Understanding UK Capital Gains Tax Rules

Capital Gains Tax (CGT) is the tax you pay on any profits arising from the sale or disposal of an asset that has increased in value.

In the UK, CGT applies to various types of assets, including property, shares and business assets, and can be applicable to individuals, trusts and certain types of organisations.

Taxpayers must ensure compliance with the CGT rules. Failure to accurately calculate and report CGT can lead to significant financial penalties and interest charges.

Beyond compliance, understanding CGT also supports effective tax planning, ensuring optimum use of the various exemptions and reliefs that may be available to minimise tax liability.

In this comprehensive guide to Capital Gains Tax in the UK, we set out the fundamentals of what CGT is, when it becomes payable and who needs to pay it, along with detailed explanations of current rates, calculations, allowances and exemptions. We also share tips for reducing CGT liability and common mistakes to avoid.

 

Section A: What is Capital Gains Tax?

 

Capital Gains Tax (CGT) is a fundamental component of the UK’s tax system, designed to tax the profit made from the sale or disposal of certain assets. Understanding CGT is crucial for anyone involved in buying, selling, or otherwise disposing of valuable assets such as property, shares, or business interests.

Capital Gains Tax (CGT) is a tax on the profit realised when an asset is sold or disposed of at a higher price than it was originally purchased for. In general, you usually ‘dispose of’ an asset when you stop owning it, which can include giving it away, transferring it or exchanging it for something else.

Importantly, it is the gain you make that may be taxable, not the sale proceeds or amount of money received.

CGT applies to a wide range of assets, including real estate (other than the primary residence), shares, and personal possessions worth over a certain amount.

The primary purpose of CGT is to ensure that individuals and businesses contribute a fair share of tax on the profits made from the sale of non-inventory assets. It is designed to prevent the accumulation of untaxed wealth and to promote equity within the tax system. By taxing capital gains, the government can generate revenue while encouraging the efficient allocation of resources within the economy.

Capital Gains Tax was introduced in the UK on 6th April 1965 by the then Chancellor of the Exchequer, James Callaghan. Before its introduction, there was no tax on the gains made from the sale of assets, which led to a significant loss of potential tax revenue and a perception of inequity in the tax system. The introduction of CGT was part of a broader tax reform aimed at creating a more balanced and fair taxation system.

Initially, CGT was levied at a flat rate of 30% on individuals, with certain exemptions and reliefs to avoid double taxation and to promote economic growth. Over the years, the tax system has evolved, with numerous changes to rates, allowances, and exemptions reflecting the shifting economic landscape and government policies. Notable changes include the introduction of indexation allowance in 1982 to adjust gains for inflation, the taper relief in 1998 to encourage long-term investment, and the Entrepreneurs’ Relief in 2008 (now called Business Asset Disposal Relief) to support business owners.

Today, CGT rates vary depending on the taxpayer’s income and the type of asset sold. There are different rates for basic and higher/additional rate taxpayers, and various reliefs and exemptions are available to reduce the tax burden in specific circumstances. The annual exempt amount allows individuals to realise a certain amount of gains each year tax-free, and special reliefs are available for business assets and other qualifying disposals.

 

Section B: When is Capital Gains Tax Payable?

 

Capital Gains Tax is not universally applicable to all transactions or taxpayers; specific criteria determine who is liable and when liability arises.

 

1. Triggering Events

 

CGT is typically due when you dispose of an asset and make a profit or gain from that disposal. “Disposal” in this context doesn’t just mean selling an asset; it can refer to several different actions or events, each of which can trigger a CGT liability. Triggering events can include:

 

a. Selling an Asset

The most common event that triggers CGT is the sale of an asset, such as property, shares, or personal possessions. If the sale price exceeds the original purchase price (after accounting for any allowable costs), the difference is considered a capital gain and may be subject to CGT.

 

b. Gifting an Asset

Giving an asset as a gift can also trigger CGT, especially if the asset has increased in value since you acquired it. This applies even if no money changes hands. However, gifts to a spouse, civil partner, or charity are usually exempt from CGT.

 

c. Transferring an Asset

Transferring ownership of an asset, such as moving property into a trust or between business entities, can trigger CGT if the asset has increased in value.

 

d. Exchanging an Asset

Swapping one asset for another (e.g., trading shares) can trigger CGT, as it is considered a disposal of the original asset.

 

e. Receiving Compensation

Compensation received for an asset that has been lost, destroyed, or damaged (e.g., insurance payouts) can also trigger CGT if the compensation exceeds the asset’s original value.

 

f. Part-Disposals

For CGT purposes, a disposal also includes a part disposal; for example, you may have disposed of a part share in a house you inherited, or you may have sold half your collection of jewellery.

 

2. Who Pays Capital Gains Tax?

 

The liability for CGT in the UK extends to several categories of taxpayers, each with specific rules and considerations:

 

a. UK Resident Individuals

In the UK, individuals are generally liable to pay CGT if they sell or dispose of a chargeable asset that has increased in value above the relevant annual allowance threshold, such as property, shares, and other investments.

This applies to all worldwide gains, regardless of where those assets are located, not just those arising in the UK.

 

b. Non-Resident Individuals

The reach of CGTliability for non-residents has extended in recent years. Currently, non-residents in the UK are required to pay CGT on the disposal of UK property and land interests, including certain disposals of shares in entities primarily holding UK land, as well as assets used or held for trade purposes conducted in the UK through a branch or agency.

