HMRC Guidance on Capital Gains Tax

HMRC Guidance on Capital Gains Tax

Introduction

Capital Gains Tax (CGT) is a tax on the profit you make when you sell or ‘dispose of’ an asset that has increased in value. This article provides a comprehensive overview of HMRC (Her Majesty's Revenue and Customs) guidance on CGT, geared towards beginners. It will cover what assets are subject to CGT, how to calculate the gain, available allowances, potential exemptions, and how to report and pay the tax. Understanding CGT is crucial for anyone involved in investing, property ownership, or selling valuable possessions. This guide aims to demystify the process, helping you navigate the complexities of the UK tax system. It's important to note that tax laws are subject to change, so always refer to the latest guidance from HMRC directly. See also Taxation in the United Kingdom for a broader context.

What is a 'Disposal'?

The term ‘disposal’ is broader than simply ‘selling’ an asset. It encompasses various ways you can realise a gain, including:

**Selling:** The most common form of disposal.
**Gifting:** Transferring an asset to someone else. Even though you receive no money, HMRC may treat this as a disposal at market value.
**Swapping:** Exchanging an asset for another.
**Destroying:** If you intentionally destroy an asset, it’s considered a disposal.
**Loss or Theft:** While unfortunate, a loss or theft can still trigger a CGT event.
**Transferring to a Trust:** Moving an asset into a trust can be a disposal.

Understanding what constitutes a disposal is the first step in determining if CGT applies. Refer also to Understanding Asset Classes for a better comprehension of different types of assets.

Assets Subject to Capital Gains Tax

Many types of assets are subject to CGT, but some are exempt. Here's a breakdown:

**Property:** This includes residential property (excluding your primary private residence – see exemptions below), commercial property, and land. Consider also Property Investment Strategies.
**Shares:** Gains from selling shares in companies are generally taxable. This includes shares bought and sold on stock exchanges. Explore Stock Market Basics.
**Unit Trusts and Investment Trusts:** Profits from selling units in these funds are subject to CGT.
**Bonds:** Gains on the sale of bonds are taxable.
**Personal Possessions:** Generally, personal possessions worth £6,000 or less are exempt (see exemptions section). This includes items like furniture, jewellery, and antiques.
**Cryptocurrencies:** Gains from selling cryptocurrencies are treated as property for CGT purposes. This is a complex area, and you should consult HMRC guidance specifically on crypto assets. See Digital Asset Taxation.
**Business Assets:** Gains from selling business assets, such as equipment or goodwill, are subject to CGT. Business Tax Considerations are important.

Calculating Your Capital Gain

The capital gain is the difference between what you paid for an asset (the ‘acquisition cost’) and what you sold it for (the ‘disposal proceeds’). However, you can reduce the gain by deducting certain allowable expenses.

1. **Disposal Proceeds:** This is the amount you receive from the sale. 2. **Acquisition Cost:** This is what you originally paid for the asset. 3. **Allowable Expenses:** These are costs directly related to the purchase and sale of the asset. Examples include:

   *   Estate agent fees
   *   Solicitor’s fees
   *   Stamp Duty Land Tax (when calculating gain on property)
   *   Advertising costs
   *   Costs of improvements to the asset (but not maintenance)

- Formula:**

Capital Gain = Disposal Proceeds – Acquisition Cost – Allowable Expenses

- Example:**

You bought shares for £5,000. You sold them for £8,000. You paid £200 in brokerage fees.

Capital Gain = £8,000 – £5,000 – £200 = £2,800

Annual Exempt Amount (AEA)

Each tax year, you have an Annual Exempt Amount (AEA) that you can use to offset your capital gains. This means you don't pay CGT on gains up to this amount. For the 2023/2024 tax year, the AEA is £6,000. For 2024/2025, it is £3,000. Keep track of the Annual Tax Allowances.

- Example:**

Using the previous example, if your AEA is £6,000, you would not pay CGT on the £2,800 gain because it's less than the allowance.

