Capital Gains Tax is applied when you dispose of an asset that has increased in value. You are taxed on the gain you have made on the asset, not simply on the money you have received from selling it. For example, if you buy an asset for £30,000 and then sell it for £42,000 you are taxed on the gain you have made – in this case, £12,000.

Who does it apply to?

Capital Gains Tax (CGT) is applied to a ‘chargeable person’ – a person who pays tax. Therefore, most UK citizens may be liable to pay CGT. Companies do not need to pay CGT on their gains, instead, they need to pay corporation tax when disposing of assets.

When does it apply?

CGT is applied when there is a sale of an asset. Additionally, it will be applied when the asset is given as a gift, exchanged, lost, or even destroyed. It is paid on the increased value between acquisition and disposal of assets that are deemed non-exempt. Though not all disposals give rise to CGT, some are exempt.

For example, CGT does not apply when there is a transfer of assets to their heirs upon death – Inheritance tax may apply here though. CGT also does not apply when there is disposal between spouses, or when there is a gift to a charity and political parties.

What are the chargeable assets? (the assets that CGT applies to)

CGT applies to most property owned by UK citizens – any premises, shares, or art for example. Though there are assets that are exempt from the tax.

What are the exempt assets?

• Your main private residence. Disposing of a second home/holiday home will be liable for CGT.
• Cash held in sterling
• Any foreign currency held that is to be used abroad
• Chattels under £6000 – Chattels are tangible assets like jewellery, furniture or painting etc.
• UK Government or gilt-edged securities (Premium Bonds and loan stock issued by the Treasury etc)
• Wasting assets – watches, locomotives etc – An asset with a predictable life of 50 years or less.
• Assets held in ISA’s (Tax-free savings account)
• Personal injury compensation

Therefore, if any of these assets are disposed of, no CGT will be applied.

Allowable deductions

The value of the asset when it was acquired – which is called the acquisition cost. The tax is levied on the gain in value even if it was given as a gift for less than market value.

For example, Tom buys a piece of art for £30,000 and it increases the value to £75,000. Tom then gifts or sells the asset to his brother for £40,000 – it will be treated as if the assets were disposed of for £75,000. Therefore, CGT will be applied for a gain of £45,000 (£75,000-£30,000=£45,000) even though he gave it away for £40,000.   

Optional reliefs

There are also several reliefs that are available that allow you to deduct CGT. Though these reliefs only apply to the disposal or acquisition of ‘business property’.

1. Entrepreneurs Relief – This relief is available when there is a disposable of all/part of a business, shares in a company etc.
2. Business Assets Roll-over Relief – This will apply when a taxpayer is selling and then re-investing in “qualifying business assets” (business premises, machinery etc).
3. Enterprise investment scheme (EIS) – When re-investing in unquoted company shares.
4. Business Assets Hold-over Relief – When there is a gift of business assets from a donor to a recipient.
5. Business Roll-over Relief
6. Allowable Losses for that Tax Year  
7. Losses brought forward from previous Tax Years
8. Trading losses – These losses can be set against CGT.

Annual Exempt Amount

There is also an annual exempt amount that is given to taxpayers – a tax-free amount. For 2020/2021 the exempt amount is £12,300. This amount will be deducted from one’s gains for the year.

Rate of tax

The basic CGT rate is 10%. If gains exceed £37,500 (combined with income tax) then the rate will be 20%.

If relying on the entrepreneur’s relief, then the gains will be taxed at 10%.

An individual must pay CGT on any disposal within a tax year.