Our experts at DSR Tax Claims know how hard it is to find good, quality information about HMRC’s tax regulations that is easy to understand, and that’s why we have created these handy guides to tell you everything you need to know. Our aim is to make life easier for our clients and that is why we want to share our expertise with you. You can also call our friendly team on 0330 122 9972 – we’re the tax experts you can trust.
What is Capital Gains Tax?
Basically, if you sell one of your business assets (or dispose of it in some way) and you make a profit on that sale, Capital Gains Tax is a tax on any profit that you make on that sale. That is the key point to take away – the tax is only on the profit you have made on the sale of the asset, not on the entire sale value of the asset.
Let’s say you sell a printing press. You bought it for £20,000 and now you are selling it for £30,000. You made a profit of £10,000 on that sale and you will be liable for Capital Gains Tax on that profit of £10,000 – but not on the whole sale value of £30,000.
Not all assets are liable for Capital Gains Tax and if your total gains for the tax year are under your tax-free allowance for Capital Gains then you won’t need to pay the tax.
What does disposing of an asset mean?
In a nutshell, it means that you have got rid of it in some way and it no longer belongs to your business.
HMRC consider disposing of an asset to be:
Giving it away as a gift or transferring it in some way to someone else
Swapping it for something else
Receiving compensation for it, for example, an insurance payout for an asset that has been lost or destroyed.
What do you pay Capital Gains Tax on?
You need to pay Capital Gains Tax on the gains (profit) you make when you sell (or dispose) of the following:
Most personal possessions that are worth £6,000 or more. This does not include your car though, unless it has been used for business purposes.
Any property that isn’t classed as your main home.
Your main home if you have let it out, used it for business purposes or it’s very large (in rough terms, that means that the total grounds are more than 5,000 square metres).
Any shares you own that aren’t in an ISA or PEP.
HMRC classes all these as ‘chargeable assets’ although you may be able to reduce some of the tax you owe by claiming a tax relief if you are eligible for any of the reliefs.
If the asset you sold was partly owned by someone else, you will have to pay Capital Gains Tax on your share of any profits.
If your asset is overseas, you still may be liable for Capital Gains Tax. Similarly, if you are a non-resident of the UK, you will still have to pay tax on any profits you make from selling residential UK property.
When don’t you have to pay?
You don’t have to pay unless your gains are above your annual tax-free allowance for Capital Gains – not to be confused with your tax-free allowance for Income Tax.
You don’t usually have to pay if you have gifted the asset to your spouse, your civil partner or to a charity.
You also don’t have to pay if the gains were from your ISAs or PEPs, UK government gifts or Premium Bonds or any profits you make from betting, lottery or pools winnings.
There are special rules surrounding Capital Gains Tax and Inheritance Tax. The estate of the deceased pays the Inheritance Tax although you may be liable for Capital Gains Tax if you later dispose of the asset.
If this all seems really complicated, our friendly team of experts are always on hand to help you sort out your tax affairs so give us a call on 0330 122 9972.
What are the Capital Gains Tax Allowances?
You only have to pay Capital Gains Tax if the gains (profits) that you make on your overall gains (that means all of the gains you have made from selling or disposing of your assets in a tax year) are above your tax-free allowance. HMRC also refer to this as the Annual Exempt Amount.
These allowances are:
£5,650 for trusts.
You may also be eligible for certain tax reliefs which can make your tax burden even less, and you can offset some losses too. Our tax preparation specialists can help you to claim your full tax relief so why not give us a call on 0330 122 9972?
What are the rules around gifts to spouses or charity?
HMRC have special rules around disposing of assets by gifting them either to your spouse or civil partner, or to a charity. However, if they were gifted to anyone else, the normal rules of Capital Gains Tax Apply.
If you gifted your assets to your husband, wife or a civil partner, you aren’t liable to pay Capital Gains Tax, unless:
You separated and didn’t live together at all in that tax year (6 April to 5 April the following year). If you lived together at any point during the tax year, then these special rules still apply.
You gave them the assets as goods for their business to sell on – if this was the case, you would be liable for Capital Gains Tax in the normal way.
If your husband, wife or civil partner later disposes of the asset themselves then they will be liable for Capital Gains Tax on any gains (profits) that they make on the disposal. This gain (or loss, if this happens to be the case) needs to be calculated from when you or they first owned it so they will need to keep a record of how much you initially paid for the asset as HMRC will want to know this.
