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The free information given below may be useful to you:

What is capital gains tax?
Persons chargeable to CGT
Rate of CGT
Changes for 2008/09
Common queries



What is capital gains tax?

Capital gains tax is charged on the arithmetic difference between:

•    amount received after deduction of certain allowable sums, and

•    the acquistion cost (this may be market value at date obtained)

For there to be a charge to CGT there must be a disposal.  Disposal includes sales, gifts and the exchange of assets. 

Persons chargeable to CGT (FOR YEARS PRIOR TO 2008/09)

A person is chargeable to CGT on chargeable gains arising in a tax year during any part of which he is resident or ordinarily resident in the UK.

Generally a person who is neither resident, nor ordinarily resident in the UK is not subject to UK capital gains tax.  However a person who is not resident in the UK but carries on a trade in the UK is subject to CGT on the disposal of assets located in the UK.

Rate of CGT (FOR YEARS PRIOR TO 2008/09)

Chargeable gains are taxed at income tax rates.  An individuals net chargeable gains for the year are treated as the top slice of income in computing CGT.

CGT is charged at the starting rate (10%), lower rate (20%), or higher rate (40%)

Example

In 2006/07 , A has earned income of £4300.  He has no other income but has incurred a chargeable gain of £20,000 (after deduction of the annual CGT exemption – see below).

He has no liability to income tax as his income is below the personal allowance threshold of £5035 – therefore the 10% band is available.  He is liable to CGT as follows:

£2150 @ 10% =       £215
£17,850 @ 20% =     £3570

CGT payable         £3785

If A's income for the year was £10,000 (ie all of the 10% band used by his earned income) then all of the chargeable gain of £20,000 would be taxable at 20% - £4000 CGT payable

If A's income for the year was £50000 then all of the chargeable gain of £20,000 would be taxable at 40% - £8000 CGT payable.

If A's income is below the 40% income tax threshold but the chargeable gain pushes him above the 40% threshold then some of the gain will be taxed at 20% and some at 40%.  His CGT liability will therefore range from £4000 to £8000.

For an individual the first tranche of gain in a fiscal year is free of CGT.  This annual exempt amount is indexed linked and is currently £9200 for 2007/08 (£8800 for 2006/07).  Husband and wife are each entitled to a separate annual exemption.

Changes for 2008/09

For the tax year 2008-09 there will be a single rate of capital gains tax set at 18 per cent. The rate will apply to individuals, trustees and personal representatives. The 18 per cent rate of CGT does not affect the income tax rates.

For disposals on or after 6 April 2008 and held over gains coming into charge on or after 6 April 2008 taper relief will no longer be available (even if assets were held before this date) and the chargeable gain will be liable to tax at the new rate of 18 per cent (subject to the deduction of allowable losses, any other reliefs and the AEA).

For disposals on or after 6 April 2008 indexation allowance will no longer be available in computing the gain arising. This change will only affect assets that were acquired before 6 April 1998.

As a result of these changes individuals disposing of assets on or after 6 April 2008 will work out the tax due as follows (please note that the example uses the 2007-08 Annual exemption allowance - AEA) for illustrative purposes; the AEA for 2008-09 will be announced at Budget 2008):

Example
In 1994 Mr A purchased a holiday home for £100,000. He sells it in July 2008 for £250,000. The CGT due is calculated by deducting the purchase cost of £100,000 from the sale proceeds of £250,000 to give a gain of £150,000. Assuming he has no other capital gains in the tax year 2008-09 he can deduct from this the full AEA of £9,200 giving a chargeable gain of £140,800. That gain is taxed at 18 per cent giving tax payable of £25,344.

Common queries

Your home –

The sale of your main home is usually exempt from capital gains tax (covered by the principal private residence relief - PPR). However, if you acquire a second home you have two years from the date you bought it to make an election as to which should be regarded as your main residence for capital gains relief. Once an election has been made it can be changed at any time. Failure to make an election within the required time means the decision is left to H M Revenue & Customs.

The sale of grounds of the dwelling house up to a permitted area (1/2 a hectare) is also covered by PPR relief.  However if the garden or grounds of the dwelling house exceed the permitted area PPR relief only applies to the excess if HMRC are satisfied that the larger area was, having regard to the size and character of the house, required for the reasonable enjoyment as a residence – please take professional advice on this matter. 

PPR relief will not apply to your garden if you dispose of your house first and your garden at a later date.

If your home has been used as your private residence for only part of the overall period of ownership then only part of the PPR relief is available.

Timing of sale – (FOR YEARS PRIOR TO 2008/09)

The rate of Capital Gains Tax you pay is dependant upon the level of your income. Therefore timing your disposals can be important where your income varies (ie if you know your income is going to be lower in the next tax year then it may be advisable to hold off from disposing of the asset so that your chargeable gain is taxed at a lower rate in the following year).

Husband & wife (FOR YEARS PRIOR TO 2008/09)

Special rules apply to the transfer of assets between spouses or civil partners.  The transfer is treated as taking place for a figure that causes neither a gain nor a loss to accrue to the one making the disposal.

Husband & wife and civil partners are each taxed separately and are therefore each entitled to an annual exemption currently £9200 (2007/08).  It may be sensible for assets to be transferred from one spouse or civil partner to another.  Any such transfers are effective for tax purposes providing the transfer is an outright gift.

Such transfers will be beneficial where one spouse or civil partner would otherwise waste their personal allowance, 10% band or basic rate band (ie where one spouse or partner would be paying higher rate tax at 40% while the other has not used their 10% or basic rate band – 22%).

When is CGT payable?

If you sell an asset on 20th June 2007 (the 2007/08 tax year) and incur a capital gain you will need to complete a 2007/08 Self Assessment form to declare the gain.  Any tax due will therefore be payable by 31st January 2009.

It is your responsibility to report a capital gains tax liability to HMRC and pay any tax due.



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Updated Daily: Friday May 23rd 2008