Capital Gains Tax exemptions

As with Income Tax personal allowances, taxpayers have an annual exempt amount for Capital Gains Tax (CGT) which is forfeited if not used. The annual exemption for individuals in 2020-21 is £12,300. A husband and wife each have a separate exemption. This also applies to civil partners who are treated in the same way as married couples for CGT purposes.

Married couples and civil partners should ensure that assets sold at a gain are either jointly owned or that each partner utilises their annual exempt amount wherever possible. Any unused part of the annual exempt amount cannot be carried forward and is forfeited if unused in the current tax year.

CGT is usually charged at a simple flat rate of 20%. If you only pay basic rate tax and make a small capital gain, the gain may be subject to a reduced rate of CGT of 10%. Once the total of taxable income and gains exceed the higher rate threshold, the excess will be subject to 20% CGT. A higher rate of CGT (8% supplement) applies to gains on the disposal of chargeable residential property.

If you have sold or are planning to sell any assets in the current tax year, 2020-21, it is important to ensure that you take full advantage of the annual CGT exemption and arrange your affairs to ensure the optimum CGT position. For example, capital losses are deducted from gains before net gains are calculated. Crystallising a loss that will waste the annual exemption should therefore be avoided.

Tax when you sell shares

Capital Gains Tax (CGT) is normally charged at a simple flat rate of 20% when you sell shares unless they are in a CGT free wrapper such as an ISA or pension. 

If you only pay basic rate tax and make a small capital gain you may only be subject to a reduced rate of 10%. Once the total of your taxable income and gains exceeds the higher rate threshold, the excess will be subject to 20% CGT. There is also an annual CGT exemption. This means that in the current tax year you can make £12,300 of gains before paying any CGT. The allowance applies to each member of a married couple or civil partnership. 

The usual due date for paying CGT you owe to HMRC on the sale of shares is the 31 January following the end of the tax year in which a capital gain was made. This means that CGT for any gains crystalised before 6 April 2021 will be due for payment on or before 31 January 2021. However, if you waited until the start of the next tax year you would have until 31 January 2022 to pay any CGT due. For example, you could benefit from this extra year to pay CGT due by waiting to crystallise a gain from the 5 April 2021 (2020-21 tax year) until the 6 April 2022 (2021-22 tax year).  

The normal way to report a gain on the sale of shares is to complete the relevant sections of your Self-Assessment tax return. When calculating your gain, you can deduct certain costs of buying or selling shares such as stockbrokers’ fees or Stamp Duty Reserve Tax.

Basics of CGT Rollover Relief

Business Asset Rollover Relief is a valuable relief that allows you to defer payment of CGT on gains made when you sell or dispose of certain assets and use all or part of the proceeds to buy new assets. The relief means that the tax on the gain of the old asset is postponed. The amount of the gain is effectively rolled over into the cost of the new asset and any CGT liability is deferred until the new asset is sold. 

Where only part of the proceeds from the sale of the old asset is used to buy a new asset a partial rollover claim can be made. It is also possible to claim for provisional rollover relief where you expect to buy new assets but haven’t done so yet. Interestingly, rollover relief can also be claimed if you use the proceeds from the sale of the old asset to improve assets you already own. The total amount of rollover relief is dependent on the total amount reinvested to purchase new assets.

HMRC’s internal manual lists the following key conditions for the relief:

  1. The old assets are within one of the classes listed in CG60280 and have been used solely for the purposes of the trade throughout the period of ownership, and
  2. the whole of the consideration obtained for the disposal is applied in acquiring new assets within one of the classes listed in CG60280 which are, on the acquisition taken into use wholly for the purposes of the trade.

There are also other qualifying conditions to be met to ensure entitlement to any relief. For example, you should purchase the new assets within 3 years of selling or disposing of the old ones (or up to one year before). Under certain circumstances, HMRC has the discretion to extend these time limits. In addition, both the old and new assets must be used by your business and the business must be trading when you sell the old assets and buy the new ones. You must claim relief within 4 years of the end of the tax year when you bought the new asset (or sold the old one, if that happened after).

What is Tangible Moveable Property?

A chattel is a legal term that defines an article which is a tangible moveable property. A tangible object is one that you can touch. The asset has to be a physical asset such as household furniture, paintings, antiques, items of crockery and china, plate and silverware, motor cars, lorries, motorcycles and items of plant and machinery not permanently fixed to a building.

There is no specific meaning for the term 'moveable' in the relevant legislation. However, HMRC’s guidance states that the definition is simply based on whether the asset can be moved easily and without damaging its surroundings. Small items of plant or other easily moved items will satisfy the test.

A charge to Capital Gains Tax usually arises after an asset is sold. However, there are special rules concerning the sale of chattels. That is because chattels with a predictable useful life of 50 years or less are normally exempt from Capital Gains Tax.

Do you owe CGT on the sale of a residential property?

HMRC has issued a press release to remind taxpayers that have sold a residential property, which was not their main home, during the 2019-20 tax year that the payment date for any Capital Gains Tax (CGT) owed is 31 January 2021.

Due to the impact of Coronavirus, there are options available to defer payments due on 31 January 2021 and pay by instalments over 12 months. This includes a self-serve Time to Pay facility online for debts up to £30,000 or by arrangement with HMRC. Interest will be applied to any outstanding balance from 1 February 2021.

The payment of CGT only applies to the sale of any residential property that does not qualify for Private Residence Relief (PRR). The PRR relief applies to a qualifying residential properly used wholly as a main family residence.

CGT is normally due on property sales such as:

  • a property that you have not used as your main home;
  • a holiday home;
  • a property which you let out for people to live in;
  • a property that you’ve inherited and have not used as your main home.

