When you dispose of an asset for more than you paid for it then the profit you make is known as a capital gain. Here in the UK these gains are not taxed under the income tax system that most of us are more familiar with. Instead capital gains tax in the UK has it’s own tax system and rules.
In todays article we will cover when a capital gain arises, how to calculate a gain, the rates of tax that apply and right the way through to how capital gains tax in the UK is reported to HMRC.
When Do We Pay Capital Gains Tax In The UK?
You may need to consider capital gains tax in the UK when a chargeable person makes a chargeable disposal of a chargeable asset.
In plain English, most of us will be a chargeable person because we are resident in the UK. A chargeable disposal most commonly takes place when you sell an asset but also when you gift it to someone else, lose it or damage it and finally a chargeable asset is typically any asset that isn’t otherwise exempt.
Exemptions to capital gains tax in the UK exist for certain assets with the most common being for:
- Your principle private residence which is usually the home that you live in permanently
- Motor cars (this specific exemption doesn’t include vans, lorries, bikes etc but these assets can sometimes be covered via another exemption
- Tangible moveable items (known as chattels) that are disposed of for £6,000 or less
- Chattels with a useful life of 50 years or less unless used in a business and qualifying for capital allowances
- Individual savings accounts (ISA’s)
- Winnings from betting & gambling
How To Calculate A Gain
- Deduct allowable losses from chargeable gains in the same period to leave you with the net gain. Where a net loss occurs this can be carried forward to set against future gains
- If there is a net gain for the year then any losses being carried forward from previous tax years would be set against the gain (see treatment of losses below)
- The capital gains allowance can then be applied. If the allowance does not alleviate the full gain then the balance that remains will be the taxable gain. If the allowance alleviates the full gain then the taxable gain is nil and any unused allowance is lost as it cannot be carried forward
Where allowable losses in a tax year exceed chargeable gains then the loss can be carried forward and must be set against the first available gain but this should only be done to the extent that the gain is reduced to an amount equal to the capital gains allowance. This ensures maximum efficiency and makes the best possible use of those losses.
Remember though this does not apply in the year that a loss is incurred as in that first year a loss must be set against gains from the same period until the net gain reaches nil (where possible) this means the year the loss is incurred you cannot preserve the capital gains allowance.
In the year of an individuals death the situation is complicated by the fact that any losses can no longer be carried forward. Any disposals made in the year prior to death are still chargeable to capital gains tax in the UK and the individual will benefit from a full years capital gains allowance irrelevant of the date they died.
If the individual incurred a net loss in the year of death then that loss can be carried back for up to 3 tax years and set against previous gains in order of most recent first. Again the gain only needs to offset to the extent that any remaining amount is covered by the CGT allowance.
Rates Of CGT
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When disposing of shares in a company there are a specific set of rules known as the share matching rules that need to be followed. These are needed in situations where a shareholding has been built up over a period of time. Often an investor will buy the the same shares on a number of different occasions at different price points to build up their position. If part of the holding is later disposed of then it is impossible to determine which shares are actually being disposed of and therefore the share matching rules are needed.
Shares in the same company of the same class must be matched in the following order:
- First against shares acquired on the same day as disposal
- Then against any shares acquired within 30 days of disposal
- Finally against shares held in the section 104 pool which is a theoretical pooling of all remaining shares held prior to the disposal that haven’t already been matched against previous disposals. An average acquisition cost for shares held in the section 104 pool is used
Reporting A Gain
Exemptions & Reliefs
There are a number of additional exemptions and reliefs that have not been covered to far in this article. The most notable being:
- Transfers between spouses & civil partners – are made on a nil gain nil loss basis meaning that assets can be passed between the two without a capital gain or loss arising
- Business asset disposal relief – qualifying business assets include all or part of a business that the individual has owned for 2 years prior to the date of disposal and some shares in a trading company that the individual was an employee or director of
- Incorporation relief – can apply when transferring a business and it’s assets to a ltd company set up. Certain qualifying criteria apply but if qualifying then the transfer will be exempt from capital gains tax in the UK