Capital Gains Tax Rates

The CGT rate you pay depends on your income tax band and the type of asset you are selling.

**Residential Property:**

   *   Basic Rate Taxpayers: 18%
   *   Higher Rate Taxpayers: 24%

**Other Assets (Shares, Unit Trusts, etc.):**

   *   Basic Rate Taxpayers: 10%
   *   Higher Rate Taxpayers: 20%

Your income tax band is determined by your total taxable income for the year. Understand Income Tax Bands in the UK.

Exemptions from Capital Gains Tax

Several exemptions can reduce or eliminate your CGT liability.

**Principal Private Residence (PPR):** You generally don’t pay CGT on the sale of your main home (PPR). However, there are conditions, such as the size of the garden or grounds. See PPR Relief.
**Gifts to Spouses/Civil Partners:** Transfers between spouses or civil partners are generally exempt.
**Gifts to Charity:** Gifts of certain assets to registered charities may be exempt.
**Business Asset Disposal Relief (formerly Entrepreneurs' Relief):** This relief reduces the CGT rate to 10% on qualifying disposals of business assets, up to a lifetime limit of £1 million. Business Asset Disposal Relief Explained.
**Individual Savings Accounts (ISAs):** Gains within an ISA are tax-free.
**Personal Possessions under £6,000:** As mentioned earlier, gains on personal possessions worth £6,000 or less are exempt.
**UK Government Gilts and Premium Bonds:** These are exempt from CGT.
**Certain types of foreign currency.**

Reporting and Paying Capital Gains Tax

How you report and pay CGT depends on how you made the gain:

**Selling Property:** You must report the sale to HMRC within 60 days of completion. This is done online through the HMRC website.
**Selling Shares and Other Assets:** You report gains from shares and other assets through:

   *   **Self Assessment Tax Return:** If your total gains are over £1,000, or if you are already required to file a Self Assessment tax return, you must report them on your return.
   *   **Real Time Capital Gains Reporting:** For certain disposals of shares and other securities, you may need to report the gain to HMRC within 60 days of the disposal.

- Payment:**

CGT is usually paid through your Self Assessment tax return. If you report and pay within the 60-day timeframe for property disposals, you will pay the tax directly through HMRC's online service.

Record Keeping

Keeping accurate records is essential for calculating and reporting your CGT liability. You should keep records of:

Date of purchase and sale
Acquisition cost
Disposal proceeds
Allowable expenses
Any relevant exemptions or reliefs claimed

Retain these records for at least four years from the end of the tax year in which the disposal occurred.

Specific Scenarios and Considerations

**Bed and Breakfasting:** This is a tax avoidance scheme involving selling shares shortly before the tax year-end and repurchasing them shortly after. HMRC actively investigates this practice.
**Share Pooling:** If you buy and sell the same shares on different dates, you can choose which shares you are deemed to have sold (first-in, first-out or specific identification).
**Transferring Assets Between Family Members:** Gifting assets to family members can trigger CGT, although there are potential exemptions.
**Inherited Assets:** The base cost of an inherited asset is usually the market value at the date of death. Inheritance Tax Implications.
**Foreign Assets:** CGT applies to gains from selling assets located outside the UK. You may need to report these gains separately.
**Wash Sales:** Similar to bed and breakfasting, this involves selling an asset at a loss and repurchasing a substantially identical asset shortly after to offset the loss. HMRC may disallow the loss relief.

Resources and Further Information

**HMRC Website:** [1](https://www.gov.uk/capital-gains-tax)
**HMRC Capital Gains Tax Guide:** [2](https://www.gov.uk/guidance/capital-gains-tax-a-guide)
**HMRC Helpline:** 0300 200 3300
**Tax Advice Professionals:** Consider consulting a qualified tax advisor for personalized advice.

Disclaimer

This article provides general information about Capital Gains Tax and should not be considered as professional tax advice. Tax laws are complex and subject to change. Always consult with a qualified tax advisor for advice specific to your circumstances. Also review Understanding Tax Legislation.

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