The world of investments can be exciting but comes with its fair share of complexities. Understanding capital gains tax (CGT) is crucial for UK investors looking to maximise their returns and minimise tax liabilities. Today I will provide you with the essential information you need to know about CGT, from its basics to strategies for minimising your tax bill.
What is Capital Gains Tax?
Capital gains tax is levied on the profit you make from the sale of any asset that has increased in value. This includes assets such as:
Shares and stocks
Property and land
Business assets and investments
Inherited assets and gifts
Valuables like art, jewellery, and antiques
What profits are tax-free?
Capital gains tax on cars: The sale or gifting of private cars.
Capital gains tax on gifts to spouses or charity: Gifts between husband and wife or registered civil partners are tax-free. Gifts to charities are also tax-free.
Capital gains tax on property sales: The sale of your main home is tax-free. The sale of a buy-to-let or second home that was your main home within the past 18 months can also be tax-free.
Capital gains tax on personal possessions: Personal possessions worth no more than £6,000 are tax-free. Possessions with a useful life of 50 years or less, such as a boat, are also tax-free.
Capital gains tax (CGT) on financial products: Betting, pools and lottery winnings, Isas or Peps, UK government gilts and premium bonds, National Savings and investments products, pensions, child trust funds, proceeds from life insurance policies.
Capital gains tax (CGT) and inheritance: Whatever you leave on death is tax-free (unless inheritance tax is payable instead).
How much tax do I have to pay on capital gains?
Determine the disposal proceeds: This is the selling price of the asset minus any selling costs.
Deduct the acquisition cost: This is the asset's original purchase price plus any allowable expenditure incurred during ownership, such as renovation costs for the property.
Apply the annual CGT allowance: Each individual has an annual CGT allowance of £6000 (for the 2022-2023 and 2023-2024 tax year) which can be offset against any capital gains.
Apply the relevant CGT rate: CGT rates in the UK vary depending on the asset disposed of and the individual's income tax band. Rates range from 10% to 28%.
What happens if you don't declare capital gains tax on property?
Failure to declare capital gains tax on property can result in serious consequences, including financial penalties, legal action, and even imprisonment. Here's a detailed explanation of the potential repercussions:
Financial Penalties: HMRC may impose substantial penalties for non-declaration of capital gains tax on property. These penalties can range from 3% to 60% of the unpaid tax, depending on the severity of the non-compliance and the taxpayer's previous history.
Interest Charges: HMRC will also charge interest on any outstanding capital gains tax, compounding with time. This can significantly increase the financial burden associated with non-declaration.
Retrospective Investigations: HMRC may conduct retrospective investigations into past tax returns, including those related to property transactions. This could lead to additional penalties and interest charges for any undeclared capital gains.
Legal Action: In severe cases of deliberate non-declaration or willful evasion of capital gains tax on property, HMRC may pursue legal action, including summons, fines, and even imprisonment.
Damage to Reputation: Non-declaration of capital gains tax on property can damage one's reputation and hinder future financial activities. Lenders, insurers, and even potential business partners may be hesitant to deal with individuals with a history of tax non-compliance.
Limitation Period: There is a limitation period for HMRC to pursue unpaid capital gains tax on property. However, this period can be extended in certain circumstances, making it crucial to declare and pay any taxes promptly.
What are the capital gains tax rates in 2023?
The current Capital gains tax rates in the UK for the 2023-2024 tax year are:
Basic rate: 10% for basic rate taxpayers (income taxpayers who earn between £6000 and £50,270 in the 2023-2024 tax year) and higher rate taxpayers (income taxpayers who earn more than £50,270 in the 2023-2024 tax year) on the first £6000 of their capital gains.
Higher rate: 20% for higher rate taxpayers on any capital gains above £6000, up to £150,000
Additional rate: 28% for additional rate taxpayers (income taxpayers who earn more than £150,000 in the 2023-2024 tax year) on any capital gains above £150,000
Reporting Requirements and Procedures
Who needs to report CGT?
Individuals who make a capital gain above their annual allowance (£6000 for the 2023-2024 tax year) must report it to HMRC.
What needs to be reported?
You must report all taxable gains and losses from the disposal of assets, including shares, property, and other investments.
How to report?
You can report CGT online through the HMRC website or by completing a self assessment tax return.
What to report?
When reporting your gains and losses, provide clear and accurate information, including:
Description of the asset disposed of
Dates of purchase and disposal
Acquisition cost and disposal proceeds
Any allowable expenditure
HMRC Reporting Deadlines:
Capital gains tax on property: You must report and pay CGT within 60 days of completing the sale.
