How does capital gains tax work? | moneyfacts.co.uk

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Michelle Monck

Michelle Monck

Consumer Finance Expert
Published: 15/03/2021

Article written by Kellands Hale our preferred independent advice firm.

This article is not intended to be financial advice to any individual. The views expressed are those of the author and Moneyfacts.co.uk does not endorse the content.

What is the capital gains tax allowance for 2020/21?

The current capital gains tax (CGT) allowance is £12,300 and this has been held at the same rate for 2021/22 following the recent March budget. This allowance is reduced to £6,150 for Trusts.

Is capital gains tax going up?

It is not certain whether there will be any change to capital gains tax in the near future, however, this has been changed at short notice in the past.

At what point do you pay capital gains?

You pay capital gains tax on the gain when you sell (or ‘dispose of’):

  • Most personal possessions worth £6,000 or more, apart from your car, property that is not your main home
  • Your main home if you have let it out, used it for business or it is very large
  • Shares that are not in an ISA or PEP
  • Business assets

These are known as ‘chargeable assets’ and you only pay CGT if your total gain is above the annual CGT exempt allowance.

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Who is exempt from paying capital gains tax?

No-one individual is exempt from paying CGT. However, there are instances when CGT does not apply:

  • You do not pay CGT on gifts to a husband, wife, civil partner, or a charity. However, if you gift an asset to a spouse or civil partner, they may have CGT upon disposal at a later date
  • No CGT is payable on death – Inheritance tax is assessed at that point. However, CGT can later apply if an inherited asset is then sold
  • Gains on ISAs, PEPs and pensions are exempt.
  • As are lottery winnings and betting winnings.
  • Also, UK Gilts and premium bonds are exempt

 

What is the income threshold for capital gains tax?

If you are a higher rate taxpayer then you will pay 28% CGT on property sales (residential) and 20% on other assets. If you are a basic rate taxpayer, the rate you pay depends on the size of your gain, your taxable income and whether your gain is from residential property or other assets.

  1. Work out how much taxable income you have - this is your income minus your personal allowance and any other income tax relief you are entitled to.
  2. Work out your total taxable gains.
  3. Deduct your tax-free allowance from your total taxable gains.
  4. Add this amount to your taxable income.
  5. If this amount is within the basic income tax band, you will pay 10% on your gains (or 18% on residential property). You will pay 20% (or 28% on residential property) on any amount above the basic tax rate.

If you are a Trustee or business, then the same rules apply as if you were a higher rate tax payer.

At what age are you exempt from capital gains?

There is no age limit that is exempt from CGT. Everyone is entitled to a CGT annual exempt allowance but then pays tax on the gain like everyone else.

Do I have to pay capital gains if I have no income?

Yes, and the gain upon sale of an asset can be used to pay that tax.

Does capital gains count as income?

Whilst income is an important factor when assessing CGT, any gain realised from a qualifying asset does not class as income.

Do I need to report capital gains under the threshold?

You do not have to pay tax if your total taxable gains are under your capital gains tax allowance. You still need to report your gains in your tax return if both of the following apply:

 

  • The total amount you sold the assets for was more than 4 times your allowance
  • You are registered for Self Assessment

What happens if you do not declare capital gains?

If you fail to report in time, then you may be liable to a late filing fine. You must contact HMRC if unsure.

The following table provides the timeframes for declaring and paying CGT:

 

UK tax residence status

Asset type

Required to report the disposal within 30 days?

Deadline for paying tax

Resident

UK residential property

Only if there is tax to pay*

30 days

Anything other than UK residential property

No

31 January following the end of the tax year

Non-resident

UK land and property

Yes*

30 days*

Anything other than UK land and property

No

N/A

*Capital gains tax for non-residents may not apply to the whole gain. If not, you may have to pay more tax if you return to the UK after a period of temporary non-residence.

Do I pay capital gains tax if I sell my house and how do I calculate CGT on property?

If you sold a residential property in the UK after 6 April 2020 then you have to report and pay CGT within 30 days of sale. This does not apply to properties that you have lived in for the entire time you owned it. Even if you have rented the property out at some point in the past, there are certain exemptions available, including the discounting of certain years your lived and owned the property. This is a complex area, and you should speak to an Accountant when dealing with the sale of a rental or partly rented property.

How long do you need to live in a house to not pay capital gains?

There are certain years that are exempt from CGT over the time period you owned the property. Essentially, you do not pay CGT on the years that you have been resident in a property, along with certain other years when you owned the property but did not live there. Again, this is a complex area which requires a professional Accountant to calculate if you feel this affects you.
How long do you need to live in a house to not pay capital gains? There are certain years that are exempt from CGT over the time period you owned the property. Essentially, you do not pay CGT on the years that you have been resident in a property, along with certain other years when you owned the property but did not live there. Again, this is a complex area which requires a professional Accountant to calculate if you feel this affects you.

Important information

Kellands (Hale) Limited {“Kellands”) is a firm of Chartered Independent Financial Advisers and our scope of authorised business activity under Financial Conduct Authority (FCA) regulations is restricted to advising and arranging life insurance, pensions, investments, protection, mortgages and general insurance contracts. Kellands is not authorised as legal specialists, accountants or tax advisers. It may be appropriate for you to seek specialist legal advice on tax matters. This guidance on CGT has been prepared by Kellands with support of trusted tax specialists and is intended as a high level overview which is provided as information only and should not be relied upon in isolation.

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Disclaimer

This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

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