Capital Gains Tax Basics, a Complete Guide

Capital gains tax in the UK, also sometimes referred to as CGT for short, is a tax on the profit you make when you sell certain assets for more than you paid for them originally. This tax applies to a wide range of assets including real estate, stocks, bonds, precious metals and property. It generally excludes personal assets such as cars or household goods.

Capital gains tax targets the gain or profit made from the asset sale, rather than the total amount received, impacting individuals, trusts, and estates that sell assets for a profit. The revenue generated from capital gains tax serves as a source of income for governments, contributing to public funding. Capital gains tax is designed to ensure fairness in financial markets by taxing investment profits similar to other forms of income. It also serves as an economic policy tool, influencing economic behaviour by encouraging or discouraging certain types of investments. Capital gains tax helps in the efficient allocation of resources by taxing gains from the sale of capital assets, contributing to wealth distribution through potentially higher rates on larger gains. Capital gains tax also often provides incentives for long-term investment by offering lower tax rates for assets held over longer periods, aligning with broader economic and social policy objectives.

 

Types of Assets Subject to Capital Gains Tax

Capital gains tax  applies to a wide range of assets when they are sold for a profit. These assets include real estate, encompassing personal residences (with some exemptions), rental properties, and other real estate investments not used for business purposes. Shares and securities held in companies or trusts are also subject to Capital gains tax, although those held in tax-exempt accounts like ISAs or pensions are exempt. High-value personal possessions such as jewellery, art, antiques, and collectables worth over a certain threshold are also subject to capital gains tax on sale. Business assets used in a business, such as buildings, machinery, and trademarks, may be subject to capital gains tax, although certain reliefs may apply. Digital assets like cryptocurrency (e.g., Bitcoin, Ethereum) are also considered taxable assets when sold for a profit. Units in investment funds, foreign assets owned by UK residents, inherited assets, gifted assets, and intangible assets such as intellectual property can also be subject to capital gains tax when disposed of at a gain.

Who Needs to Pay Capital Gains Tax?

pay your tax now sign on glass door

In the UK, capital gains tax applies to various individuals and entities based on specific circumstances. These include:

  • Individuals must pay capital gains tax on gains from selling personal and investment assets if the total gains exceed the annual tax-free allowance (currently £3 000 for the tax year 2024/25).
  • Company directors and business owners are liable for capital gains tax on profits from selling business assets, including shares in their own companies.
  • Trustees are responsible for paying capital gains tax on gains from trust assets, subject to different rates and allowances compared to individuals.
  • Partners in a partnership are subject to capital gains tax on their share of gains from partnership asset disposals.
  • Non-residents may need to pay capital gains tax on the sale of UK property or land, even if they are not tax residents in the UK.
  • Executors of estates are liable for capital gains tax on gains made from selling estate assets during the administration period.
  • Spouses and civil partners can transfer assets between each other without immediate capital gains tax implications, but capital gains tax may apply when the receiving partner later sells the asset.
  • Expatriates (former UK residents) may be subject to capital gains tax on UK assets sold while non-resident, depending on their period of non-residence and other factors.
  • Minors are subject to capital gains tax on gains from their assets, with parents responsible for reporting and paying the tax on their behalf.
  • Non-domiciled residents may also be subject to capital gains tax on gains from both UK and foreign assets, depending on their domicile status and tax election.

 

Capital Gains Tax Rates for 2024/25

Here is an overview of capital gains tax rates for different asset types and taxpayer categories.

 

Asset Types:

Residential Property:
– Higher rates than other assets.
– Possible reliefs for primary residences.

Non-Residential Property and Land:
– Standard capital gains tax rates apply.
– Includes commercial properties.

Shares and Securities:
– Standard capital gains tax rates, excluding shares held in tax-exempt accounts like ISAs.

Business Assets:
– Entrepreneurs’ Relief may apply, offering lower rates on certain business disposals.

Personal Possessions:
– Specific rate for high-value items (e.g., art, antiques) over a certain threshold.

Cryptocurrency:
– Treated as a standard asset with applicable capital gains tax rates.

 

Taxpayer Categories:

Basic Rate Taxpayers (£12,571 – £50,270):
– Lower capital gains tax rate for most assets (10%).
– Residential property and carried interest may attract a slightly higher rate (18%)

Higher and Additional Rate Taxpayers (£50,271 +):
– Higher capital gains tax rate for most assets (20%).
– Residential property and carried interest subject to the highest rates (28%).

Trustees & Representatives of Deceased Persons:
– Generally subject to higher capital gains tax rates (28%).
– Special rules and reliefs may apply (20%).

Non-Residents:
– Special rules for capital gains tax on UK property or land.
– Non-residential assets are generally not subject to capital gains tax, with exceptions.

Companies:
– Not subject to capital gains tax. Gains are treated as part of corporate tax calculations.

 

Reporting Capital Gains Tax

Reporting capital gains tax involves several key steps and considerations. If you’re already registered for self-assessment, you must report capital gains on your annual tax return, which is due by 31 January  following the end of the tax year (which runs from 6 April  to 5 April 5). Alternatively, HMRC offers an online Capital Gains Tax service for immediate reporting and payment if you’re not registered for self-assessment or prefer a separate reporting method for capital gains. Specifically for the sale of UK property, capital gains tax must be reported and paid within 60 days of completion using the UK Property Reporting Service. Non-residents selling UK property have a shorter deadline of 30 days to report the sale and any capital gains, regardless of whether tax is due. It’s important to keep detailed records of asset transactions, including purchase and sale dates, amounts, and related expenses, for at least six years after the tax year to which they relate. You should also report any capital losses, as they can be used to offset gains and reduce your overall tax liability. Seeking professional advice from a tax expert is advisable, especially for complex cases or substantial gains, to ensure accurate reporting and compliance with capital gains tax regulations.

 

How QAccounting Can Help

While this article is a good starting point if you need to wrap your head around capital gains tax basics, seeking assistance from a tax professional remains the most effective way to manage capital gains tax obligations, optimise tax planning strategies and ensure compliance with HMRC requirements. Our team of expert accountants is on hand to provide tailored solutions to your tax needs. From advice and consulting to calculating and reporting and more, we’ll help you navigate the complexities of capital gains tax confidently and minimise tax liabilities where possible.

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