Other capital gains tax: You must report and pay CGT by the 31st of January following the tax year in which the gain was made.
Simplifying the Calculation Process:
Maintain accurate records: Keep detailed records of all your asset purchases and sales, including dates, costs, and proceeds.
Utilise online tools: HMRC provides a capital gains calculator on its website to assist with calculations.
Seek professional help: If you are unsure about any aspect of CGT calculations, consult a tax advisor for personalised guidance.
Ensure your calculations are accurate and double-check all figures before submitting your report.
Why is Capital Gains Tax Important for investors?
Beyond the immediate impact on your financial gains, CGT plays a significant role in shaping your investment choices. By understanding its mechanisms, you can:
Make informed decisions about when to buy and sell assets: Timing your investments strategically can help you minimise CGT liability and maximise your overall returns.
Structure your portfolio tax-efficiently: Utilising tax-advantaged accounts like ISAs and pensions allows your investments to grow without incurring CGT until withdrawal.
Develop long-term investment strategies: Understanding the tax implications of different asset classes can help you build a portfolio that aligns with your financial goals and reduces your overall tax burden.
Plan for future tax liabilities: By anticipating potential CGT bills, you can ensure you have the necessary funds available when due, preventing any financial challenges.
What strategies can be employed to minimise Capital Gains Tax?
Annual Tax-Free Allowances: Every individual in the UK has an annual Capital Gains Tax allowance, currently set at £6000 for the 2023-2024 tax year. Any gains below this threshold are exempt from CGT.
Utilising tax-efficient accounts: Invest in tax-efficient wrappers like ISAs and pensions where your gains are not subject to CGT.
Holding assets for longer periods: Assets held for more than one year qualify for a lower CGT rate.
Claiming capital losses: Any capital losses incurred on the disposal of assets can be offset against future capital gains.
Gifting assets to utilise allowances: Gifting assets to spouses or civil partners can utilise each other's CGT allowances.
Principal Private Residence Relief: This relief exempts any capital gain made from the disposal of your primary residence, regardless of the profit amount. This allows you to sell your home and move without incurring CGT, providing flexibility in your living arrangements.
Investments in Enterprise Investment Schemes (EIS) and Seed Enterprise Investment Schemes (SEIS): These government-backed schemes offer CGT relief to investors who support smaller companies.
Entrepreneurs' Relief: Under certain conditions, entrepreneurs may qualify for a 10% CGT rate on qualifying business assets.
Transfer assets to joint names: Consider transferring assets into joint names if you're married or in a civil partnership. By transferring an asset into joint ownership, you can both make use of your tax-free allowance so that up to £24,600 of any gain is tax-free. But the transfer to your spouse or partner must be a genuine outright gift.
Invest in pieces that aren't sets: Investing in paintings, antiques and other collectables can be tax-efficient, especially where they are not treated as a set and so can be sold piece by piece, with each item qualifying for the £6,000 exemption.
Consider the 5/3rds option: If your gain after selling possessions is between £6,000 and £15,000, you can either pay tax on the actual gain, or for 5/3rds of what you sold it for, minus £6,000. You can choose whichever figure is lower.
Choose different main homes if you're unmarried: Unmarried partners can each nominate a different property as their main home. You can then benefit from tax relief on both. Married couples and civil partners must choose just one, however.
Live in your property: If possible, live in a property before letting it out. If the property is your main home for a time period before you sell it, you can potentially reduce the CGT bill when you eventually sell it. See our guide capital gains tax on property.
Sell shares within your CGT allowance: If you immediately sell employee shares that you get through a save-as-you-earn (SAYE) share option scheme, company share option scheme, or enterprise management incentive scheme, you may have a CGT bill. Instead, consider selling in several tranches so that each year's gain is within your annual tax-free allowance.
How to stay ahead of the curve:
By staying informed about the latest developments and anticipating future trends in CGT, you can be well-prepared to adapt your investment strategies and minimise your tax liabilities. Here are some tips:
Regularly check HMRC updates: Visit the HMRC website for the latest information on CGT regulations and any upcoming changes.
Subscribe to financial publications and blogs: Stay informed about industry insights and expert predictions on the future of CGT.
Seek professional advice: Consult Edmil Accountants for personalised guidance and tailored strategies based on your individual circumstances and the evolving CGT landscape.