Understanding capital gains tax rates is crucial in determining your potential tax liability following the disposal of an asset. Below we consider different capital gains tax rates and how these apply.
What is capital gains tax?
Capital gains tax is a tax levied on the profit when you sell or dispose of an asset that has increased in value since the date of acquisition or purchase.
It is the gain you make on the chargeable asset that is taxed, not the overall amount of money you receive having disposed of that asset. Disposing of an asset can include selling, gifting or transferring a chargeable asset to someone else.
A ‘chargeable asset’ includes property that is not your main residence, for example, a holiday home, second home, a buy-to-let or investment property.
It can also include personal possessions worth more than £6,000, such as jewellery, antiques and artwork; shares, other than those held in a tax-free scheme or investment; as well as business assets.
Some assets are entirely tax-free, where you do not have to pay any capital gains tax whatsoever, for example, cars are specifically excluded as these are classed as ‘wasting assets’ with a predicted useful life of less than 50 years.
You are also not liable to capital gains tax if all your gains in one year fall below your tax-free allowance.
What is my tax-free allowance?
Capital gains tax is only payable on any overall gains that exceed your tax-free allowance. This is known as your ‘Annual Exempt Amount’ (AEA).
The AEA for capital gains tax for the year 2018/19 is £11,700. This applies to gains accrued on or after 6 April 2018. For the tax year 2019/20 your allowance will be £12,000, ie; for gains accrued on or after 6 April 2019.
The net effect is that there will be no capital gains to pay on any profit on the sale of chargeable assets falling below your tax-free allowance for that year.
The AEA is increased annually to keep pace with inflation in-line with rises in the Consumer Prices Index, rounded up to the nearest multiple of £100.
What are the current capital gains tax rates?
The capital gains tax rate that you will need to apply will depend on the total amount of your taxable income and whether you are a basic or higher rate tax payer.
For individuals, net gains are added to their total taxable income to determine the appropriate rate of tax. It is therefore important to ascertain your annual income before applying any capital gains rate.
For the years 2018 & 2019 the following capital gains tax rates apply:
- 10% standard, or 20% higher rate, for individuals for chargeable assets not including a non-primary residence
- 18% standard, or 28% higher rate, for individuals for a non-primary residence.
The standard rates apply only to the net gains which, when added to the individual’s total taxable income, do not exceed the basic rate band.
If you pay basic rate tax on your income, you will pay capital gains tax at the standard rate up to an amount of gain equal to your unused income tax basic rate band, and at the higher rate on any excess.
If you pay higher rate income tax, you will pay capital gains tax at the higher rate on the entirety of any profit acquired from a chargeable asset.
How do I calculate any capital gains tax?
To do a basic capital gains tax calculation, first work out your annual income for the year in which the gain was made. You will then need to deduct your tax-free personal allowance from your total income. For 2018/19 this is £11,850.
For a basic-rate taxpayer the maximum taxable income for the 2018/19 tax year that you can earn is £34,500. This is the higher-rate threshold (£46,350) minus the tax-free personal allowance (£11,850).
You will next need to work out your taxable capital gain by deducting the tax-free capital gains annual exemption of £11,700, as well as any allowable losses.
If your taxable income and taxable capital gain added together is less than £34,500, the basic capital gains tax rate applies. Where the two figures combined are above the higher tax threshold, you pay the basic-rate on the part up to the threshold, and the higher rate on the remainder.
You bought a rental property for £150,000 and later sell it for £175,000, resulting in a profit of £25,000.
Having deducted your annual exempt amount of £11,700 (for 2018/19), you are liable to pay capital gains tax on the sum of £13,300.
If your total taxable income is £24,500, you will pay the basic capital gains tax rate of 18% on the first £10,000 of your taxable gain, and the higher rate of 28% on the remaining £3,300.
This equates to £1,800 + £924 = £2,724 capital gains tax liability.
When must I pay any capital gains tax?
You are only liable to pay capital gains tax, if after deducting any losses and applying any reliefs, your overall gains for the year are in excess of your personal tax-free allowance.
Any capital gains will need to be declared by way of a self-assessment tax return. You should also report any loss on the disposal of a residential asset, such as selling a second home or rental property for less than the purchase price.
Any capital gains tax payable will typically fall due by 31 January after the end of the tax year in which the disposal occurred. However, proposed revisions to the rules mean capital gains tax on residential property sales will be payable within 30 days following the completion of the disposal.
For UK residents the measure will have effect for disposals made on or after 6 April 2020. For non-UK residents the proposed changes have effect for disposals on or after 6 April 2019 and 6 April 2020.
What if I am non-UK domiciled?
You may be liable to pay capital gains tax even if your asset is located overseas. There are, however, special rules where you are a UK resident but not domiciled in the UK.
UK residents who have their permanent home outside the UK can pay tax on what’s known as a remittance basis. This means that they will only be liable to pay capital gains tax on any foreign gains that are brought to the UK.
However, if you are non-domiciled in the UK and have claimed the remittance basis of taxation on your foreign income and gains, you will lose your tax-free allowances.
What if I inherit an asset?
When you inherit an asset, typically 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 dispose of the asset(s) bequeathed to you.
Broadly speaking, the taxable gain will be calculated on the basis of the difference between the value of the asset at the date it was inherited and the proceeds of sale, deducting any personal allowance for that tax year.
Other capital gains tax rates
Trustees will need to apply a capital gains rate of 20% on chargeable assets other than residential property, and 28% on residential property.
The current annual exempt amount for trustees is £5,850 (2018/19).
Further, if you are a sole trader or business partner you may qualify for what’s known as entrepreneur’s relief. This means you will pay tax at 10% on all gains on qualifying assets. There is, however, a lifetime cap of £10 million.
Key takeaway for capital gains tax rates
Knowing which capital gains tax rate is applicable can be crucial in making tax efficient decisions on when to best dispose of an asset. Seeking professional advice from a tax specialist is always advisable.