Practical guide to Paying Capital Gains Tax
It is important to be aware of who has to pay capital gains tax. Capital gains tax (CGT) is a tax chargeable on the increase in value of an asset that you own when you dispose of (e.g. sell or give away) that asset or receive a sum of money from that asset.
Your asset might be a physical asset, such as a painting or a second home, or an intangible asset, such as a lease on a property.
What you don’t pay Capital Gains Tax on
It is important to be aware of who has to pay capital gains tax and on what. Capital gains tax was introduced in 1965. However, only gains which you have accrued since 31 March 1982 are chargeable to capital gains tax. This means that any assets that you have owned before that date must be revalued at that date. This will then form the ‘base cost’ to calculate any chargeable gain.
- Gifts or sales to your spouse (in these notes ‘spouse’ includes a civil partner) unless you separated and did not live together at all in that tax year. Your spouse may have to pay tax on any gain if they subsequently dispose of the asset, calculated from it was first owned by either of you.
- On land, property or shares that you give to a charity
- When you sell a property that has been your sole or main residence throughout the period of ownership having gardens or grounds of half a hectare or less. That is about 50 metres x 50 metres or 1.23 acres.
- Your car – unless you use it for business. It would, of course need to be a very special car to have increased in value. If you own a vintage car which may well have increased in value it will escape Capital Gains Tax provided that it is capable of carrying at least one passenger. So a vintage racing car would be liable for Capital Gains Tax on any gain in value when you dispose of it.
- Anything with a limited lifespan – which HMRC consider to be less than 50 years, unless used for business
- Personal possessions you dispose of for less than £6,000 or where your share of a jointly owned item is less than £6,000
- Winnings from the pools, horses, bingo and lotteries etc.
- National Savings Certificates and gilt-edged securities (i.e. loans to the Government) and qualifying corporate bonds (i.e. loans to companies)
- Life assurance policies but only where the policy is disposed of by you as the original owner or your beneficiaries, or by you if you had acquired it as a gift from a person who had not themselves acquired it by purchasing it.
- Shares held in Individual Savings Accounts (ISAs), Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs).
It follows that, where your asset is exempt from capital gains tax, no relief is normally given for losses. Losses on disposal of shares in an Enterprise Investment Scheme are an exception to this general rule.
Who has to pay Capital Gains Tax?
It is important to be aware of who has to pay capital gains tax. Capital gains tax applies in respect of gains accruing to individuals, personal representatives and trustees.
Capital gains tax generally only applies if you are resident in the UK. However, in certain circumstances you can also be liable if you sell an asset while non-resident in the UK.
Any company resident in the UK is also within the charge to capital gains tax. However, where a company realises a chargeable gain, the gain will be calculated in accordance with capital gains tax principles but will be charged to corporation tax.
What is a disposal?
A disposal for capital gains tax purposes in relation to an asset is its sale, gift, or exchange. These are the most recognisable forms of disposal. However, there are others, which include:
- a sale, gift or exchange of rights over an asset without transferring the asset itself
- the entire loss, destruction, dissipation or extinction of an asset
- a part-disposal of an asset, that is a disposal of part of an asset itself or rights over the asset
- the receipt of compensation for giving up rights
The disposal proceeds may be cash, another asset, forgiveness of a debt, or (in the case of a gift) nothing at all.
- Sales – the proceeds will be the price received. However, where the sale is to a ‘connected person’ the market value is substituted for the sale proceeds. It should be noted that if the sale proceeds are less than the market value the difference will be considered a gift for Inheritance Tax purposes.
- Gifts – disposal value is the market value of the asset on the date of gift. Again there will be Inheritance Tax considerations.
- Loss, destruction etc – the disposal proceeds are whatever is received to compensate for the loss, usually insurance proceeds.
The general rule is that market value must be used unless your transaction is at arm’s length. In the straightforward situation where you enter into a contract with a third party on a commercial basis, the disposal proceeds are the actual sale proceeds. You are not penalised because you might have made a bad bargain. That is, you sold an asset for less than it is really worth.
What if the transaction is not at arm’s length? Where you deliberately sell the asset for an amount less than its true value, then HMRC will substitute the market value. If your disposal is to a connected person there is an automatic assumption that the disposal is not at arm’s length. Examples of a connected person are a relative or a family company, or the trustee of a family trust. In this case market value is always substituted for the actual sale proceeds if the two amounts are different.
Mrs A has a second home in Worthing which she decides to gift to her daughter on the occasion of her daughter’s wedding. The property was purchased for £180,000. At the time of the gift to her daughter it was worth £430,000. Mrs A has not received a penny in return for the gift. The property is mortgage free. Mrs A is deemed to have disposed of the property at its market value (£430,000) leaving her with a chargeable gain of £250,000.
Mr B agrees the sale of a painting for £200,000. The agent selling the painting deducts his fee of 7.5%. So for CGT purposes Mr B’s disposal proceeds are £185,000.
Inheriting an asset
If you inherit an asset you are deemed to have acquired it at its market value at the testator’s death (i.e. the probate value).
Personal representatives of a deceased’s estate are liable for capital gains tax at 20%. However, they are entitled to the full annual capital gains tax exemption due to an individual for the year of death and the following two further tax years.
When is Capital Gains Tax Due?
Your liability to capital gains tax is determined by the tax year in which the date of your disposal falls. Capital gains are assessed over the tax year and the due date for the payment of Capital Gains Tax is 31 January following the end of the tax year.
If you made a gain in March 2022, the end of the tax year is 5 April 2022 and so any tax due is payable by 31 January 2023.
If you made a gain in July 2022, the end of the tax year is 5 April 2023 and so any tax due is payable by 31 January 2024.
From 6 April 2020 if you sell a residential property that gives rise to a capital gains tax liability (e.g. a buy-to-let property) you must send a new standalone online return to HMRC. Furthermore you must pay the tax due within 30 days of the completion of the sale.
Capital Gains Tax Service – If you do not complete an annual tax return you can declare your gains (and pay the tax) immediately using this ‘real time’ online service. You will need to access it by first signing in to the Government Gateway.
Links to more information
- Capital Gains Tax
- How to calculate Capital Gains Tax
- Capital Gains Tax exemptions
- Capital Gains Tax planning
- Special Capital Gains Tax situations
- HMRC notes on Capital Gains Tax
- If you need personal financial advice on Who has to pay Capital Gains Tax, on what and when then I am happy to introduce you to Flying Colours Life who have access to independent financial advisers throughout the UK
This information does not constitute personal advice and should not be treated as a substitute for specific advice based on your circumstances.
Information given relating to tax legislation is based on my understanding of legislation and practice currently in force. Whilst I believe my interpretation of current law and practice to be correct in these areas, I cannot be responsible for the effects of any future legislation or any change in interpretation or treatment. In particular you are warned that levels of tax and tax reliefs are subject to alteration and, in any case, the value of such reliefs and benefits may depend on an individual’s circumstances.
If you are in any doubt as to whether any course of action is suitable for you, then you should discuss the matter with a suitably qualified independent financial adviser or other specialist.