The CGT reporting and payment date for UK residents that sell a residential property changed from 6 April 2020. This change means that any CGT due on the sale of a residential property now needs to be reported and a payment on account of any CGT due made within 30 days of the completion of the transaction.

Business Asset Disposal Relief

Business Asset Disposal Relief used to be known as Entrepreneurs’ Relief before 6 April 2020. The relief was renamed in Finance Act 2020. The name change does not affect the operation of the relief.

Business Asset Disposal Relief applies to the sale of a business, shares in a trading company or an individual’s interest in a trading partnership. Where this relief is available CGT of 10% is payable in place of the standard rate. There are a number of qualifying conditions that must be met in order to qualify for the relief.

When the relief was first introduced there was a lifetime limit of £1 million for gains. This was increased to £2 million from 6 April 2010, to £5 million from 23 June 2010 and to £10 million from 6 April 2011. The limit was reduced to £1 million on 11 March 2020.

The £1m lifetime limit means that individuals can qualify for the relief more than once subject to an overriding total limit of £1m of qualifying capital gains. The changes to the lifetime limit are not retrospective.

To qualify for relief, you should be either an officer or employee of the company and own at least 5% of the company and have at least 5% of the voting rights. There are also other qualifying conditions that must be met in order to qualify for the relief. The minimum period during which certain conditions must be met in order to qualify for Business Asset Disposal Relief increased from one to two years from 6 April 2019.

Taxable business gains

If you are in business as a self-employed sole trader or as part of a partnership, there may be occasions when you are required to pay Capital Gains Tax (CGT). CGT is normally charged at a flat rate of 20% on the amount of ‘profit’ or ‘gain’.

You will usually be liable to CGT where you sell or dispose of a chargeable business asset for more than the acquisition price. CGT may also apply if you give away an asset or sell it for less than it is worth. This is because CGT under these circumstances is calculated based on the market value of an asset at the time of its disposal, not the amount of money (if any) that you sell it for. HMRC can check your valuation and it is important to keep detailed records regarding the sale and purchase of the asset.

Business assets you may need to pay tax on include:

  • land and buildings
  • fixtures and fittings
  • plant and machinery, for example a digger
  • shares
  • registered trademarks
  • your business’s reputation

There are various tax reliefs available that can significantly reduce or delay the amount of CGT you are required to pay such as Entrepreneurs' Relief, Business Asset Rollover Relief and Incorporation Relief. There is generally no CGT payable on gifts to your spouse, civil partner or to a charity.

It is important to remember that CGT is not payable by limited companies or unincorporated associations when they sell an asset and make a gain. Instead, the gain (less any allowable costs and reliefs) is subject to Corporation Tax.

Donating land, property or shares to a charity

There are special rules in place for taxpayers who gift land, property or certain shares to charity. This can include Income Tax and Capital Gains Tax (CGT) relief provided all the necessary conditions are met. There is no Income Tax relief on donations to community amateur sports clubs (CASCs).

Income Tax relief

Where qualifying assets are gifted, the market value of the asset is deducted from the taxpayer’s total income rather than adjusting their basic rate tax band. This should be done for the tax year (6 April to 5 April) in which they made the gift or sale to charity.

Capital Gains Tax relief

Taxpayers do not have to pay CGT on land, property or shares they give to charity. Taxpayers may have to pay some tax if they sell for more than the land, property or shares cost, but less than their market value. The gain should be calculated using the amount the charity actually pays, rather than the value of the asset.

Selling land, property or shares on behalf of a charity

When a taxpayer offers a gift of land, property or shares, the charity might ask the taxpayer to sell the gift on its behalf. Taxpayers can do this and still claim tax relief for the donation, but they must keep records of the gift and the charity’s request. Without them, they might have to pay CGT.

Nominating a principal private residence

There is usually no Capital Gains Tax (CGT) due on a property which has been used solely as the main family residence. Conversely, an investment property which has never been used as a private residence will not qualify for relief. This relief from CGT is commonly known as private residence relief.

There are a number of issues taxpayers that own more than one home should be aware. An individual, married couple or civil partnership can only benefit from CGT on one property at a time. However, it is possible to choose which property benefits from a CGT exemption by making an election.

This must be done by nominating one property as your main home by writing to HMRC and specifying (with the full address) which home you want to nominate. All owners of the property must sign the letter. If you want to nominate a home you must do this within 2 years of any relevant change. You must have also lived in the house as your main or only residence at some point in the past.

There are special rules for overseas property and for non-UK residents. It is important to carefully consider the timing and frequency of changing an election.

If a property has been occupied at any time as an individual’s private residence, the last 9 months of ownership are disregarded for CGT purposes – even if the individual was not living in the property when it was sold.

Tax and divorce

When a couple is in the process of becoming separated or divorced it is unlikely that they are thinking about the tax implications of doing so. However, it is important that the tax consequences of the break-up are properly considered.

Whilst Income tax does not automatically cause an issue for separating couples, as it is an individually assessed tax, there are other taxes that need to be considered. For example, when a couple are together there is no Capital Gains Tax (CGT) payable on assets gifted or sold to your spouse or civil partner. However, if a couple separate and do not live together for an entire tax year or get divorced then CGT may be payable on assets transferred between ex-partners.

This effectively means that the optimum time for a couple to separate would technically be at the start of the tax year so that they would have up to a year to plan how to split their assets most tax efficiently. Obviously, in the real world most couples will have far more on their minds than deciding to get separated on a certain day, but these issues should be kept in mind.

It is also important to look at making a financial agreement that is agreeable to both parties. If no agreement can be reached, then going to court to make a 'financial order' will usually be required. The couple and their advisers should also give proper thought to what will happen to the family home, any family businesses as well as the Inheritance Tax implications of separation and / or divorce.