If the asset was first owned by you or them before April 1982 then the gain needs to be worked out using its market value on 31st March 1982 instead of the current market value.
As you can see, it is really important to keep good records on how much you have paid for your assets because you will have to prove this to HMRC.
If you gift the asset to charity, you also don’t need to pay Capital Gains Tax. However, if you sell the asset to charity, you may be liable for Capital Gains Tax if you sell it either for more than you paid for it, or if you sell it for less than its market value. You need to work out your gain (profit) using the amount the charity actually pays you for the asset rather than its market value.
How do you know if you need to pay Capital Gains Tax?
If your total taxable gains in a tax year are above the Annual Exempt Amount (£11,300, or £5,650 for trusts) then you will need to pay Capital Gains Tax on the gains (profits above that amount).
For example, if all your taxable gains in a particular tax year total £13,500 then you will be liable for Capital Gains Tax on the £2,200 above your allowance.
To work out your total taxable gains you need to:
Work out the profit for each asset that has been disposed of (or your share of that profit, if it had been jointly owned). You need to do this for each of the eligible personal possessions, shares, property or business assets you have disposed of in any way in that tax year.
Add together all these gains (profits) from each asset – don’t get them mixed up over more than one tax year. You must make sure that all of the assets have been disposed of in that particular tax year.
Deduct any allowable losses.
This will leave you with your total taxable gains for that tax year (which runs from 6th April to 5th April the following year). Any gains above your Capital Gains allowance will need to be reported to HMRC on your self-assessment tax return and they will calculate the tax owing.
What if your total gains are less than the tax-free allowance?
If this is the case then you won’t have to pay any Capital Gains Tax. If you have any losses to report to HMRC, these need to be reported differently.
You will still need to report any gains to HMRC, even if they are below the Annual Exempt amount, if either of the following apply:
If any of the assets you disposed of had an overall value of 4 times the Capital Gains Allowance, even if your actual profit on them was below that amount. So, for tax year 2017/18, this works out at an asset value of £45,200. This doesn’t mean that you will have to pay any Capital Gains Tax but you do need to inform HMRC that you have disposed of that asset.
If you have any losses to report.
You need to inform HMRC through your self-assessment tax return, if you are registered for self-assessment. If not, you can write to HMRC to inform them instead. The address is: Capital Gains Tax queries, HM Revenue and Customs, BX9 1AS
What if you don’t have anything to report?
If you don’t have any Capital Gains to report and you are not registered for self-assessment then you don’t have to do anything at all.
If you are registered for self-assessment, then you do need to fill in the capital gains section of your self-assessment return. It’s really quite simple though, so there’s no need to worry – if you use the online tax return, you just confirm that you will be completing the Capital Gains section under ‘Tailor your return’ and then under the ‘Details of chargeable assets’ section, answer ‘No’ to all of the questions.
Always make sure you complete your tax return before the deadlines though. Of course, if you are a client of DSR Tax Claims then you know that you don’t need to worry about any of this because our experts take care of this for you – call our friendly team on 0330 122 9972 and let our experts sort it out for you.
If you are a non-resident of the UK, you will still need to tell HMRC when you sell any residential property in the UK – even if the gain (profit) is below the tax-free allowance. You don’t need to inform them of any other capital gains though if you are classed as a non-resident.
How do you report and pay your Capital Gains Tax liability?
There are two ways to report your Capital Gains Tax liability to HMRC. You can either:
Report your gains straight away using the ‘real time’ Capital Gains Tax service, or;
Report your gains annually through your self-assessment.
Don’t forget though, that if you still need to send in a self-assessment form for any other reason, you will need to include your capital gains on that tax return as well, even if you have already reported them using the ‘real time’ Capital Gains Tax service.
Non-residents need to inform HMRC of any sale of residential property within 30 days of the sale – even if there is no tax to pay on any gains.
It always pays to make sure you don’t fall foul of HMRC regulations – you could end up with a nasty penalty fine otherwise – so double-check that you are treating any gains (profits) correctly or get expert advice so that you can rest assured that everything is being reported correctly.
What should you have ready before you report?
Before you report your capital gains to HMRC, you will need to have ready:
Your calculations for each of the capital gains (or losses, if that is applicable to you) that you intend to report to HMRC.
Information about how much each of the assets originally cost you and how much you received from their sale (or disposal) so that HMRC can see how much of a gain you have made.
