Capital Gains Tax is charged to you when you sell or dispose of an asset and it has grown in value, or you have gained a profit out of the sale. Here we look at how the CGT rules work in practice.
Under the CGT tax regime, you are only taxed on the amount that you have gained, rather than on what you have received for the overall sale of an item/asset.
As an example, if you were to buy a valuable watch for £5,000 and sell it on for £15,000, you would have made a gain of £10,000. That’s the £15,000 sale minus the £5,000 original purchase price. You would face a potential tax liability on the £10,000 gain, as this is the amount by which you have profited.
Some disposals are tax-free
There are some assets that are considered tax-free, such as gifts between a husband, wife, civil partner or charity. However, this is only in the event that you are still together with your partner and they plan to keep the item. If you are separated or have stopped living together during the tax year, or the goods you gave them were deliberately sold on as a business venture, then they may be required to pay tax.
The Annual Exempt Amount
You won’t need to pay Capital Gains Tax on the value of any gains which fall below the tax-free allowance (or Annual Exempt Amount) for the 2021/22 tax year of £12,300. You also won’t be required to pay Capital Gains Tax on any premium bonds, government gilts, lottery winnings or betting wins.
What do you pay CGT on?
Items that you may find yourself paying Capital Gains Tax for include almost all personal possessions with a value higher than £6,000, aside from your car. Additionally, if you sell a property that isn’t considered to be your main residence, or if you sell your main home that you have let out or used for business purposes, you will need to pay it.
You will also pay Capital Gains Tax on any business assets or shares, aside from anything that is in an ISA account or PEP. On top of this, if you inherit assets from someone who has died, you may need to pay Capital Gains Tax if you later dispose of this asset, even if it has been subject to inheritance tax previously.
There are several ways in which you could be perceived as disposing of an asset, and it isn’t just a case of selling it. Also included are giving it away as a gift or transferring it onto another individual. Additionally, you could be swapping the item for something else or receiving compensation for the asset in the event that it has been lost or destroyed and you are getting an insurance payout.
Different rates of CGT
The amount you need to pay for Capital Gains Tax depends on what you earn. If you are a basic rate income taxpayer, then how much you pay will vary depending on what the size of your gain is, whether it has come from a residential dwelling or another asset, and what your other taxable income is.
Disposals falling within the prevailing basic rate band are taxed at 10% (or 18% for residential properties).
If you are a higher rate taxpayer, you will pay either 20% on any gains from assets or 28% on anything gained from residential dwellings.
Here are the CGT rates for the 2019/20 tax year:
|Tax Band||2021/22 Rate|
|Basic (Residential Property)||18%|
|Higher (Residential Property)||28%|
It is worth noting that you may be eligible for Entrepreneurs’ Relief, which can help to reduce the amount you need to pay in Capital Gains Tax if you are disposing of a business asset that would otherwise require you to pay tax on your gains. Instead of the usual rates, you would be required to instead pay 10% tax on all gains of any qualifying assets. This includes selling shares or securities in a business in which you have a minimum of 5% shares or voting rates, any assets that you lent to your company, shares you got after 5 April 2013 through the Enterprise Management Incentive (EMI) scheme, or if you dispose of all of your business, or part of it, as a sole trader or business partner. This includes any business assets disposed of after the sale.
Entrepreneurs’ Relief is now known as Business Asset Disposal Relief. You can read our in-depth guide here.
Can I close down my company and extract the capital?
If you are planning on exiting contracting or having a substantial break, you may be able to close down your limited company and claim Entrepreneurs’ Relief when extracting any remaining cash. However, this very much depends on your personal situation. You would need to prove that any substantial funds remaining on the company’s balance sheet were for trading purposes, otherwise, the company would be regarded as a close investment company (CIC). New anti-avoidance measures were also introduced in April 2016, which aim to clamp down on the artificial use of Members’ Voluntary Liquidations (MVLs), and participator loans – both of which can be used to extract capital from companies prior to closure, at lower rates of tax.
If you are closing down your company, you should seek professional expert advice to find out the most tax-efficient way of doing so.