A guide to capital gains tax and the reliefs available for 2017/18.
When you buy an item with the intention of selling it for a profit, that transaction is treated as a trade and you should pay income tax on the profit you make on the sale.
When you acquire an asset to use or hold for a period, the profit you make when you dispose of that item is treated as a capital gain, which is subject to capital gains tax (CGT).The difference between trading (income tax) and owning an item as an investment (CGT) can change depending on how you intend to use the item. For example, if you buy a house to let then sell it for a profit, you will pay CGT on the gain. However, if you buy a house with the intention of doing it up to improve its value, then sell at a profit, HMRC will view your activity as a trade and charge you income tax, and possibly national insurance, on the profit you make.
The distinction between trading and making a capital gain is important because the rates of tax you pay are different:
|Taxpayer’s income and gains:||Income tax on profits||CGT on most gains||CGT on residential property|
|Up to £33,500 (basic rate)||20%||10%||18%|
|Up to £150,000 (higher rate)||40%||20%||28%|
|Above £150,000 (additional rate)||45%||20%||28%|
For Scottish taxpayers the CGT rates depend on UK rates and thresholds for income tax rather than Scottish rates and thresholds.
Add together all your taxable gains and the taxable income you make in the tax year and that total determines which rate of CGT you pay from the table above. The income thresholds can be expanded by making gift-aid donations or personal pension contributions.
Your taxable income is calculated after deducting your personal allowance of £11,500 and any allowable income losses. Your taxable gains are calculated after deducting your annual exemption of £11,300 and any capital losses.
You are not entitled to the personal allowance if you have income of more than £123,000. Non-domiciled individuals who elect to be taxed on the remittance basis are not entitled to the annual exemption for CGT. If you don’t use all your personal allowance or annual exemption in the tax year, you can’t carry the unused amount into another tax year or allocate it to another person.
Some types of assets are not subject to CGT when you dispose of them. These include:
- moveable possessions worth no more than £6,000
- motorcars of any value
- government stock (gilts) and savings certificates
- currency for personal use
- debts and most corporate bonds.
Your own home
When you sell the property you have occupied as your main home for the entire period of your ownership, the gain is completely free of CGT. If you lived in the property for only part of that time, the proportion of the gain relating to your period of occupation is exempt from CGT and the gain for the last 18 months is also exempt.
When you have two or more properties, you need to notify HMRC which property should be treated as your main home for CGT purposes. Married couples or civil partners can only have one main home between them.
There are additional reliefs from CGT for periods when you let your home, when you need to live elsewhere for your job or if you move into a care home. Selling part of your garden can also be tax free if it is sold before or with the house.
Ask us to check whether the sale of your home will be tax free.
Any assets you give to charity or to a community amateur sports club are free of CGT.
There is a general exemption from CGT for gifts between husband and wife or civil partners who are living together in that tax year, but not for gifts to other relatives. For example, if you give a house to your son, you are taxed as if you had sold the property at its market value.
Reinvesting and deferring
If you are prepared to take some risk with your investments, you can defer paying CGT on gains by investing the amount of the gain in shares issued under the Enterprise Investment Scheme or shares or bonds issued under the Social Investment Tax relief scheme.
Investing your gain under the Seed Enterprise Investment Scheme (SEIS) will halve the amount of tax your pay on that gain, but you can only invest up to £100,000 per year in SEIS.
Losses and negligible value
Sometimes an investment will make a loss when you sell it. That capital loss can be useful as it can be set against the capital gains you make in the same tax year or be carried forward. You need to claim the loss on your tax return so it can be used in this way.
When you own assets or shares which become worthless while you own them, perhaps because the company has ceased trading, you can claim that capital loss as if you had disposed of the assets or shares.