 

c. Non-Doms

The current UK tax regime for non-domiciled individuals – UK residents who have their permanent home (‘domicile’) outside the UK – will be abolished from 5th April 2025.

 

i. Current Rules

Non-doms may not have to pay UK tax on capital gains when the following two apply: the gains are less than £2,000 in the tax year, and you do not bring them into the UK, such as transferring them to a UK bank account.

Gains of more than £2000, or money brought into the UK, must be reported in a self-assessment tax return. There are two options to deal with the liability; you can either pay UK tax on the gains, with the possibility of reclaiming it later, or you can opt for the ‘remittance basis’.

Choosing the remittance basis means you will only pay UK tax on the gains that you bring into the UK. However, this option has some drawbacks; for example, you will lose your tax-free allowance for Capital Gains Tax, although some ‘dual residents’ may retain it. You will also have to pay an annual charge if you have been a UK resident for a certain period: £30,000 if you have been a resident for at least 7 out of the previous nine tax years, or £60,000 if you have been a resident for at least 12 out of the previous 14 tax years.

Claiming the remittance basis can be complex. There is the additional potential impact of the UK’s new FIG regime, which offers an option for Non-Doms to claim relief on gains for the first four years of UK residence. This could indirectly affect CGT planning, as it might influence decisions about when to remit funds to the UK.

You can either contact HMRC directly or seek professional tax advice, such as from a tax adviser.

 

ii. New Rules from 5th April 2025

Starting from 6th April 2025, significant changes to the taxation regime for non-doms will come into effect, particularly concerning Capital Gains Tax.

Under the new rules, non-doms who previously benefited from the remittance basis of taxation will be required to pay CGT on a worldwide basis, similar to UK residents.

For non-doms who will transition to the arising basis of taxation on 6th April 2025, CGT will apply to all gains, regardless of whether the assets are located in the UK or abroad. This marks a departure from the previous system, where non-doms were only taxed on gains from UK assets or foreign assets when the proceeds were remitted to the UK. Under the new regime, any disposal of foreign assets will now trigger a CGT liability, even if the proceeds remain offshore.

One of the transitional provisions includes the potential rebasing of foreign assets. This means that certain non-doms may be allowed to rebase the value of their foreign assets to their market value as of a specified date, expected to be announced in the Autumn Budget of 2024. Rebasing could potentially reduce the CGT liability on gains accrued before the transition to the arising basis, as only the gains accrued after the rebasing date would be subject to CGT.

It is important for non-doms to understand that while the remittance basis provided a tax deferral opportunity for foreign gains, the new rules will impose immediate tax obligations on gains as they arise, regardless of where the assets are held or where the proceeds are used. This change necessitates careful planning to manage the potential tax impact.

Non-doms may also need to review their current asset structures, particularly those involving offshore entities, as the new rules may lead to increased scrutiny and taxation of gains that were previously outside the scope of UK tax. The Temporary Repatriation Facility (TRF) being introduced may offer some relief for remittance basis users who wish to bring pre-6 April 2025 gains into the UK, though details on this are still forthcoming.

 

d. Trusts

Trusts are treated as separate entities for CGT purposes. When a trust disposes of an asset and realises a gain, the trustees are responsible for paying CGT. The tax rates and allowances for trusts differ from those for individuals, with trusts typically having a lower annual exemption.

Beneficiaries of a trust may also have CGT liabilities depending on how and when they receive assets or distributions from the trust.

 

e. Companies

Companies generally do not pay CGT directly. Instead, they pay corporation tax on their chargeable gains. The calculation of gains is similar to CGT, but the applicable tax rate is the corporation tax rate.

Individuals operating as sole traders or in partnerships are personally liable for CGT on the disposal of business assets, such as premises, machinery, or goodwill.

 

f. Charities

Charities are generally exempt from CGT, provided the gain is used for charitable purposes. However, if a charity disposes of an asset that was not used for charitable purposes, CGT may be applicable.

 

g. Pension Funds

Registered pension schemes are exempt from CGT on gains arising from their investments. This exemption helps maximise the funds available to provide pension benefits.

 

h. Investment Companies and Funds

Investment companies and collective investment schemes, such as unit trusts and open-ended investment companies (OEICs), are subject to CGT on their gains. The tax treatment can vary depending on the structure and type of the fund.

 

i. Non-Resident Companies

Since April 2019, non-resident companies have been subject to CGT on gains from UK property and certain interests in property-rich entities. These gains are subject to corporation tax rather than CGT.

 

j. Public Bodies and Government Entities

Public bodies and certain government entities are typically exempt from CGT. This includes local authorities and other government organisations.

 

Section C: Types of Assets Subject to CGT

 

Capital Gains Tax applies to a wide range of assets, referred to as ‘chargeable assets’. Knowing which assets are affected and which are exempt can help you manage your investments and disposals more efficiently.

 

1. Chargeable Assets

 

Chargeable assets can include the following:

 

a. Property

One of the most common assets subject to CGT is property, including second homes or rental properties, commercial property and land.

The sale of your main residence is typically exempt due to Private Residence Relief, provided it has been your main home throughout the period of ownership.

