Capital gains tax (CGT) is a type of tax levied on individuals, sole traders, partnerships and trusts, and becomes payable when you sell an asset such as a second property, a business, shares or an heirloom that has appreciated in value.
It is the gain, or profit, you make on the chargeable asset that is taxed, not the overall amount of money you receive having sold that asset. However, the amount you pay depends on your income and the asset in question.
Below we look more closely at chargeable assets and how to calculate capital gains tax based on your particular level of income.
Chargeable assets explained
Although an individual’s primary residence is exempt from capital gains tax under what’s known as private residence relief, any property that is not your only or main residence will be classed as a ‘chargeable asset’.
This means that any second home, holiday home, buy-to-let or business property will all be potentially liable to capital gains tax in the event that you make any money on these assets when you come to sell.
Capital gains tax is also payable on assets other than land or buildings. In particular, a chargeable asset can include:
- personal possessions worth £6,000 or more, such as jewellery or artwork.
- shares that are not in an ISA or PEP.
- business assets, such as plant and machinery or fixtures and fittings.
Your car is excluded from personal possessions as this is classed as a ‘wasting asset’ with a predicted useful life of less than 50 years.
Tax-free allowance for capital gains
You are not liable to capital gains tax if all your gains in one year fall below your tax-free allowance. For 2018/19 your tax-free allowance is £11,700, increasing to £12,000 for the tax year 2019/20.
The current annual exempt amount for trustees is £5,850 (2018/19).
The net effect is that if the profit made on the sale of a chargeable asset does not exceed the relevant threshold, there will be no tax to pay for that year. However, you must take into account your overall gains for any given tax year.
Current capital gains tax rates
Capital gains tax is charged at various rates where the applicable rate will be determined by the type of asset disposed of and your total taxable income.
For basic rate taxpayers you will pay the following standard rate of CGT:
- On residential property 18%
- On other chargeable assets 10%.
For higher rate taxpayers you will pay the following enhanced rate of CGT:
- On residential property 28%
- On other chargeable assets 20%.
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.
For a basic-rate taxpayer the maximum taxable income that you can earn is currently £34,500 (2018/19). This equates to a basic rate threshold of £46,350 minus the tax-free personal allowance of £11,850.
If you pay higher rate income tax (with taxable income in excess of £34,501+), you will pay capital gains tax at the higher rate on the entirety of any profit acquired from a chargeable asset.
How to calculate capital gains tax
The starting point in how to calculate capital gains tax is to work out any taxable gain, ie; any profit made on the disposal of the asset(s) in question.
Broadly speaking, you will deduct the purchase price from the selling price. If the asset was a gift, you will instead need to ascertain the market value of the asset at the time it was bequeathed to you.
All profits 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 any allowable costs as well as your tax-free allowance.
These net gains are then added to your total taxable income to determine the appropriate rate of tax. If your taxable income and chargeable gains added together are 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.
Deducting costs from any chargeable gains
When working out how to calculate capital gains tax you will need to know what costs can be deducted from your overall chargeable gain.
The type of allowable expenses that can be deducted will depend on the asset in question. By way of example, for the sale of a property you will be able to deduct costs incurred in disposing of the property, such as any stamp duty, legal fees, as well as estate agents’ fees.
How to mitigate any capital gains tax liability
Once you have worked out how to calculate capital gains tax, you can then go on to consider how to mitigate your liability.
Needless to say, you will have already deducted the tax-free CGT allowance from any profit made. However, there are other ways to reduce the level of chargeable gains in any given tax year.
In particular, you can use your tax-free allowance against the gains that would be charged at the highest rates, for example, where you would be liable to pay 28% on residential property.
With forward planning and professional advice, it may also be possible to offset any losses from previous years against any gains made in subsequent years.
A tax specialist can additionally advise on any tax reliefs that may be available to you, for example, business asset rollover relief where you use the proceeds from the sale of business assets to buy new assets. Here, any liability to capital gains on the original asset only becomes payable when the new asset is sold.
Deferring your tax liability in this way can be beneficial where your tax-free allowance has been exceeded for that year.
How to calculate capital gains tax for non-UK domiciled
There are special rules in relation to capital gains tax where you are a UK resident but not domiciled in the UK.
If you are non-domiciled in the UK and you pay tax on the remittance basis, you will only be liable to pay capital gains tax on any foreign income and gains that are brought to the UK. However, you will lose your tax-free allowances.
Further, if you are not resident in the UK but own UK residential property, you will be liable to pay non-resident capital gains tax.
How to calculate any capital gains tax in time
Any capital gains will need to be declared by way of a self-assessment tax return and paid within the relevant timeframe.
Any capital gains tax payable will usually fall due by 31 January after the end of the tax year in which the disposal occurred. Alternatively, if you are a UK resident, you can use the ‘real time’ Capital Gains Tax service to report and pay any capital gains straight away.
If you are a non-resident and you have sold a residential property in the UK, you will need to tell HMRC within 30 days. Similar provisions will apply to UK residents for disposals of residential property made on or after 6 April 2020.
Key takeaway on how to calculate capital gains tax
How to calculate capital gains tax is not necessarily straightforward. The rules on capital gains can be complex, not least where numerous assets are disposed of across a number of years, some resulting in losses, others making profit.
However, once you understand how to calculate capital gains tax, you can begin to take full advantage of all available allowances and reliefs to help maximise the benefits and minimise your tax bill.