Where capital gains arise on the disposal of certain types of asset, one must then apply the correct capital gains tax rate.
For the year 2017/18, the following capital gains tax rates apply:
|Individuals||Capital gains tax rate (2017/18)|
|Standard rate for chargeable assets||10%|
|Standard rate – non primary residence||18%|
|Higher rate for chargeable assets||20%|
|Higher rate – non primary residence||28%|
|Entrepreneurs relief – lifetime cap of £10million||10%|
|Investors relief – lifetime cap of £10million||10%|
Capital gains tax becomes payable after the taxpayer’s capital gains annual exemption has been reached. The annual exemption for capital gains tax in the year 2017/18 is £11,300.
This means there is no capital gains charge on the first £11,300 of profit on the sale of ‘chargeable assets’. These include:
- Property that is not your main home e.g. second homes, buy to lets, holiday rentals
- Personal possessions worth more than £6,000 e.g. art, jewellery (cars are excluded)
- Business assets
- Shares not held in an ISA or PEP
The capital gains tax rate is set by the government each year. The rates were most recently reviewed in the Spring Budget 2017, when they were generally reduced for gains on most types of chargeable assets. One key exception was that this reduction did not apply to the disposal of UK residential property. Private equity professionals also found that this reduction did not apply to gains in relation to their ‘carried interest’.
Essentially this means a surcharge of 8% is payable on gains arising from the sale of non-primary residence residential property – equating to 18% and 28% respectively.
How do I know which capital gains rate applies?
To determine which capital gains tax rate is applicable, you need to ascertain whether you are a higher or basic rate taxpayer.
For individuals, net gains are added to total taxable income to determine the appropriate rate of tax.
The standard rate applies only to the net gains which, when added to total taxable income, do not exceed the basic rate band.
Above this level, gains are taxed at a rate of 10% until your total taxable income and gains after the allowance reaches the threshold of £33,500. From this point upwards, the capital gains tax rate is 20%.
If your income makes you a basic rate taxpayer but you have made large enough capital gains to push you into a higher rate tax bracket, you will pay the higher capital gains tax rate on the amount that takes you over the threshold.
Gains which qualify for Entrepreneurs’ Relief or Investors’ Relief are charged at 10% for the first £10 million of qualifying gains. A lifetime limit of £10 million for each of the two reliefs applies.
The capital gains tax rate applicable to trusts is 20%.
How to calculate which capital gains tax applies
First calculate your total taxable income, from earned income, profits, rents, pensions.
Next, deduct your tax-free personal allowance (as at October 2017, £11,500) from your total income.
Then work out your taxable capital gain by deducting the tax-free capital gains annual exemption (as at Ocotber 2017, £11,300) from the gain.
Finally, add your taxable capital gain to your taxable income.
For a basic-rate taxpayer, the maximum taxable income for the 2017/18 tax year that you can earn is £33,500. This is the higher-rate threshold (£45,000) minus the tax-free personal allowance (£11,500).
If your taxable income and your taxable capital gain added together is less than £33,500, the basic-rate capital gains tax rate applies.
Where the two figures combined are above the higher tax threshold, you pay the basic-rate on the part up to the threshold, and the higher rate on the rest.
When do you have to pay your capital gains tax?
Capital gains are reported on your tax return. You should also report any loss on the disposal of an asset, such as selling a second home for less than the purchase price.
Included in your submission should be details of how you arrived at your calculation.
Under current rules, any capital gains tax due on the sale of property is payable by 31 January after the end of the tax year in which the disposal occurred.
From April 2019 onwards, capital gains tax on property sales will be payable within 30 days.
Capital gains tax rate – Exemptions
Where you are liable to capital gains tax, it is prudent to explore the availability of exemptions and reliefs. Careful use of capital gains tax planning can be leveraged to manage your exposure through use for example of:
- Principal Private Residence (“PPR”) Relief: Due to the general availability of PPR Relief, in most circumstances, CGT is not usually payable on the sale of an individual’s main home. However, CGT will usually apply to the sale of additional residential properties they own (buy to let property second homes, holiday lets). If a property has been your main home at any time in the past (there is no minimum time requirement), you can claim tax relief for the last eighteen months of ownership, regardless of periods of non-occupation. This last 18 months rule is often referred to as a period of non-occupation. Other such deemed periods of occupation exist in the legislation, so it is always worth investigating if you have temporarily not lived in your home due to, say, working overseas or the property was let.
- ‘Pooling’: Married couples and civil partners are able to pool their capital gains exemption allowance where they jointly own an asset.
- Gifts to charity or spouses/civil partners: There will be no capital gains liability on gifts to charities or between spouses or registered civil partners. However, be aware other tax may be due later if the new owner sells the item.
- Personal possessions: Up to a sale price of £6,000 there will be no capital gains tax due on any profit. This includes items such as art, antiques and jewellery.
- Inheritance: There is no CGT on your death (the rather slightest of silver linings!). The beneficiaries of an estate will inherit the assets at the probate value rather than the original purchase or base cost of the asset. Of course, an estate above the relevant nil rate band, and subject to any available reliefs, will be subject to Inheritance Tax. We would therefore recommend that a person with a valuable estate checks their potential inheritance tax liability in good time.
- Financial products: a number of financial ‘products’ are exempt from capital gains, these include:
- ISAs or PEPs
- Betting, pools and lottery winnings
- UK government gilts and premium bonds
- National Savings & Investments products pensions and child trust funds
- Proceeds from most life insurance policies
- Most corporate and local authority bonds owned directly
Please note that other special tax rules may apply to these investment products.
Capital gains tax rate – Non residents
For many years it has been an enduring principle of UK CGT that a non-resident person is outside of the jurisdiction of CGT – regardless of whether the asset is in the UK or overseas. This was subject to anti-avoidance rules for individuals, offshore trusts and offshore companies.
This rule was broken by the introduction of Non-resident CGT (“NRCGT”) with effect from 6 April 2015.
This new rule only applies to non-residents owning UK residential property. Any part of a gain which arose after 6 April 2015 will be subject to UK CGT. Where an asset has been held a long time, then the gain is sliced and diced into that which arose before the relevant date (not taxable) and the part of the gain that arose after this date (taxable).
Other assets are not within the charge.
Capital gains tax rate – Non-UK domiciled
A UK resident non-UK domiciled individual (who is not deemed domiciled) may only be subject to non-UK gains on the remittance basis.
If the assets are in the UK then they will be taxable as normal.
If the individual is now deemed domiciled for tax purposes then they will be taxable regardless of the location of the asset. However, such a person may be able to take account of the rebasing relief that was introduced with effect from 6 April 2017.
ETC can advise on you relevant capital gains tax rate
Where you are liable to capital gains tax, it is prudent to explore the availability of exemptions and reliefs to manage your exposure.
As specialist tax advisers, we can assist with all aspects of capital gains tax, including liabilities, allowances and exemptions. We can also advise which capital gains tax rate applies to you, as part of an effective approach to tax planning.
We offer the following services, among others:
For advice, please contact one of our chartered tax specialists.