With ongoing changes to legislation, staying informed on the current capital gains tax rates can be a complicated process for any taxpayer. Is it any wonder that there are continual requests to simplify tax law?
So how do you know which capital gains tax rate applies to you? There are four main considerations to bear in mind:
- What category of asset has been disposed of?
- Has the disposal led to a gain?
- What is the financial value of that gain?
- What is the personal tax position of the individual who made the disposal?
Category of disposed asset
The kind of assets that may lead to capital gains tax, if disposed, include, but are not limited to:
- residential property that is not your main home, for instance, a holiday let or a house that you rent out to tenants
- any shares you hold which are not connected to an ISA
- business assets, such as shares in a business or items that you own which are used in a business
- personal possessions with a value of over £6,000 but not private cars
If you dispose of an asset that is chargeable under capital gains tax, you must work out whether this resulted in a gain. Remember that a disposal is not necessarily a sale. It could be a transfer or a gift.
Capital gains tax generally doesn’t come into play in the sale of a home, where the property is your main place of residence. Any gain made on such a sale would be exempt from capital gains tax.
If you dispose of any other UK property, however, capital gains tax generally will apply at an 8% surcharge on the usual rate.
Did the disposal result in a gain?
Capital gains tax is charged on gains over your annual tax-free allowance each year, which in 2020/21 is a maximum of £12,300, or £6,150 for trusts.
Where an asset is sold, subtract from the sale price both the purchase price and any money spent on the asset during your ownership. This calculation will tell you whether the sale resulted in a gain.
Where an asset is transferred for a nil amount, for instance, a gift to a grandchild by way of a trust, this disposal will be treated as if the market value had been received. There may, however, be certain reliefs applicable in such a situation that may reduce the amount of capital gains tax incurred.
Allowable costs may also come into play depending on the category of asset, for instance, reducing capital gains tax in the case of a property disposal by including the value of legal fees in the calculation of the gain.
Who is affected by capital gains tax rates?
If you are self-employed, a sole trader or a business partner, it is important that you remain aware of current capital gains tax rates and your resulting tax liability.
Non doms, non-residents and expatriates should also ensure that they are fully aware of the capital gains tax rates, especially after recent changes in relevant tax legislation.
Limited companies, by comparison, are not subject to capital gains tax but instead pay corporation tax.
How does your personal tax position affect the capital gains tax rates you pay?
The first consideration is what income tax band you fall into. Higher rate taxpayers incur a 20% capital gains tax rate, whereas basic rate taxpayers are liable for the standard 10% capital gains tax rate.
Basic rate taxpayers continue to pay 10% capital gains tax until their income and gains together amount to more than the basic rate band for the relevant tax year, which for 2020/21 is £37,500. At this point, their tax rate will change to 20%.
Where the capital gain is related to the disposal of property, there is an 8% surcharge on top of your capital gains tax rate (20% increasing to 28%, for instance), unless the property is your main home.
Where an interest in a business is sold, be that part or the whole of a company or shares in that company, and the resulting gain is eligible for Entrepreneurs’ Relief, a tax rate of 10% will apply.
Due to the role that income tax plays in deciding capital gains tax rates, it is always advised that you consider your wider tax situation and that of your family members. Looking at the bigger picture and planning ahead may allow you to reduce your capital gains tax liability, for instance, by moving income between family members, or splitting gains between tax years, within the current tax legislation.
Any disposal that results in a gain must be reported to HMRC as part of your annual self-assessment tax return, although you may wish to report the disposal straightaway.
Capital gains tax rates reliefs
There are a number of reliefs available against capital gains tax. Making full use of relevant reliefs and exemptions generally requires asset holders to plan and consider their options in advance of asset disposal.
Taking professional advice will assist in ensuring that you are not only informed of any relevant relief but also take advantage of the right reliefs for your tax situation.
Such reliefs could include:
Where a gain is eligible, Entrepreneurs’ relief sets the chargeable rate at 10%. This is especially helpful where you are a higher rate taxpayer.
This type of relief is most commonly used for the sale of company shares. In such a case, eligibility requires that the shareholder disposing of shares must have been an employee or officeholder of the company for a minimum of one year prior to the disposal, and that the activities of the company must largely be trading unless it is a holding company for such.
Entrepreneurs’ relief can also be used for the disposal of:
- a company, or part of a company
- assets lent to the company
- assets held in a trust
There is a lifetime limit of £10 million.
Investor’s relief sets the capital gains tax rate at 10% and applies to investment in unquoted companies where the investor has no direct involvement during the period of holding shares.
It applies to shares issued on or after 17 March 2016 that are disposed of on or after 6 April 2019, provided the shares have been owned for at least 3 years up to the date of disposal.
There is a lifetime limit of £10 million.
Business asset roll over relief
Using this form of relief may allow you to delay the payment of capital gains tax after the disposal of certain types of business asset, as long as you buy replacements within three years.
Gift holdover relief
Using this type of relief may remove capital gains tax liability where a business asset is given way. The liability then passes to the person who received the asset, should they make a gain on selling the item.
Eligibility requires that:
- both you and the other party agree to this arrangement
- the asset was used by you in your business
- you are a sole trader or a partner in your business
Should there be any unused allowable losses in previous years, these can be brought forward to the current year to reduce capital gains tax liability.
Gift holdover relief may also be applicable for the transfer of assets into a trust.
This type of relief may be used to delay payment of capital gains tax when a business is incorporated.
Eligibility includes that you are part of a business partnership or a sole trader, and that the business and its assets are transferred in return for company shares.
Loss relief can be used to reduce a capital gains tax liability by offsetting a capital loss against any taxable gains.
Any losses in a tax year may be carried forward to offset future taxable gains.
However, if you make a claim under the capital allowance scheme, this amount must be deducted from any loss you wish to offset against gains.
Private residence relief
The sale or otherwise disposal of an individual’s home is usually exempt from capital gains tax.
However, where any part of the home has been used for the sole purpose of business, you may be required to pay capital gains tax on that section of the property.
Enterprise Investment Schemes
Any gains resulting from an Enterprise Investment Scheme are exempt from capital gains tax after a period of three years.
During the first three years, however, it may be possible to defer, reduce or completely remove any capital gains tax liability thought the use of deferral or disposal reliefs.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute tax, financial or legal advice, nor is it a complete or authoritative statement of the rules and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert tax, financial, legal or other advice should be sought.