Capital gains tax (CGT) is a tax levied on the profits arising from the disposal or sale of an asset, such as a second home, a buy-to-let property or a business asset.
The extent to which you are liable to capital gains tax depends upon a number of factors, for example, whether you are classed as UK tax resident or non-resident, where you are domiciled, as well as how much income you earn.
If you are thinking of selling a capital asset it is important to know, in the context of your own individual circumstances, the answer to the all-important question: “How much is capital gains tax?”
How much is Capital Gains Tax: Higher & Lower Rates
The applicable rate of capital gains payable will be determined by the amount of taxable income you earn in the tax year in which the disposal is made, and on the type of asset being disposed of.
A basic rate taxpayer will pay 10% on gains on chargeable assets and a higher rate of 20% on property (non-primary residences). For higher rate taxpayers the respective rates are 18% and 28%.
For individuals, net gains are added to your total taxable income to determine the appropriate rate of tax. The standard rates apply only to the net gains which, when added to your taxable income, do not exceed the basic rate band.
How much is Capital Gains Tax: Annual Exempt Amount
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).
There is one AEA for UK residents, executors or personal representatives of a deceased person’s estate, as well as trustees for disabled people. A lower rate of AEA applies for most other trustees.
The main AEA currently stands at £12,300 for the tax year 2020/21. The lower rate for trustees stands at £6,150.
If you are not entitled to any personal allowance, you will be liable to pay tax on all your chargeable gains.
If you are UK non-domiciled and the remittance basis is selected for a particular tax year, you are not entitled to a personal allowance unless you have less than £2,000 of unremitted gains in that year.
Non-UK residents who dispose of residential property in the UK can, in most cases, claim the AEA in the same way as UK residents, although any double taxation agreement in place between the UK and the country in which you reside may affect your overall tax liability.
How much is Capital Gains Tax: Exemptions & Relief
There are various exemptions and relief from capital gains tax that can be used to reduce or avoid any liability. In particular personal possessions with a value of less then £6,000, or shares held in an ISA or PEP are wholly exempt.
You will also not be liable to pay CGT on what’s known as wasting assets, ie; assets that depreciate in value over time. Your car is a wasting asset and so, even if it exceeds a value of £6,000, any gain made on its disposal will not be chargeable to CGT.
Examples of the main forms of relief from capital gains tax are as follows:
- Primary residence relief – any gain made on the sale of your only or main residence will not be subject to CGT. A liability will arise, however, in relation to any parts of the property used for business purposes.
- Business asset rollover relief – this allows you to defer any liability to CGT where you sell or dispose of a business asset, including land and buildings, and use all or part of the proceeds to buy a new asset within three years.
- Entrepreneurs’ relief – this provides for an effective rate of 10% on gains made from qualifying assets when selling all or part of your business, although there is lifetime cap of £10 million.
How much is Capital Gains Tax: Residence & Domicile Status
UK resident taxpayers
When determining your liability to CGT, you will need to establish whether or not you are UK tax resident. Typically, a UK resident is liable to UK capital gains tax arising from the disposal of assets, both at home and abroad.
Under the ‘statutory residence test’, your status will be determined based primarily on the number of days you have spent in the UK during the relevant tax year, although other factors may come into play.
You will be automatically classed as UK resident if either you spent 183 or more days in the UK in the relevant tax year, or your only home was in the UK and you spent at least 30 days there in that year.
For the automatic overseas test, the criteria focuses on a maximum, rather than a minimum, number of days spent in the UK (see non-UK residents below).
In circumstances where your residence status is not conclusive, you may need to apply what’s known as the sufficient ties test.
This concentrates on the number of different ties or connections you have in the UK, such as family or work ties, together with how many days you have spent in the UK in the relevant tax year.
For many expats who have left the UK and are living abroad permanently, you will now regard yourself as non-UK resident.
However, to be automatically classed as non-UK resident for taxation purposes, you must meet one of the following criteria:
- You were resident in the UK for one or more of the previous three tax years and you spent fewer than 16 days in the UK in the relevant tax year.
- You were not resident in the UK for any of the three preceding tax years and you spent fewer than 46 days in the UK in the relevant tax year.
- You work abroad full-time and spent fewer than 91 days in the UK, of which no more than 30 were spent working.
As a non-UK tax resident you will not be chargeable to any gains arising abroad, and you will only be liable to pay CGT on any gains arising in the UK from residential property. This is known as Non Resident Capital Gains Tax (NRCGT).
You may also soon be liable to NRCGT on commercial real estate if the government’s proposals, extending the rules that currently only apply to residential property, come into force.
Non-UK residents are not taxed on gains made on UK assets, other than residential property, providing that they remain non-resident for a qualifying time period.
If, however, you return to the UK after a period of ‘temporary non-residence’ of less than five years, you may still be fully liable to capital gains tax for that period of absence.
Non-domiciled UK residents
If you are UK tax resident but not domiciled in the UK, commonly referred to as non-doms, special rules apply to determine the basis upon which you pay tax on any capital gains.
Whilst a UK tax resident is liable to pay UK taxes on the arising basis of taxation, where all their worldwide gains are chargeable in the UK, a non-domiciled UK resident can elect to pay tax on the remittance basis.
As a non-dom using the remittance basis, whilst any profit from the disposal of an asset in the UK will remain chargeable to capital gains tax, you will only pay CGT on any foreign gains you bring, or remit, to the UK.
However, there is no statutory definition of ‘domicile’, rather it is determined with reference to common law principles and case law.
Your domicile is not necessarily where you are ordinarily resident, rather it is the country in which you have the closest ties or connections. This may be your domicile of origin, ie; where your father considered his permanent home when you were born, although your domicile can change.
However, if you are a long-term resident, you may have to pay for the privilege of not being subject to CGT in the UK on foreign gains. This is known as the remittance basis charge and is calculated as follows:
- £30,000 for non-doms who have been resident in the UK for at least 7 of the previous 9 tax years immediately before the relevant tax year.
- £60,000 for non-doms who have been resident in the UK for at least 12 of the previous 14 tax years immediately before the relevant tax year.
Note that for long-term residents who have been UK resident for at least 15 of the 20 tax years immediately before the relevant tax year will now be classed as domiciled in the UK under the ‘deemed domicile’ rules.
These rules also apply to any individual who is currently not domiciled in the UK but was born in the UK, with a UK domicile of origin, and subsequently becomes resident in the UK.
If you fall within the criteria under the deemed domicile rules, you will no longer be able to claim the remittance basis of taxation. As with any domiciled UK tax resident you will then be assessed on your foreign gains on the arising basis.
How much is capital gains tax – key takeaway
The rules on CGT can be highly complex, not least where either your residence or domicile status are inconclusive.
For a definitive answer on “How Much is Capital Gains Tax?” you should always seek professional advice tailored to your particular circumstances.
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.