 

b. Shares and Investments

CGT is payable on the profit from selling shares and investments, including stocks and shares outside of tax-advantaged accounts like ISAs, units in investment funds and business assets, and shares in a company you own.

 

c. Personal Possessions

Certain personal possessions, known as “chattels,” are subject to CGT if they are sold for more than £6,000. Examples include antiques, artwork, jewellery and collectables.

 

d. Business Assets

Business owners may have to pay CGT on the disposal of business assets, such as machinery and equipment, commercial properties and intellectual property. Special reliefs like Entrepreneurs’ Relief may reduce the CGT payable on these disposals.

 

e. Cryptocurrency

As digital currencies become more prevalent, CGT also applies to the gains made from disposing of cryptocurrencies like Bitcoin and Ethereum.

 

2. Exemptions from CGT

 

Exemptions from CGT liability include:

 

a. Gains Below the Annual Exempt Allowance

CGT only becomes payable if the total gains exceed your annual tax-free allowance.

 

b. Certain Gifts

You would not usually need to pay CGT on gifts to your spouse, civil partner or a charity.

 

c. Exempt Assets

Investments held within Individual Savings Accounts (ISAs) or Personal Equity Plans (PEPs) are not subject to CGT, allowing tax-free growth. Similarly, UK government gilts and Premium Bonds offer tax-free returns. Winnings from betting, lotteries, or pools are also exempt from CGT.

 

Section D: Capital Gains Tax Rates and Allowances

 

Capital Gains Tax (CGT) rates and allowances are vital components of the UK’s tax framework, influencing how much tax is payable on profits from the sale or disposal of assets.

The rate at which you pay Capital Gains Tax will depend on factors such as the type of asset disposed of and the taxpayer’s income during the year in which the sale or disposal is made. There are different rates for basic rate and higher rate taxpayers. Different rates also apply depending on whether the asset comprises residential property or other chargeable assets.

 

1. Annual Exempt Amount

 

You are only required to pay Capital Gains Tax on your overall gains that exceed your tax-free allowance, known as the Annual Exempt Amount.

For the current tax year, the tax-free allowance for individuals is £3,000, while for trusts, it is £1,500.

This exempt amount allows taxpayers to benefit from a certain level of capital gains each year without incurring any tax liability.

It is important to note that this amount is subject to change with each tax year as determined by government policy.

[insert table 3: Annual Exempt Amount Over the Years]

In addition to the Annual Exempt Amount, you may be able to reduce your CGT bill further by deducting allowable losses or claiming specific reliefs, depending on the type of asset involved. This can include strategies such as offsetting losses from the sale of other assets or making use of reliefs available for business assets or primary residences.

Understanding these allowances and reliefs can significantly impact your overall tax liability, so it is advisable to keep detailed records and seek professional advice where necessary.

 

2. Current Capital Gains Tax Rates

 

The UK CGT rates vary depending on the taxpayer’s income level and the type of asset being disposed of.

 

Taxpayer Type	Income Threshold	CGT Rate (Standard Assets)	CGT Rate (Residential Property)
Basic Rate Taxpayer	Up to £37,700	10%	18%
Higher Rate Taxpayer	£37,701 to £150,000	20%	28%
Additional Rate Taxpayer	Over £150,000	20%	28%

 

a. Individuals

CGT rates differ based on the taxpayer’s overall income. The UK’s tax system is progressive, meaning that higher earners pay a higher rate of CGT.

The current CGT rates are:

 

i. Basic Rate Taxpayers: 10% on gains that fall within the basic income tax band.

ii. Basic Rate Taxpayers: 18% on gains from residential property and carried interest.

iii. Higher and Additional Rate Taxpayers: 20% on gains that exceed the basic income tax band.

iv. Higher and Additional Rate Taxpayers: 28% on gains from residential property and carried interest.

 

Gains from the sale of residential property (excluding the primary residence) are taxed at higher rates (18% for basic rate taxpayers and 28% for higher/additional rate taxpayers) due to the significant value typically involved in property transactions.

Gains from other assets, such as shares and personal possessions, are taxed at standard CGT rates (10% for basic rate taxpayers and 20% for higher/additional rate taxpayers).

 

b. Businesses

For businesses, CGT is typically incorporated within the corporation tax framework rather than being treated as a separate tax. Companies pay corporation tax on their chargeable gains at the prevailing corporation tax rate, which is 25% for the 2023/2024 tax year.

However, specific rules and reliefs, such as Entrepreneurs’ Relief, can apply to business asset disposals.

 

Section E: Calculating Capital Gains Tax

 

You are only liable to capital gains tax on the increase in value or gain that you make on a chargeable asset, not the overall amount of money you receive having sold or otherwise disposed of that asset.

To calculate any chargeable gain, typically, you would deduct the purchase price from the selling price. However, if the asset was a gift, you will need to work out its market value at the time it was given to you.
Equally, if you give away or transfer an asset, the market value can be used to determine the disposal proceeds and, therefore, the extent of any actual gain.

All gains made on chargeable assets during any given tax year will need to be added together to give your overall net gains for that year, having deducted your tax-free allowance, as well as any allowable costs.
You will need to add these net gains to your total taxable income to determine the appropriate rate of tax, the standard or higher rate.

If your taxable income and chargeable gains added together are less than the current basic rate income threshold, you will pay tax at the standard CGT rate.

Where the two figures combined are above the basic rate threshold, you pay the standard rate on any gains up to the threshold and the higher rate on the rest.

