Capital Gains Tax in the UK is the tax that applies to the profits made from selling an asset. It applies to assets that are worth £6,000 or more in the UK. The profit made is as a result of an increase in value since the asset was bought and this is what Capital Gains Tax addresses.
For properties, this tax is hugely important as properties are regularly sold for a profit and therefore taxed in this way (read more on property sales). For individuals, the tax on Capital Gains is 18% or 28% depending on a number of factors and the tax applies to the ‘disposal’ of an asset. Furthermore, this tax is not paid on a person’s place of residence should they sell that, as this qualifies them for Private Residence Relief (PRR).
Whilst this tax is paid for a large proportion of properties, there are instances where you do not have to pay the tax. This is due to ‘reliefs’ provided depending on circumstances. It is important however to check whether or not you qualify to pay Capital Gains Tax when selling any property in the UK.
Also, if one is ‘domiciled’ in the UK, then they may have to pay tax on any gains from overseas assets that would qualify for the tax in the UK.
Capital Gains Tax on Property
Properties in the UK are one of the most regularly qualifying assets for Capital Gains Tax. This is because properties are regularly bought and sold and also due to the large sums of money that naturally need to be exchanged when purchasing and selling properties of any size; almost every type of property in the UK will cost more than £6,000 and therefore fully qualify for this taxation (source: HM Revenue & Customs).
Whilst places of abode and one’s home tends to be exempt from this tax, there are occasions where you would still need to pay full or partial tax on your home:
- If one develops all or part of their place of residence. This includes converting all or part of the property into flats and studios
- If you let/ rent out all or part of your home property
- If any part of the property is used exclusively for business purposes (offices, studios, workshops or otherwise)
- If one sells part of the property’s garden and the total property’s plot exceeds 1.2 acres
Calculating Capital Gains
You will need to pay tax as long as your gains exceed the Capital Gains allowance. It is therefore very important to work out your ‘total taxable gains.’ This is quite straightforward and is calculated by adding up all of the gains for all assets in a tax year including:
- Personal Items and Possessions
- Business Items and Assets
The gains will be the profits made as a result of selling or disposing of an asset. For example, if you bought a property for £500,000 and sold it on for £550,000, your gains will be £50,000 for that property and this is what you will be taxed on (not the value you purchased it for.) This applies to all items.
What is my Capital Gains Tax Allowance?
Your Capital Gains Tax Allowance is the amount of gains you can make on capital before having to pay any of this tax. This is much in the same way that there are thresholds for other taxes; Income Tax, National Insurance and others. If one doesn’t qualify then there is nothing to declare and no tax is paid in this respect.
Since April 2016, the amount paid on Capital Gains was drastically cut from 18% to 10% for basic rate tax payers and down from 28% to 20% for higher rate tax payers. This has meant that even when tax is paid, the amount paid is reduced by 8%, allowing for potentially significant savings.
Tax Exemptions for ‘Gains’
Whilst most gains qualify for taxation, there are some that do not and that are exempt from this tax. These include:
Gifts – For example between partners or from a person to a charity organisation
Some Sales – This is most relevant to a person’s home when sold (as long as a few criteria are met)
Financial Exemptions – This refers to the likes of lottery winnings, money made from betting and gambling, premium and other government bonds, life insurance policy proceeds and others.
Whilst there are exemptions, it is important to check and confirm whether you qualify for any Capital Gains Tax and if so, how much as not paying can lead to severe legal and financial penalties.