When you sell something that’s increased in value, you may have to pay tax on the gain, and this is Capital Gains Tax (CGT). The Bluebird Accountancy Team has written a short guide on Capital Gains Tax which explains everything you need to know, from when you need to pay it – to calculating your CGT bill and what allowances you can claim to reduce your CGT bill.
What is Capital Gains Tax?
If you own an asset that’s increased in value, you’ve made a ‘gain’. When you dispose of that asset, HMRC sees the gain as taxable. For example, if you buy an antique for £7,000 and then sell it later for £20,000, you will pay GCT on the £13,000 gain. CGT applies when you dispose of different types of assets, including but not limited to:
- Business assets (including shares, plant and machinery, and land)
- Personal possessions worth £6,000 or more
- Property that’s not your main home
- Your main home, if you’ve been renting it out or using it for business
What are the Capital Gains Tax rates and allowances for the 2021/22 tax year?
When working out how much CGT you owe, it’s essential to factor in the CGT allowance. This is the amount of profit you can make from an asset before any tax is due. For the 2021/22 tax year, the allowance is £12,300 for an individual or £6,150 for trusts. If you own an asset with another person, you can use both of your allowances to effectively double the amount you can make before CGT is due. If you are married or in a civil partnership, you can transfer assets to each other without any CGT being charged. However, if the assets are sold later, CGT will be due on the gain made during the time you owned it as a couple, rather than when it was passed to your partner.
There are two rates of CGT, and how much you pay will depend on the profit you’ve made and the tax band you fall into:
|CGT rate on property||CGT rate on assets|
|Basic rate taxpayer||18%||10%|
|Higher or additional rate taxpayer||28%||20%|
Capital Gains Tax when selling a property
If you sell a property in the UK, you generally won’t need to pay the tax when selling your main home. You may need to pay CGT on your profits if you are selling a buy-to-let property or second home. You may also need to pay CGT if your home is partly used as a business premise or you lease out part of your property. As the name suggests, CGT is only charged on the gains you make rather than the amount you sell the property for.
To work out your gain, calculate the difference between how much you paid for the property and how much you sold it for. Then deduct legitimate costs relating to selling or improving the property from your gain. These can include estate agent fees and solicitor fees, as well as improvements you made to the property like extensions (but not regular maintenance costs, like decorating). You can also offset losses when selling other assets, and these can be carried forward indefinitely. As such, if you have a property portfolio and make a loss when selling one property, this will increase the tax-free gain you can make when selling another.
Capital Gains Tax on business assets
CGT may be due when a sole trader or business partnership sells part or all of a business asset. Limited companies pay Corporation Tax on profits, including income from selling assets, so CGT doesn’t apply. CGT may apply to the following business assets:
- Fixtures and fittings
- Plant and machinery
- Land and buildings
To calculate how much CGT is due, work out the difference between the amount you paid for the asset, and how much you sold it for. You can also subtract certain costs related to the asset from the gain, such as Stamp Duty Land Tax, VAT, fees for advertising the asset, and money spent on improving it. It is also important to consider any tax reliefs that could apply to reduce the amount of CGT that you will be required to pay. These include Business Asset Rollover Relief, Incorporation Relief and Business Asset Disposal Relief (formerly Entrepreneurs’ Relief).
Make sure you deduct any losses
CGT is charged on your total gains each tax year, so it’s vital to deduct any losses made from the gain before working out how much tax is due. You cannot carry forward any unused allowances; however, it is possible to carry forward any losses that haven’t been used. Therefore, even if you don’t owe any CGT, it is important to submit details of any losses to make it easier to offset against gains in future years.
When is your Capital Gains Tax payment due?
How and when you report any CGT over the annual allowance depends on what you made the gain on. As of the 6th April 2020, any sales of property that generate a CGT bill must be paid within 30 days of the completion date by submitting a property return directly to HMRC.
If your gain is not from residential property, you have a choice of how and when to report the gain. If you know how much you owe, you can use the ‘real time’ Capital Gains Tax service to report and pay straight away. Please be aware; you must report your gain by the 31st December in the tax year after you made the gain. For example, if you made a gain in the 2020 to 2021 tax year, you need to report it by the 31st December 2021.
You can also report your gains via a self-assessment tax return the following year after you dispose of the assets. After you’ve sent your return to HMRC, they will tell you how much CGT you owe and when and how to pay it.
Bluebird Accountancy provides contractors with a modern-day accountancy service
Bluebird Accountancy specialise in understanding the needs of contractors and freelancers and making it as simple as possible to manage all your booking using state-of-the-art accountancy software. Your dedicated Account Manager will be on hand to offer expert advice and support to allow you to manage your limited company effectively, including any questions you may have about Capital Gains Tax.