Calculating Capital Gains Tax liability can, therefore, become complex, but breaking it down into a systematic process can make it more manageable and ensure compliance with tax laws.

 

1. Step-by-Step Guide to Calculating CGT

 

Step 1: Determine the Disposal Proceeds

Calculate the amount received from the sale or disposal of the asset. This could be the selling price or the market value if the asset was given away or transferred.

 

Step 2: Calculate the Cost Basis

Identify the original cost of acquiring the asset. This includes the purchase price, associated costs (e.g., legal fees, stamp duty), and any improvement costs that have added value to the asset.

 

Step 3: Compute the Capital Gain

Subtract the cost basis from the disposal proceeds to find the capital gain:

Capital Gain = Disposal Proceeds−Cost Basis

 

Step 4: Apply Any Reliefs and Exemptions

Deduct any applicable reliefs and exemptions, such as the annual exempt amount. Currently, the annual exempt amount is £3,000 for individuals and £1500 for trusts.

 

Step 5: Determine the Taxable Gain

Subtract the annual exempt amount and any other applicable reliefs from the capital gain to get the taxable gain:

Taxable Gain = Capital Gain−Annual Exempt Amount

 

Step 6: Apply the Appropriate CGT Rate

Calculate the CGT based on your income level and the type of asset. Basic rate taxpayers pay 10% on most assets and 18% on residential property. Higher and additional rate taxpayers pay 20% on most assets and 28% on residential property.

 

2. Examples CGT Calculations

 

The following examples illustrate how CGT is calculated for different types of taxpayers, considering the annual exempt amount and applicable CGT rates.

 

Example 1: Individual Selling Shares

 

Step	Calculation	Amount (£)
Disposal Proceeds	Sale price of shares	20,000
Cost Basis	Purchase price + associated costs	10,000
Capital Gain	Disposal Proceeds – Cost Basis	10,000
Annual Exempt Amount (Individual)		3,000
Taxable Gain	Capital Gain – Annual Exempt Amount	7,000
CGT Rate	Basic Rate Taxpayer (10%)	10%
CGT Payable	Taxable Gain x CGT Rate	700

 

Example 2: Business Selling Commercial Property

 

Step	Calculation	Amount (£)
Disposal Proceeds	Sale price of commercial property	500,000
Cost Basis	Purchase price + improvement costs	300,000
Capital Gain	Disposal Proceeds – Cost Basis	200,000
Annual Exempt Amount (Business)		3,000
Taxable Gain	Capital Gain – Annual Exempt Amount	197,000
CGT Rate	Higher Rate Taxpayer (20%)	20%
CGT Payable	Taxable Gain x CGT Rate	39,400

 

Example 3: Trust Selling a Collectible

 

Step	Calculation	Amount (£)
Disposal Proceeds	Sale price of collectible	12,000
Cost Basis	Purchase price	5,000
Capital Gain	Disposal Proceeds – Cost Basis	7,000
Annual Exempt Amount (Trust)		1,500
Taxable Gain	Capital Gain – Annual Exempt Amount	5,500
CGT Rate	Trust Rate (20%)	20%
CGT Payable	Taxable Gain x CGT Rate	1,100

 

3. Joint Ownership and Shared Assets

 

When assets are jointly owned, each owner is responsible for their share of the gain. The gain is divided based on the ownership share, and each owner can apply their own annual exempt amount.

For example, if two individuals jointly sell a property for £200,000, which they bought for £100,000. The gain is £100,000, and each owner’s share of the gain is £50,000. Each owner deducts their annual exempt amount of £3,000, resulting in a taxable gain of £47,000 each.

In scenarios where assets are shared but not equally, the calculation should reflect the proportionate ownership. This ensures each party pays CGT on their respective share of the gain.

For example, if three owners sell an asset for £90,000, which they bought for £30,000, the gain is £60,000. If ownership is divided as 50%, 30%, and 20%, the gains are £30,000, £18,000, and £12,000, respectively. Each owner then applies their own annual exempt amount to their share of the gain.

 

Section F: Capital Gains Tax Exemptions and Reliefs

 

Capital Gains Tax can significantly impact the net returns from the sale or disposal of assets. However, various exemptions and reliefs are available to reduce the CGT liability for taxpayers. These provisions are designed to encourage investment, support business owners, and provide relief in specific circumstances.

 

Relief/Exemption	Eligibility Criteria	Maximum Amount
Primary Residence Relief	Main home, lived in as principal residence	Unlimited
Business Asset Disposal Relief	Qualifying business assets, owned for at least 2 years	£1 million lifetime limit
Letting Relief	Rented out primary residence, meets specific conditions	Up to £40,000
Annual Exempt Amount	All individuals and trusts	£3,000 (individuals), £1,500 (trusts)

 

1. Primary Residence Relief

 

Primary Residence Relief, also known as Private Residence Relief (PRR), is a major exemption that allows homeowners to exclude any gain from the sale of their main residence from CGT. This relief is intended to make homeownership more affordable and to prevent homeowners from being penalised by taxes on their primary living space.

The property must have been the taxpayer’s only or main residence throughout the period of ownership. The taxpayer must have lived in the property as their main home for all the time they owned it, with certain exceptions (e.g., periods of work relocation).

