Capital Gains Tax is a tax on the profit made when you sell an asset you own. This usually applies to things such as second properties that have increased in value. Simply put, it is the tax payable on the increase in value of something you own, if when you come to sell the item it has significantly gone up in value. It is usually payable on assets that are sold on for a substantial profit, but as always, there are some exceptions.
There is no Capital Gains Tax chargeable on certain assets, including any gains you make from ISAs or PEPs, UK Government gilts and Premium Bonds, betting, lottery or pools winnings. Gifts to your husband, wife, civil partner or a charity are also exempt from CGT.
CGT also does not apply on the sale of your car if it is for personal use, your home if it is your only property and qualifies for private residence relief (PRR), or selling personal possessions or valuables worth less than £6,000 in any given tax year. You are however obliged to pay capital gains tax if you purchase a property for the purpose of renovating it and selling it on.
What is the Capital gains tax threshold and tax allowance in 2018/19?
There are two levels of rate for capital gains tax, and these vary depending on how much profit is made on the asset. The rate you pay is also based on what your current tax band is. Remember though, this is not applicable to your private residence. It is only chargeable on first or second home/residential properties that are buy to let, or investment properties.
The basic rate is fixed at 10% and will be 20% for high rate income tax taxpayers on an investment that isn’t a property, capital gain tax on a second home or buy-to-let investment is at 18% and 28% for high rate income tax taxpayers.
The capital gains tax allowance, often (called the Annual Exempt Amount), is the amount of tax free profit one is entitled to make during the year. Capital gains tax allowances for an individual for the years 2017-18 and 2018-19 is £11,300 and £11,700 respectively. Because you can gift assets to spouses, you can think of it as being twice the amount for couples. For trusts the CGT allowance amount is £5,850 per tax year.
Please check the HMRC website for more information on CGT and updated allowances.
Capital Gains Tax for Business
One must pay Capital Gains Tax if they are either self-employed, a sole trader, or in a business partnership. It is also applicable for organizations like limited companies. These must pay Corporation Tax on profits from selling their assets. CGT includes land and buildings, fixtures and fittings, plant and machinery, shares and registered trademarks.
One must pay capital gain tax when selling their company but may be able to reduce the amount by claiming Entrepreneurs Relief and other applicable reliefs.
You can claim Entrepreneurs’ relief if: you’re a sole trader, a partner selling part or all the business or its assets, you control at least 5% of a company whose shares or assets are being sold, you’re selling assets from the above businesses within three years of it closing down.
The relief effectively reduces the capital gains tax rate to 10% on the first £10 million of gains made over the lifetime from selling such assets. Any gains above this are taxed at 20%. The relief applies if running a trading business or furnished holiday letting, but not any other property letting business.
CGT on gifted and inherited homes
There is no capital gains tax payable if you inherited an asset as the result of a death of a family member. The value of the home will be included in the estate (defined as all assets and property minus debts and funeral expenses). This means inheritance tax may be payable instead of CGT.
But still one may have to pay CGT when they come to sell the house. When they come to sell, the Capital gains tax amount will be based on the increase in value between the date the property was gifted and when it was sold.