chattels where the disposal proceeds do not exceed £6,000;
• Private motor cars;
• Gifts to charity and certain amateur sports clubs;
• SAYE contracts, savings certificates and premium bonds;
• Betting winnings and prizes including the lottery;
• Compensation for damages for personal or professional injury;
• Some compensation payouts for mis-sold pensions;
• Life assurance policies in the hands of the original owner or beneficiaries;
• Company reorganisations and takeovers where there is a share for share exchange.

Tax Schemes Available

There are certain types of investment which have been designed with preferential tax treatments for Capital Gains Tax and Income Tax, mainly to encourage investment in new companies and also to encourage employees to own shares in the companies they work for.

Schemes include the Enterprise Investments Scheme (EIS) which gives income tax and capital gains tax relief on investments made in companies with assets worth less than £15million. A similar scheme Seed Enterprise Investments Scheme (SEIS) with similar reliefs for smaller companies.The Enterprise Management Incentive Scheme is a share option scheme which can be used to provide tax efficient targeted incentives to key employees or employee groups.

See our helpsheets that deal with EIS, SEIS and EMI in more detail.

Payment of CGT

CGT is generally paid through the self-assessment system and gains and losses must be declared on your self-assessment return. The gains after all reliefs and exemptions are added to your taxable income and then taxed at your top marginal rate. The tax is usually payable by 31 January following the tax year in which the gain arose.

There are special rules for paying capital gains tax arising on disposals of UK land and property.

The HMRC guidelines state that you “must report and pay any Capital Gains Tax due on UK residential property within 60 days of selling the property if the completion date was on or after 27 October 2021 or 30 days of selling the property if the completion date was between 6 April 2020 and 26 October 2021.”

The deadlines are the same as above for anyone who is not a UK resident.

How We Can Help You

Capital Gains Tax is a specialist area and you should contact us for advice in minimising CGT liabilities.