Capital gains tax (CGT) is charged when an asset is sold or transferred at a profit.
The gain is calculated by taking the sale proceeds (net of selling costs) and deducting the purchase price (net of acquisition costs), together with any enhancement expenditure which may have been incurred over the period of ownership.
CGT can arise on the disposal of personal possessions, shares or securities, the sale of a second property or a buy-to-let investment, from assets held in trust or assets sold from a death estate whilst it is being administered.
CGT rules can be complex to understand, when there are different rates of tax depending on what asset is being disposed of, and whether you are a basic rate, or a higher rate taxpayer.
It is especially difficult to grasp the concept that you may have CGT to pay if you gift an asset or transfer an asset into a trust, especially as you will not have received any ‘liquid’ sale proceeds out of which to pay the tax. This is commonly referred to as a ‘dry tax charge’.
In some circumstances, it may be possible to complete an election to defer the gain so that you do not pay an immediate tax charge, but rather it is deferred until the asset is ultimately sold.
What are the Capital Gains Tax Rates and Allowances
Every individual is entitled to a CGT allowance, this was recently reduced from £6,000 to £3,000 from 6 April 2024 meaning that increasing numbers of taxpayers will now be liable to pay CGT.
Executors of death estates can claim the same CGT allowance as an individual taxpayer for the year of death and the following two tax years.
Trustees are also entitled to claim a CGT allowance, but this is less and is equivalent to half of the standard CGT allowance, so currently £1,500.
CGT on the sale of assets, other than residential property, is currently charged at either 10% or 20% for individuals depending upon whether the gain after deducting the annual exemption is liable at the basic rate or higher rate of tax. Residential property gains for individuals are taxed at 18% at the basic rate or 24% at the higher rate.
Trustees and executors are liable to a 20% capital gains tax rate on the sale of assets other than residential property. The sale of residential property out of a trust or an estate attracts a 24% tax rate.
Shares and Unit Trusts
When acquiring identical shares or units at different times there are special rules, which state that
the shares or units you are selling must be matched to the ones bought, in the same order.
Those purchased on the same day and those purchased within the subsequent 30 days are treated as being held in a pool and acquired at their average price. There are other special rules in respect of bed and breakfasting and the 30-day rule.
You will usually have to pay CGT on the sale of shares unless these are held in a pension or ISA.
Read more : HS284 Shares and Capital Gains Tax (2022) – GOV.UK (www.gov.uk)
Capital Gains Tax on Property
You do not generally pay CGT on a property which is your only, or main residence, as any gain should be covered by principal private residence relief (PPR relief).
In some circumstances it may still be possible to claim PPR relief if you move out of your property to take up work elsewhere, or move abroad, or go into a nursing home. There are specific rules for claiming PPR relief depending on the precise circumstances you moved out of your home and for how long. It is important you understand these rules so that you can preserve as much PPR relief as possible.
If you own two properties which you live in, say a flat in the city and a house in the country, you can make an election to HMRC to declare which is your main residence for claiming PPR relief. You normally have 2 years from acquiring a second property, or a different combination of residences to make this election and lodge it with HMRC.
Previously, if you rented out a property which had been your only or main residence, it was possible to also claim Lettings Relief. This tax concession was significantly restricted from 6 April 2020 and is now only available for disabled persons, or those in a care home, or where the owner of the property is in shared accommodation with the tenant. Lettings relief is worth up to £40,000, per person, per property and where relevant, is available in addition to PPR relief.
If you are a resident in the UK, you pay Capital Gains Tax when you dispose of overseas properties. If however, you are resident in the UK, but domiciled abroad, special tax rules apply. This is a complex area of tax, as in addition to paying tax in the UK, you may also have to pay tax in the country where the property is located.
The Tax Angel can provide specialist tax advice for individuals and landlords and the CGT aspects of selling or gifting assets. I can also advise you in respect of claiming double tax relief in respect of overseas properties.
Read more: Tax when you sell property: What you pay it on – GOV.UK (www.gov.uk)
60-day Capital Gains Tax Reporting for Residential Properties
It is now necessary to report and pay any taxable gains within 60 days of the completion of a sale of residential property. Failure to do so may lead to penalties and interest charges.
An online Capital Gains Tax on UK property account has to be set up with HM Revenue & Customs before the tax can be reported and paid.
The 60-day Capital Gains Tax reporting applies to equally to individual, trustees and executors of estates.
Non-UK residents must also use the 60-day reporting facility to report sales of UK residential property, commercial property, and land, as well as rights to assets that derive at least 75% of their value from UK land.
Non-UK residents must report all sales and disposals of UK property, regardless of whether there is a tax liability.
Capital Gains Tax for Non-UK Residents
You must pay CGT on gains you make on property and land in the UK even if you’re non-resident for tax purposes.
You do not pay tax on the sale of other UK assets or overseas properties unless you return to the UK within 5 years of leaving.
When someone dies there is a capital gains tax-free uplift in the value of all the assets in their estate at the date of death and so the assets are deemed to be acquired by the executors at their probate value.
If during the estate administration period a property or an asset is sold for more than the probate value, a Capital Gains Tax liability may arise. The CGT rate is 20% for most assets, but 24% for residential property.
It may be necessary to complete an estate tax return to report any CGT, or if the gain is small, declare it to HMRC using the informal procedure.
Executors have the same annual CGT as an individual for the year of death and the following 2 years, this is currently £3,000.
Beneficiaries who inherit assets from the estate will receive them at their probate value. However, this means that if they sell or give an inherited asset away, they may have to pay CGT on any gain calculated on the difference between the probate value and the current value.
Any CGT which arises on disposals made before the date of death will remain payable and due to HMRC. These liabilities must be settled by the executors.
Read more: Capital Gains Tax when someone dies (Self Assessment helpsheet HS282) – GOV.UK (www.gov.uk)
You are potentially liable to CGT when you transfer an asset into trust. The trustees are liable to the CGT charge when assets are transferred out of a trust.
It may be possible to complete a holdover election to defer any CGT due until the assets are ultimately sold. Only the person transferring the assets into a trust signs the holdover election, but both the trustees and the beneficiary sign the holdover election when assets are transferred out of a trust.
Read more: Trusts and taxes: Trusts and Capital Gains Tax – GOV.UK (www.gov.uk)
The Tax Angel has extensive experience dealing with all aspects of CGT and can advise on the best way to minimise your CGT liability whether you are an individual, a landlord, non-resident, an executor, or a trustee or a professional advising your clients.
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