Capital gains tax (CGT) applies to gains made on the disposal of an asset. There are exemptions and reliefs available for CGT and this article provides a comprehensive overview of those reliefs.
What is capital gains tax?
Simply put, capital gains tax (CGT) is the amount you pay on any profit you make when you come to sell an asset that has increased in value.
This includes:
Annual exemption
The annual exemption for 2023/24 is £6,000, however, as announced in the November 2022 budget it will reduce to £3,000 from 6 April 2024.
This is a ‘use it or lose it’ exemption; it cannot be carried forward to future years. It therefore can make sense to crystalise gains each year to the extent of the annual allowance, if possible.
It should be noted that transfers between spouses are deemed to be at “no gain, no loss”, which means that gains and losses do not arise on such transfers, and the recipient effectively assumes the donor spouse’s base cost. This means that spouses can plan in order to maximise the benefit of both annual exemptions.
We would recommend considering making the most of this year’s £6,000 exemption by realising gains prior to 6 April 2024 where possible.
Rates of tax for shares
The rate of capital gains tax is 10%, where the total taxable gains and income is less than £37,700.
Any excess gains are taxed at 20%. Where ‘Business Asset Disposal Relief’ (BADR) applies, the rate of tax on the whole gain is 10%, subject to a £1m lifetime allowance. We explain more about BADR further down in this article.
Note that under the ‘bed and breakfasting’ rule, a gain or loss does not crystalise for tax purposes if you sell shares and repurchase the same shares within 30 days. The ‘bed and breakfasting‘ rule is where an individual sells shares and then buys the same shares back shortly afterwards to crystalise a gain or a loss.
It is possible to sell shares, and then repurchase the same shares through an ISA so that future gains are CGT free.
Alternatively, a person can arrange to sell shares to their spouse or civil partner after their spouse or civil partner has transferred some loss-making shares to them to reduce the overall gain.
In some cases, losses from share disposals can be used against other income.
It should be noted that transfers between spouses are deemed to be at “no gain, no loss”, which means that gains and losses do not arise on such transfers, and the recipient effectively assumes the donor spouse’s base cost. This means that spouses can plan in order to maximise the benefit of both annual exemptions.
Investment property
The 10% and 20% rates also apply to gains on commercial property but gains on residential properties are taxed at the higher rates of 18% and 28%.
Taxable gains on the sale of UK residential property must be reported to HMRC within 60 days of completion of the sale. You may have to pay interest and a penalty if you do not report and pay the tax on time and the 60-day return does not preclude the need to file a self-assessment tax return.
Crystallise and use capital losses
Capital losses are automatically offset against capital gains in the same year. Unused losses are carried forward indefinitely and can then be offset against future gains.
A formal claim is required. The claim must be submitted to HMRC within four years of the end of the tax year of the loss, otherwise, it will be time-barred. Hence, claims must be made by 5 April 2024 in respect of 2019/20 losses if claims have not already been filed.
When an asset has become valueless or worth next to nothing, it may be possible to make a “negligible value claim” to crystallise a capital loss. The claim can be related back up to two tax years in certain circumstances, allowing the loss to be offset against gains made in earlier years.
Business Asset Disposal Relief (BADR)
CGT is charged at 10% where BADR applies, subject to a lifetime limit of gains totalling £1m.
BADR applies to the sale of a trading business carried on as a sole trader or partnership, or to the sale of shares in a trading company.
It can also apply to personally held assets that have been used in the trade of a partnership that you are a partner of or a company that you are a shareholder in.
Business owners should regularly review their BADR position as it is easy to fall foul of the detailed rules.
Private Client Tax
Read more about Private Client TaxRead moreWhen an asset has become valueless or worth next to nothing, it may be possible to make a “negligible value claim” to crystallise a capital loss. The claim can be related back up to two tax years in certain circumstances, allowing the loss to be offset against gains made in earlier years.
Main residence relief
Ownership of two homes in the UK is becoming more commonplace as couples who both own houses marry, houses are inherited, parents buy houses for their children to live in, or people just buy a place in the country, either to let or to escape to at weekends. The gain on a person’s only or main residence is normally free from CGT.
If you have more than one private residence, your ‘main’ residence will normally be, by default, the one in which you spend the greatest time.
However, it is also possible to determine that matter by nominating one property as your main residence. This requires careful planning since the flip side of a gain on one residence being treated as exempt is that a gain on the other residence will become chargeable.
Written nominations must be submitted to HMRC within 24 months of any change in residences becoming available. Lettings relief of up to £40,000 (£80,000 per couple) is available for those landlords who are in shared occupancy with more than one tenant or lodger. Housing a single lodger should not impact availability of full CGT relief on your main residence, however, if there are two or more then full relief may not apply as this may be deemed to be a lodging business. In such cases, lettings relief may cover all or part of the gain not covered by the main residence relief.
The final 9 months of ownership of a main residence are exempt from CGT, irrespective of how you use the property during that time.
If you own more than one home, consider whether a principal private residence election is needed.
Marital Breakdown
From 6 April 2023, separated spouses may transfer assets up to three years after the end of the tax year in which they separate, without incurring a CGT liability, e.g. if separated in the current tax year, assets could be transferred on or before 5 April 2027, or without time limit if the assets are transferred as part of a formal divorce agreement.
This recent change gives greater flexibility to separating couples and avoids the need to make quick decisions on assets to avoid triggering a tax charge.
CGT overhaul
With the cost-of-living crisis, COVID-19 debt, and recent political turmoil, the future direction of CGT remains uncertain.
Previous suggestions have included aligning capital gains tax rates with income tax (currently 20%, 40% and 45%) and abolishing or adjusting BADR.
No such changes have been announced so far, but this could change in a future Budget or be brought in by a new Government.
Individuals who anticipate realising capital gains in the short to medium term should consider whether it is appropriate to bring these gains forward, where possible.
Please note: We always recommend that advice be sought from a suitably qualified independent financial advisor before disposing of, or acquiring, assets.
For further guidance
For further guidance on any of the measures discussed in this article, please contact your usual MHA advisor or contact us here
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