Any other relevant details you think HMRC need to know, such as details of any tax relief you are entitled to.
Reporting using the ‘real time’ Capital Gains Tax service
If you don’t want to hang around, you can use the online ‘real time’ Capital Gains Tax service to report these gains – you will need a Government Gateway account and you will also need to be a UK resident. If you use this service, you can report your gains straight away and pay any Capital Gains Tax owing, if you would rather do this than wait until the end of the tax year to settle up. Do note though, that you will need to be able to upload PDF or JPEG files to show how you are calculating those capital gains so make sure you have the capability to do so beforehand.
The ‘real time’ service means you don’t have to wait until the end of the tax year to sort out any Capital Gains Tax you might owe but you have to report by 31st January after the tax year when you had the gains – you can’t use this service if you are planning to backdate any tax relief you are claiming.
Once you have reported your gains through the ‘real time’ service, you will receive a letter or email from HMRC giving you a payment reference number and informing you of the ways you can pay.
Reporting through your self-assessment tax return
You can use your self-assessment tax return to report any gains – you will be reporting in the tax year after you sell or dispose of your assets. If you don’t usually have to fill in a self-assessment tax return, make sure you have registered for self-assessment in plenty of time – this means you need to have registered with HMRC by 5th October in the year following the tax year in which you disposed of your assets.
If you have registered but haven’t been contacted by HMRC to remind you that you need to fill in a tax return, then make sure you contact HMRC by 5th October.
Make sure that you send your self-assessment return to HMRC by 31st January or you will land yourself an immediate £100 penalty for missing that deadline, even if you only missed it by a day! If you use the paper forms instead of the online service, your deadline is even earlier – 31st October!
If you are struggling with your tax return it can often pay to get expert advice – our team of tax preparation specialists can take the pain out of your return, so give our team a call on 0330 122 9972. We take care of all the paperwork so you don’t have to. We even deal with HMRC on your behalf.
What happens after you send your tax return to HMRC?
HMRC will calculate how much tax you owe, including any Capital Gains Tax, and will let you know how much you have to pay and when you need to pay it.
Do make sure you meet all HMRC’s deadline or you will end up with fines or penalties!
What are the rates of Capital Gains Tax?
How much Capital Gains Tax you pay depends on the asset you have sold. Residential property has a different rate of tax and you don’t usually pay when you sell your home.
The rates, if you are a higher rate Income Tax payer, are:
28% on any gains (profits) from residential property
20% on any gains (profits) from other chargeable assets
Rates are different if you are a basic rate taxpayer. If this is the case, the rate you pay is dependent on several factors: the size of your gain, your taxable income and where that gain came from – residential property or other assets.
The way you work it out if you are a basic rate taxpayer is to:
Work out your taxable income – how much you have earned from all your various income areas, minus any allowances and tax relief you are entitled to.
Work out your total taxable gains.
Deduct your Annual Exempt Amount (tax-free capital gains allowance) from your total taxable gains.
Add this amount to your taxable income.
If this amount is still within the basic Income Tax band, you pay 10% on your gains (18% on residential property) – you will pay the higher rate tax amounts on any gains above this.
If you have gains from both residential property and other chargeable assets, you can use your tax-free allowance against the gains that would have the highest tax rates – the residential property gains.
Rates are slightly different if you are a trustee or a business. Trustees pay the higher rate amounts of 28% on residential property and 20% on all other chargeable assets. If you are a sole trader or in business partnership and your capital gains qualify for Entrepreneur’s Relief, you will only pay 10%.
Of course, we know how complicated this might sound to you – our experts know just how tricky it can be to get your taxes right, so if this is going way over your head don’t worry, give our friendly team at DSR Tax Claims a call on 0330 122 9972 and let us take away the strain of your taxes.
What happens if you make a loss?
It’s never great to make a loss in business but a small upside is that you can use any losses to offset against your gains, so at least you can lessen the pain. These losses are called ‘allowable losses’ and you report them to HMRC so you can reduce your overall taxable gains.
When you report a loss, that amount is deducted from the capital gains you made in the same tax year. However, if your gains are still above the Annual Exempt Amount (capital gains tax-free allowance), you can deduct any unused losses you have reported in previous tax years and any unused losses can be carried forward to be used in a future tax year.
