Understanding Capital Gains Tax: A Guide for UK Taxpayers

Capital Gains Tax (CGT) is a critical area of UK tax legislation that individuals and businesses must understand to effectively manage their financial affairs. Whether you’re selling an investment property, disposing of shares, or cashing in on the value of your business, CGT can have a significant impact. This guide will break down the essentials of CGT to help you stay compliant and maximise your tax efficiency.

What is Capital Gains Tax?

Capital Gains Tax is a tax on the profit (or gain) you make when you sell or dispose of an asset that has increased in value. It’s important to note that CGT is not charged on the total amount you receive, but on the gain you make from the transaction. For example:

• If you bought an asset for £50,000 and sold it for £80,000, your taxable gain is £30,000.

CGT applies to various assets, including:

• Investment properties
• Shares
• Business assets
• Personal possessions worth over £6,000 (excluding your car)

CGT Rates pre-30 October 2024

The rate of CGT you’ll pay depends on the type of asset and your income tax band:

• Basic-rate taxpayers:
  • 10% on most gains, including non-residential property
  • 18% on gains from residential property
• Higher or additional-rate taxpayers:
  • 20% on most gains, including non-residential property
  • 24% on gains from residential property

CGT Rates from 30 October 2024

The rate of CGT you’ll pay remains based on your income tax bands, but have increased for most gains and are as follows:

• Basic-rate taxpayers:
  • 18% on all gains, including residential & non-residential property
• Higher or additional-rate taxpayers:
  • 24% on all gains, including residential & non-residential property

Business Asset Disposal Relief (BADR)

This relief covers certain gains subject to a lifetime limit of £1m. BADR will be limited for the 2025/26 tax year, and again for the 2026/27 tax year, as follows:

• Pre-6 April 2025 – 10%
• From 6 April 2025 – 14%
• From 6 April 2026 – 18%

Exemptions and Allowances

For the 2024/25 tax year, individuals benefit from a CGT annual exemption of £3,000 (£6,000 for couples who jointly own assets). Gains within this allowance are not taxed. It’s worth noting that this allowance has been reduced from previous years, making strategic tax planning even more essential.

Key Considerations for Businesses

If you own a business or are selling business assets, you may be eligible for certain reliefs to reduce your CGT liability. These include:

• Business Asset Disposal Relief (BADR): Previously known as Entrepreneurs’ Relief, this allows you to pay a reduced rate of 10% on qualifying gains, up to a lifetime limit of £1 million, as mentioned above these rates change from 6 April 2025.
• Incorporation Relief: If you transfer your business to a company in exchange for shares, you can defer paying CGT on the gain.

How to Report and Pay CGT

You must report taxable gains to HMRC by completing a Self Assessment tax return or using the “real-time” Capital Gains Tax service. Residential property gains must be reported and paid within 60 days of the sale.

Failing to report gains accurately or on time can result in penalties and interest charges, so it’s essential to stay organised.

Strategies to Reduce Your CGT Liability

1. Use your annual exemption: Ensure gains are within the tax-free threshold.
2. Offset losses: Capital losses can be used to reduce your taxable gains.
3. Plan disposals strategically: Spread sales over multiple tax years to utilise multiple annual exemptions.
4. Transfer assets to a spouse: Spouses and civil partners can transfer assets tax-free and benefit from their own CGT allowances.
5. Claim available reliefs: Ensure you’re claiming BADR or other reliefs where applicable.

Need Help with Capital Gains Tax?

Navigating the complexities of CGT can be daunting, but that’s where we come in. At Munro Bowman, we specialise in helping individuals and businesses in the UK optimise their tax strategies and stay compliant with HMRC regulations.

Get in touch today to discuss your needs and ensure you’re making the most of your tax position. Together, we can turn tax challenges into opportunities.