If the property was not the main residence for the entire period of ownership, partial relief might be available. The relief is calculated based on the proportion of time the property was used as the main residence.

If part of the home was rented out, letting relief might apply, which can further reduce the CGT liability. Letting relief is available up to a maximum of £40,000.

 

2. Business Asset Disposal Relief

 

Business Asset Disposal Relief (BADR), previously known as Entrepreneurs’ Relief, provides a reduced rate of CGT when you sell or dispose of all or part of your business. This relief is intended to reward and encourage entrepreneurship by allowing business owners to retain more of the profits from selling their businesses.

BADR is available to individuals (including sole traders, partners, and company directors) who dispose of all or part of their business. To qualify, you must have owned the business for at least two years before the sale, and you must have been involved in the business’s operations.

Under BADR, qualifying gains are taxed at a reduced rate of 10%, regardless of your income tax bracket. This rate applies to the first £1 million of qualifying gains over your lifetime (the lifetime limit). Any gains above this limit are taxed at the standard CGT rates.

BADR can be claimed on the sale of a business, shares in a personal company (where you own at least 5% of the shares and voting rights), or assets used in a business that has ceased trading.

The relief applies to individuals selling all or part of their business. The business must be a trading business, not an investment business. The individual must have owned the business or shares in the business for at least two years prior to the sale.

 

3.  Gift Hold-Over Relief

 

Gift Hold-Over Relief allows you to defer the payment of CGT when you give away certain business assets or shares in a trading company. This relief is particularly useful for those who wish to transfer assets within the family or as part of succession planning.

Gift Hold-Over Relief is available when you gift business assets, shares in a trading company, or agricultural property. The recipient of the gift must be a UK resident, and the asset must be used for trading purposes.

Instead of paying CGT at the time of the gift, the gain is “held over” until the recipient disposes of the asset. This means that the recipient takes on the original acquisition cost and the deferred gain, and CGT will be due when they eventually sell or dispose of the asset.

Gift Hold-Over Relief is particularly beneficial for family businesses and assets transferred into trusts. It allows the current owner to pass on assets without an immediate CGT charge, preserving the asset’s value for the next generation.

 

4. Other Common Exemptions and Reliefs

 

a. Annual Exempt Amount: Individuals have an annual exempt amount of £3,000, which means they can make this amount in gains each year without incurring any CGT.

b. Gifts to Spouses or Civil Partners: Transfers of assets between spouses or civil partners are exempt from CGT. This can be used strategically to maximise the use of annual exempt amounts and to potentially benefit from lower CGT rates.

c. Inheritances: CGT is not payable on assets inherited upon death. Instead, these assets are subject to Inheritance Tax. The beneficiary is deemed to acquire the asset at its market value at the date of death, which can reduce future CGT liability. However, CGT may be payable if the asset is later disposed of or sold.

d. Chattels Relief: Personal possessions worth less than £6,000 are exempt from CGT. This includes items like antiques, jewellery, and art.

e. Investment Reliefs: Investments in tax-advantaged schemes such as Individual Savings Accounts (ISAs) and Enterprise Investment Schemes (EIS) are exempt from CGT.

f. Relief for Losses: Capital losses from the disposal of assets can be used to offset capital gains in the same tax year or carried forward to future years, reducing the overall CGT liability.

g. Reliefs for Charitable Giving: Gifts to registered charities are exempt from CGT, and in some cases, you may receive additional tax relief on the donation.

 

Section G: Reporting & Paying Capital Gains Tax

 

In most cases, you will need to declare all chargeable gains to HMRC by way of a self-assessment tax return.

However, you only need to include in your tax return any gain on the disposal of an asset where the disposal proceeds were more than £6,000, and the asset is not exempt from Capital Gains Tax.

Failure to report or pay CGT on time can result in penalties and interest charges. It’s essential to adhere to the deadlines and ensure all calculations are accurate to avoid additional costs.

 

1. How to Declare CGT Liability

 

The most common and efficient way to report CGT is through HMRC’s online services. Taxpayers can use the ‘real-time’ Capital Gains Tax service for property disposals or report through their online self-assessment account.

For those who cannot use online services, paper forms are available. Individuals can use the SA108 form to report capital gains alongside their main self-assessment tax return.

For trustees and personal representatives, specific forms like SA905 (Trust and Estate Capital Gains supplementary pages) are used to report CGT.

Many taxpayers opt to use the services of accountants or tax advisers to ensure their CGT calculations and reporting are accurate. Professionals can file returns on behalf of their clients through HMRC’s agent services.

 

2. Deadlines for Reporting CGT to HMRC

 

For individuals, trustees, and personal representatives, any CGT liability for the tax year must be reported to HMRC by 31st January following the end of the tax year in which the gain was realised. For example, gains made in the tax year 2023/2024 must be reported by 31st January 2025.

Since 6th April 2020, UK residents must report and pay CGT on the sale of UK residential property within 30 days of the completion date. Non-UK residents must report and pay CGT on the sale of all UK property and land within 30 days.

 

3. Payment Deadlines

 

The deadline for paying any CGT owed is the same as the reporting deadline. For most taxpayers, this means 31st January following the end of the tax year in which the gain was made.

For property sales reported under the 30-day rule, payment is due within 30 days of the sale.

