By Alan Gregory | October 4, 2021 | 8 minutes of reading

Although most taxpayers understand that their income is subject to income tax, many are not sure how to treat the sale of a capital asset, such as property (that is not your house) or stocks. Additionally, changes to capital gains tax (CGT) reporting over recent years have further complicated matters and left many taxpayers confused.

You probably came across this guide while searching for the answer to the question “what is capital gains tax?” » This is probably because it was mentioned to you because you have just sold a valuable asset or are considering selling it.

Well, you’ve come to the right place as this easy to digest article provides a comprehensive overview of capital gains tax for UK residents, explaining what capital gains tax is , what assets it applies to, how much CGT is and who should do it. pay it.

What is capital gains tax?

Simply put, when you sell an item you own and it has increased in value, you may be liable for tax on the amount of the increased value. This tax is Capital Gains Tax (CGT).

Whether or not you have to pay UK capital gains tax on the sale of your asset will be determined by several factors which are discussed in more detail below.

Who pays capital gains tax?

You may be wondering if CGT is separate from income tax. Individuals pay income tax on their income (e.g. salary, profits from self-employment, rental income). Capital gains tax, on the other hand, applies to capital gains resulting from the sale of taxable assets. Common examples of taxable assets include stocks, property and land. CGT can apply both when an asset is sold and when it is gifted.

As UK resident taxpayers are generally subject to capital gains tax on their worldwide gains, sales of taxable assets abroad (e.g. an overseas rental property) are also subject to UK CGT on disposal.

Note that businesses do not pay capital gains tax. Instead, they pay Corporation tax on their taxable earnings.

Exempt assets

Not all disposals result in a capital gains tax liability. Let’s look at some examples of what is exempt from CGT.

One of the most common exemptions is the transfer of principal residence (where the property has been a taxpayer’s principal residence throughout their ownership and has not been used to produce income – e.g. example by renting it out or being used as a place of business).

Another well-known situation where CGT does not arise is where an individual transfers assets to their spouse or civil partner. Such transfers are generally considered to be at zero gain/loss.

Some asset disposals are also exempt from CGT – HMRC guidance provides a high-level summary.

How much is the capital gains tax?

Capital gains tax applies to the net increase resulting from the disposal of an asset. The amount of CGT you will have to pay depends on several factors which we will discuss.

How to calculate CGT

In its simplest form, CGT is calculated by taking the amount paid to acquire the asset and deducting this “cost basis” from the net proceeds resulting from the sale.

In practice this calculation can be more complicated, for example where an asset is being donated, capital losses are being claimed or where only partial private residence relief is available on a property sale. For more complicated situations, it may be helpful to seek professional advice.

Once the net gain has been calculated, the taxpayer must consider the annual exemption amount (AEA) available. The AEA is a CGT allowance, meaning that no capital gains tax is payable on gains that fall within the AEA.

Now you know how to calculate capital gains tax. If you think you overpaid, check out our guide to claim back tax.

What is the capital gains tax allowance?

The AEA threshold is currently £12,300 for individuals in 2021 (at the time of writing, October 2021). The government has confirmed that this rate will be frozen until April 5, 2026.

What percentage does the CGT represent?

The capital gains tax rate applicable to a transfer depends on the property and tax status of the seller.

When the property is a residential building, the CGT rate is either 18% or 28%. The 18% rate applies to basic rate taxpayers, while the 28% rate applies to higher and additional rate taxpayers.

In the event of a sale of other taxable assets, the CGT rates are lowered to 10% or 20% respectively depending on the taxpayer’s rate band.

Taxpayers can also access specific capital gains tax reliefs when certain conditions are met. Eligible assets may, for example, be eligible for Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) which applies a CGT rate of 10% on eligible earnings up to a lifetime allowance of £1 million.

When do you pay capital gains tax?

The legal deadline for paying capital gains tax is January 31 following the tax year of the transfer.

If the taxpayer pays a deposit, the capital gain is not considered part of the POA. The full CGT balance is due by January 31.

Penny sells its shares in December 2021, realizing a net capital gain after the annual exempt amount of £30,000. Penny is a higher rate taxpayer, meaning CGT of 20% (£6,000) is payable. This amount must be paid no later than January 31, 2023.

The exception to this rule is the sale of residential property in the UK. In such cases, the disposal must generally be reported to HMRC and the associated CGT paid within 30 days of the sale being completed.

Declaration of transfers

If a taxpayer makes a taxable disposal, subject to limited exceptions, that disposal must be reported to HMRC.

This is usually done by filing a self-assessment tax return and completing the additional capital gains tax pages.

An individual sells an investment property abroad in January 2022 and realizes a net capital gain after all reliefs and allowances of £100,000. This disposal must be reported in their 2021-22 self-assessment tax return. The filing deadline is October 31, 2022 if you file a paper return, or January 31, 2023 if you file online.

If this is an individual’s first self-assessment return, the deadline to register for self-assessment is October 5 following the end of the relevant tax year.

Exceptions to transfers

However, there are certain exceptions. For example, a taxable gain below the AEA does not need to be declared.

If a taxpayer is not in self-assessment, or is in self-assessment and wishes to pay the CGT due on a disposal early, the Real Time Capital Gains Tax service can be used to declare capital gain on a disposal other than the United Kingdom. residential property.

If a taxpayer uses the Real-Time Service and (apart from the assignment) does not need to file a self-assessment tax return, then by declaring the gain via the Real-Time Service, no tax return should not be produced. Taxpayers who are self-assessment must still report the disposal on their tax return, even if they use the real-time service.

Declaration of transfers of property

There are additional reporting requirements to consider when disposing of a residential property in the UK.

For UK tax residents, the disposal of UK residential property (e.g. rental property) from 6 April 2020 must be reported to HMRC via Capital Gains Tax in the UK Property Account. The deadline for declaring the transfer and paying the CGT due is 30 days from the completion of the sale.

There are some exceptions for UK residents. Where a disposal of a UK residential property is exempt from CGT (e.g. the sale of the main residence) or where the disposal does not trigger any CGT liability through the AEA or use of capital losses , the disposal does not need to be declared via CGT on the UK property account.

However, this is not an optional declaration form; where a taxpayer meets the criteria, the disposal must be reported via CGT to a UK property account on time.

Where a taxpayer is not in self-assessment and (apart from disposal) does not need to file a self-assessment tax return, no tax return is necessary if the gain is declared via CGT to a UK property account. However, self-assessment taxpayers must still declare the disposal on their tax return, in addition to reporting the disposal via CGT on the UK property account.

10 key points to remember for the CGT

1. CGT can apply both when an asset is sold or given away.
2. The AEA (Annual Exempt Amount) is currently £12,300 for individuals in 2021.
3. One of the most common CGT exemptions is the transfer of the main residence.
4. Capital gains tax applies to the net increase resulting from the disposal of an asset.
5. Where the property is residential property, the rate of CGT is either 18% (for basic rate taxpayers) or 28% (for higher/additional rate taxpayers).
6. When other taxable assets are sold, the CGT rates are much lower, at 10% or 20% respectively.
7. The legal deadline for paying capital gains tax is January 31 following the tax year of the transfer.
8. Reporting disposals is usually done by filing a self-assessment tax return and completing the additional capital gains tax pages.
9. A taxable gain below the AEA does not need to be declared.
10. There are additional reporting requirements to consider when disposing of a residential property in the UK.

At IRIS, we understand how confusing tax can be, even for the most experienced people. Our area of ​​expertise is tax software which simplifies tax declaration for individuals and professionals. For help with CGT, look no further than our latest cloud solution, IRIS Elements.