You report your losses to HMRC through your tax return. If you have never made a gain and don’t need to complete a self-assessment tax return, you can write to HMRC instead.
You don’t need to report your losses straight away – you can claim up to 4 years after the end of the tax year in which you sold or disposed of the asset. If the losses were made before 5th April 1996 and you can still claim for them, they must be deducted after any more recent losses.
What about losses when disposing of assets to family and others?
If you have disposed of an asset to your husband, wife or civil partner, you don’t pay any Capital Gains Tax anyway so you can’t claim these losses against any gains.
If you have disposed of an asset to any other family member or ‘connected person’ (such as a business partner), you can’t deduct those losses unless you are offsetting them against a gain from the same person.
HMRC considers the following to be connected people:
Your brothers, sisters, parents, grandparents, children and grandchildren (and their spouses or civil partners).
The brothers, sisters, parents, grandparents, children and grandchildren (and their spouses or civil partners) of your spouse or civil partner.
Your business partners
Any company you control
Trustees where you are the ‘settlor’ (the person who puts assets into the trust) – or someone you are connected to is the ‘settlor’.
Can you claim losses for an asset that has lost its value?
Yes, you can. If an asset you own has become worthless, or of negligible value, you can claim that as a loss.
What are HMRC’s special rules on losses?
HMRC has a set of special rules that may apply to losses. These are set out below (we don’t go into detail here but don’t worry, our experts do cover these in our helpful series of guides on Capital Gains):
When someone dies
If you are not a UK resident and you sell UK residential property
If you have lived abroad as a non-resident temporarily
If your losses are from income on shares that are unquoted or in the Enterprise Investment Scheme
On overseas assets if you are non-domiciled in the UK and you have claimed the ‘remittance basis’.
What records do you need to keep for your Capital Gains?
HMRC will need to see the documentation you used to calculate your gains or losses and fill in your self-assessment tax return. Make sure you keep them for at least a year after the deadline in case HMRC decide to open an enquiry into you. If you filed your return late, or HMRC have already opened an enquiry or check into your tax return, you will need to keep those records for even longer.
Businesses need to keep all their records for 5 years after the tax return deadline.
The records you will need to keep for your capital gains return are:
Receipts, bills and invoices, showing the date and amount that you paid for the asset.
Receipts, bills and invoices for any additional costs, such as for fees or professional advice that you obtained, any Stamp Duty you were liable for or to show HMRC the market value of the asset.
Receipts, bills and invoices for the amount you received for the asset when you disposed of it. This includes any instalment payments if they are applicable, or any compensation you received for any damage to the asset.
If you have any contracts relating to the buying or selling of the asset (from a solicitor or stockbroker, for example) or any valuations you had done on the asset, keep hold of those too.
What if you don’t have those records?
If you don’t have them because they have been lost, stolen or destroyed then you need to attempt to recreate them (perhaps by getting copies or getting written confirmation from the document provider). When you fill in your tax return, you will need to show where the figures are estimated or provisional as a result of not having the actual records to use in your tax return.
Where does the Market Value come in?
Usually, the Capital Gain is calculated as the difference between what you sold the asset for and what you originally paid for that asset. However, there are a few situations where you will need to use the market value of the asset to calculate the gain. These are as follows:
For gifts, you use the market value at the date the gift was given.
For assets sold for less than they were worth to help the buyer, you use the market value at the date of sale.
For inherited assets where you don’t know the Inheritance Tax Value, you use the market value at the date of death.
For assets owned before April 1982, you use the market value on 31st March 1982.
If you are not sure of the valuation you have used, HMRC can check that valuation for you – you will need to ask them to do this by completing a ‘Post-transaction valuation check’ form. Do be warned though, that it can take up to 2 months to get a response from HMRC so this isn’t a speedy way of doing things.
How can DSR Tax Claims help?
We know that Capital Gains Tax can be a complicated affair, even with our helpful guide to tell you everything you might need to know. it’s all very well reading about it and knowing what HMRC’s stand on it is – but how do you apply that to your own circumstances? It can seem like an absolute minefield but help is always available and you don’t need to battle through this alone. Our team of experts at DSR Tax Claims are always on hand to help our client and our excellent standing with HMRC means that we can make sure you don’t fall foul of their regulations, while claiming your maximum tax relief. We can even take care of all that paperwork and deal with HMRC on your behalf too. Call our friendly team on 0330 122 9972 – we’re the tax experts you can trust.