 

Section H: Tips for Reducing Your CGT Liability

 

It may be possible to reduce your Capital Gains Tax (CGT) liability legally through various strategies and techniques, to help you retain more of your profits from asset sales and disposals.

 

1. Legal Strategies for Minimising CGT

 

Strategy	Details
Timing Your Sales
Spread Gains Over Tax Years	If possible, spread the sale of assets over multiple tax years to take advantage of the annual exempt amount each year. This can significantly reduce the taxable gain in any single year.
Offsetting Losses	Use capital losses to offset gains. If you have investments that have performed poorly, selling them can create a loss that you can use to reduce your overall CGT liability.
Gifting Assets
Spousal Transfers	Transfers between spouses or civil partners are exempt from CGT. Gifting assets to your spouse can utilise their annual exempt amount and potentially benefit from their lower tax rate.
Family Gifts	Consider gifting assets to other family members, especially if they fall into a lower tax bracket. Be aware of the potential implications for Inheritance Tax.
Using Tax-Advantaged Accounts
Individual Savings Accounts (ISAs)	Gains from investments held within ISAs are free from CGT. Maximise your annual ISA allowance to shelter gains from tax.
Pension Contributions	Contributing to a pension can provide immediate tax relief and potentially reduce your taxable income, placing you in a lower CGT rate band.
Reinvesting for Reliefs
Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS)	Investing in EIS or SEIS qualifying companies can provide deferral or exemption from CGT, along with income tax relief.
Venture Capital Trusts (VCTs)	Gains from VCT investments are exempt from CGT if certain conditions are met.

 

To minimise Capital Gains Tax (CGT) liabilities, there are several legal strategies that can be employed. One approach involves timing the sale of assets. By spreading the sale of assets over multiple tax years, it is possible to take advantage of the annual exempt amount each year, significantly reducing the taxable gain in any single year. Additionally, if investments have performed poorly, selling them to create capital losses can offset gains and reduce overall CGT liability.

Gifting assets is another effective strategy. Transfers between spouses or civil partners are exempt from CGT, allowing the utilisation of their annual exempt amount and potentially benefiting from their lower tax rate. Similarly, gifting assets to other family members, particularly those in a lower tax bracket, can be beneficial, though it is important to consider the potential implications for Inheritance Tax.

Utilising tax-advantaged accounts can also help in minimising CGT. Gains from investments held within Individual Savings Accounts (ISAs) are free from CGT, so maximising the annual ISA allowance can shelter gains from tax. Additionally, contributing to a pension provides immediate tax relief and can potentially reduce taxable income, placing the taxpayer in a lower CGT rate band.

Reinvesting in certain schemes can offer further reliefs. The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) provide opportunities for deferral or exemption from CGT, along with income tax relief, when investing in qualifying companies. Similarly, gains from investments in Venture Capital Trusts (VCTs) are exempt from CGT if certain conditions are met. These strategies, when used effectively, can significantly reduce CGT liabilities.

 

2. Using Exemptions and Reliefs Effectively

 

To maximise Primary Residence Relief, ensure you live in your home as your main residence. If you own more than one property, nominating your main residence can maximise relief.

For Business Asset Disposal Relief (formerly Entrepreneurs’ Relief), it is essential to plan your business sales to meet ownership and trading requirements, considering the timing to optimise benefits.

If you have rented out part of your home, understand the conditions for Letting Relief, which can provide up to £40,000 of additional relief on top of Primary Residence Relief. Utilising the annual exempt amount each tax year is also crucial, as even small disposals can help reduce overall CGT liability.

 

3. Importance of Proper Record-Keeping

 

Maintaining accurate records is vital for managing CGT. Keep detailed records of all asset purchases, improvements, and associated costs to accurately calculate your cost basis and any allowable expenses, thereby reducing your taxable gain.

To evidence claims for Primary Residence Relief, maintain evidence of your primary residence status, such as utility bills, electoral roll registration, and correspondence addressed to your home. Record all capital losses and ensure they are reported to HMRC, as losses can be carried forward indefinitely to offset future gains. Retain all relevant documentation for any claimed exemptions and reliefs, including certificates for EIS/SEIS investments, records of pension contributions, and evidence of spousal transfers.

Seeking professional tax advice is advisable to deal with the complex CGT rules and ensure all available reliefs and exemptions are claimed, with a tax advisor providing tailored strategies to minimise your CGT liability.

 

Section I: Common CGT Mistakes to Avoid

 

Understanding common mistakes can help you avoid pitfalls in reporting and calculation, misunderstanding exemptions and reliefs, and facing the severe consequences of non-compliance.

 

1. Errors in Reporting and Calculation

 

One of the most common mistakes is miscalculating the cost basis of an asset. This includes not accounting for all allowable costs, such as the purchase price, improvements, and incidental expenses. All relevant costs should be included to accurately determine the gain.

Another frequent error is reporting the incorrect disposal proceeds. The reported amount should reflect the actual amount received from the sale or the market value if the asset was given away or transferred.

Omitting to report gains from all disposals within the tax year is also a common mistake. It is essential to ensure that all transactions, including those from cryptocurrency or foreign assets, are reported accurately.

Misclassification of assets can lead to incorrect CGT rates being applied. Different types of assets are subject to different CGT rates, such as higher rates for gains from residential property compared to other types of assets.

 

2. Misunderstanding Exemptions and Reliefs

 

Failing to utilise the annual exempt amount can lead to unnecessary tax liability. Each individual has an exempt amount, which should be used to reduce taxable gains.

