UK Capital Gains Tax and Exemptions

Capital Gains Tax (CGT) is a tax imposed on the profit (capital gain) made from the sale or disposal of certain assets. In the UK, individuals, partnerships, and companies are subject to CGT on the gains they make.

Assets Subject to Capital Gains Tax:

Capital Gains Tax is applicable to various assets, including but not limited to:

  • Property (except your main residence, which may be eligible for relief)
  • Shares and securities
  • Business assets
  • Personal possessions (with a value exceeding £6,000, excluding cars)

Calculation of Capital Gains:

The capital gain is calculated by deducting the cost of acquiring the asset (including associated expenses) from the sale proceeds.

If the asset was gifted or inherited, the market value at the time of acquisition is used instead of the original cost.

Annual Exempt Amount:

  • Each individual is entitled to an annual exempt amount, which represents the tax-free capital gain that can be realized within a tax year.
  • As of the 2021/2022 tax year, the annual exempt amount for individuals is £12,300.
  • Couples who are married or in a civil partnership can each utilize their individual annual exempt amount.

Rates of Capital Gains Tax:

The rates of Capital Gains Tax depend on the individual’s income tax band.

  • For individuals, the rates for the 2021/2022 tax year are as follows:
  • Basic rate taxpayers: 10% on gains (after the annual exempt amount)
  • Higher rate and additional rate taxpayers: 20% on gains (after the annual exempt amount)

Capital Gains Tax for Residential Property:

  • There are specific rules for Capital Gains Tax on residential property, including main residences and second homes.
  • Principal Private Residence (PPR) Relief exempts the gain made on the sale of an individual’s main residence.
  • Lettings Relief may be available if a property that was once the main residence is let out.

Capital Gains Tax Allowable Deductions:

  • When calculating the capital gain, certain deductions and costs can be subtracted from the sale proceeds to reduce the taxable gain.
  • Allowable deductions may include acquisition costs, enhancement costs, professional fees, and certain incidental costs of buying and selling the asset.

Capital Gains Tax Exemptions:

Some assets are exempt from Capital Gains Tax. Key exemptions include:

  • Assets held in tax-efficient accounts, such as Individual Savings Accounts (ISAs) and Personal Pension Plans (subject to specific rules).
  • Government gilts and certain other UK government securities.
  • Betting, lottery, and pool winnings.
  • Personal possessions (excluding cars) with a value of £6,000 or less.

Capital Gains Tax Reliefs and Allowances:

Various reliefs and allowances are available to reduce the amount of Capital Gains Tax payable or defer the tax liability. These include:

  • Entrepreneurs’ Relief: Reduces the rate of Capital Gains Tax to 10% on qualifying business disposals.
  • Gift Hold-Over Relief: Defers Capital Gains Tax on assets that are gifted.
  • Rollover Relief: Allows deferral of Capital Gains Tax when selling certain assets and acquiring replacement assets.
  • Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) reliefs: Offer tax incentives for investments in qualifying small and high-risk businesses.
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