Misunderstanding the conditions for Primary Residence Relief can result in incorrect claims. The property must qualify as your main residence, and you must have lived in it as such throughout the period of ownership.
Business Asset Disposal Relief has specific criteria that must be met. Ensure the ownership period is sufficient and that the business qualifies as a trading business to claim the relief correctly.

Letting Relief is available under certain conditions for landlords who have rented out their primary residence. Understanding the qualifying criteria and the maximum relief available (£40,000) is crucial.

Ignoring capital losses can also be detrimental. Capital losses can be carried forward to offset future gains. Ensure all losses are reported and recorded accurately to reduce future CGT liability.

 

3. Consequences of Non-Compliance

 

Failure to report gains accurately or on time can result in penalties and interest charges. HMRC imposes strict penalties for late filing and underpayment of CGT.

Non-compliance or inaccuracies can trigger HMRC audits, leading to additional scrutiny of your financial affairs. This process can be both time-consuming and stressful.

Persistent non-compliance or deliberate tax evasion can lead to severe legal consequences, including prosecution and substantial fines.
Incorrect claims for reliefs and exemptions can result in their disallowance, leading to a higher tax bill. Ensure all claims are substantiated with proper documentation.

Non-compliance can also damage your reputation, especially for businesses and professionals. Maintaining accurate and timely tax records is crucial for sustaining trust and credibility.

 

4. Avoiding Common Mistakes

 

To avoid these common mistakes, maintain comprehensive records of all asset transactions, costs, and improvements. Regularly update yourself on CGT rules, rates, and allowances. Consult with tax advisers or accountants to ensure compliance and optimise your tax position. Review all calculations and reports for accuracy before submission. Utilise HMRC’s online tools and resources for guidance on reporting and paying CGT.

 

Section J: Summary

 

Capital Gains Tax (CGT) is a self-declared tax, which means it is the taxpayer’s responsibility to correctly identify, calculate, declare, and pay any applicable CGT on gains made from the disposal of assets.

Non-compliance can lead to severe consequences, including penalties, interest charges, and increased scrutiny from HMRC.

The guidance in this area is, however, not always clear-cut. Taking professional advice is highly recommended to ensure compliance and optimise the use of reliefs and allowances, particularly in complex situations such as residency issues and the accurate reporting of gains and losses. A tax adviser or accountant can provide valuable guidance and strategies to ensure compliance, optimise your tax position, and avoid potential pitfalls.

 

Section K: FAQs

 

What is Capital Gains Tax (CGT)?
Capital Gains Tax is a tax on the profit when you sell or dispose of an asset that has increased in value. The tax is on the gain made, not the amount received.

 

Who needs to pay Capital Gains Tax?
Individuals, businesses, and trusts that sell or dispose of assets such as property, shares, or personal possessions with gains above the annual exempt amount need to pay CGT.

 

What is the annual exempt amount for CGT?
For the 2024/2025 tax year, the annual exempt amount is £3,000 for individuals and £1,500 for trusts. Gains below this threshold are not subject to CGT.

 

What assets are subject to CGT?
CGT applies to various assets, including second homes, rental properties, shares, business assets, personal possessions worth over £6,000, and cryptocurrencies.

 

How are CGT rates determined?
CGT rates depend on the taxpayer’s income and the type of asset. Basic rate taxpayers pay 10% (18% for residential property), and higher/additional rate taxpayers pay 20% (28% for residential property).

 

Are there any reliefs available to reduce CGT?
Reliefs such as Primary Residence Relief, Business Asset Disposal Relief (formerly Entrepreneurs’ Relief), and Letting Relief can reduce CGT liability. Additionally, losses can offset gains.

 

How do I calculate my CGT liability?
Calculate the gain by subtracting the asset’s cost basis (purchase price plus associated costs) from the disposal proceeds. Apply any reliefs and the annual exempt amount to determine the taxable gain, then apply the appropriate CGT rate.

 

When do I need to report CGT to HMRC?
For most assets, report CGT by 31st January following the end of the tax year in which the gain was made. For UK residential property sales, report within 30 days of the completion date.

 

How do I report and pay CGT?
Report CGT online through HMRC’s services or via a paper form (SA108 for self-assessment). Payments can be made online, by bank transfer, debit/credit card, or cheque.

 

What happens if I don’t report CGT on time?
Late reporting or payment of CGT can result in penalties and interest charges. HMRC may also conduct audits, leading to further scrutiny and potential legal consequences.

 

Can I transfer assets to my spouse to reduce CGT?
Transfers between spouses or civil partners are exempt from CGT, allowing strategic use of each person’s annual exempt amount and lower tax rates.

 

Are there any assets exempt from CGT?
Certain assets are exempt, including personal possessions worth less than £6,000, ISAs, PEPs, UK government gilts, Premium Bonds, and winnings from betting or lotteries.

 

Can I use losses from previous years to reduce my current CGT liability?
Yes, capital losses can be carried forward to offset future gains. Ensure all losses are accurately reported and recorded with HMRC.

 

Do non-residents have to pay CGT?
Non-residents must pay CGT on disposals of UK residential property and, since April 2019, on all UK property and land, as well as certain interests in property-rich entities.

 

How can I get help with CGT calculations and reporting?
Consider seeking advice from a tax professional or accountant to ensure accurate CGT calculations and compliance with HMRC requirements. HMRC also provides guidance and online tools for assistance.

 

Does a Capital Gains Tax liability arise when someone dies?
Typically, when you inherit an asset, inheritance tax is paid by the estate of the person who has died. You will only be liable to any Capital Gains Tax in the event that you subsequently dispose of the asset(s) left to you.

Broadly speaking, the taxable gain will be calculated on the basis of the difference between the market value of the asset at the date it was inherited, and the disposal proceeds, deducting any CGT tax-free allowance for that tax year.

 

Section L: Glossary

 

Term	Definition
Annual Exempt Amount	The amount of capital gains that can be realised tax-free each tax year.
Capital Gains Tax (CGT)	A tax on the profit from the sale or disposal of an asset that has increased in value.
Cost Basis	The original value of an asset, including purchase price and associated costs, used to calculate capital gains.
Disposal Proceeds	The amount received from selling or disposing of an asset.
Entrepreneurs’ Relief	A relief that reduces the CGT rate on the sale of qualifying business assets to 10%, now called Business Asset Disposal Relief.
Exemptions	Specific allowances that reduce taxable capital gains, such as the annual exempt amount and certain asset transfers.
Gains	The profit made from selling or disposing of an asset, calculated as the disposal proceeds minus the cost basis.
HMRC	Her Majesty’s Revenue and Customs, the UK government department responsible for tax collection and regulation.
Letting Relief	Relief available for landlords who have rented out their primary residence, up to a maximum of £40,000.
Primary Residence Relief	Relief that exempts gains from the sale of a taxpayer’s main home from CGT.
Reporting Deadline	The date by which CGT must be reported to HMRC (e.g., 31 January following the end of the tax year).
Taxable Gain	The amount of gain subject to CGT after deducting exemptions and reliefs.
Taper Relief	A former relief that reduced CGT on business assets held for a certain period, replaced by Entrepreneurs’ Relief.
Venture Capital Trusts (VCTs)	Investments that provide CGT exemptions on gains if certain conditions are met.
Self-Assessment	A system used by HMRC where taxpayers report their income and gains, and calculate their tax liabilities.
Spousal Transfers	The transfer of assets between spouses or civil partners, which is exempt from CGT.
Real-Time CGT Service	An online HMRC service allowing taxpayers to report and pay CGT on property sales within 30 days.
EIS (Enterprise Investment Scheme)	A scheme providing tax relief for investments in small, high-risk companies, including CGT deferral and exemption.
Chattels	Personal possessions such as antiques, jewellery, and artwork, subject to CGT if sold for more than £6,000.
Indexation Allowance	An adjustment for inflation on the cost of assets, available until April 1998 for individuals.
Inheritance Tax (IHT)	A tax on the estate of a deceased person, related to, but separate from CGT.
Business Asset Disposal Relief (BADR)	The current name for Entrepreneurs’ Relief, providing a 10% CGT rate on qualifying business disposals.
ISAs (Individual Savings Accounts)	Tax-advantaged accounts where gains and income are exempt from CGT.
Property-Rich Entities	Companies where at least 75% of the value derives from UK land or property, relevant for non-resident CGT.
Non-Residents	Individuals who do not reside in the UK but may still be liable for CGT on UK property and land disposals.

 

Section M: Additional Resources

 

HM Revenue & Customs (HMRC) – Capital Gains Tax Overview
https://www.gov.uk/capital-gains-tax
HMRC provides comprehensive information on CGT, including what it is, how it works, and the latest rates and allowances.

 

HMRC – Self Assessment Tax Returns
https://www.gov.uk/self-assessment-tax-returns
Detailed guidance on how to complete and file your Self Assessment tax return, including how to report capital gains.

 

HMRC – Private Residence Relief
https://www.gov.uk/tax-relief-selling-home
Information on how to claim Private Residence Relief for your main home, including eligibility criteria and how to calculate relief.

 

HMRC – Business Asset Disposal Relief (Entrepreneurs’ Relief)
https://www.gov.uk/business-asset-disposal-relief
Guidance on claiming Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) for qualifying business disposals.

 

HMRC – Enterprise Investment Scheme (EIS)
https://www.gov.uk/government/publications/the-enterprise-investment-scheme-introduction
Information on the Enterprise Investment Scheme, which offers tax reliefs to investors in qualifying companies.

 

HMRC – Seed Enterprise Investment Scheme (SEIS)
https://www.gov.uk/guidance/seed-enterprise-investment-scheme-background
Guidance on the Seed Enterprise Investment Scheme, providing tax reliefs for investors in small early-stage companies.

 

HMRC – Letting Relief
https://www.gov.uk/government/publications/private-residence-relief-hs283-self-assessment-helpsheet
Details on Letting Relief for landlords who have rented out their primary residence, including eligibility and how to claim.

 

HMRC – Venture Capital Trusts (VCT)
https://www.gov.uk/guidance/venture-capital-trusts-venture-capital-schemes
Information on Venture Capital Trusts and how they can provide CGT exemptions for qualifying investments.

 

Citizens Advice – Capital Gains Tax
https://www.citizensadvice.org.uk/debt-and-money/tax/capital-gains-tax/
Practical advice and information on CGT from Citizens Advice, including how it works and how to report it.