Understanding Capital Gains Tax

Capital Gains Tax is the tax which is due as a result of the financial gain (profit) received once an asset is sold or disposed of.

The total gain is calculated by subtracting the sale value from the original purchase value.

For example, if you are selling a property, the sale value will normally be the sale price, or in some cases the market value which the property could be reasonably expected to sell for in an open market. You would use the market value if you give the property away, sell it at a reduced cost or pass it to a connected person (such as a family member).

You may also need to use the market value when calculating how much the property originally cost, often used if the property was inherited or was owned before 31st March 1982.

It may also be possible to deduct the costs of any improvements made to the property during ownership. These costs may include advice received, general improvements (but not decoration or maintenance) and also some taxes.

Once the total gain has been calculated, you would then need to apply any tax relief and/or allowances before calculating the Capital Gains Tax using the appropriate rate.

New rules on Capital Gains Tax from April 6th 2020

New rules from HMRC on capital gains tax are due to take effect from April 6th 2020. These will ultimately be impacting buy-to-let landlords and second homeowners in the UK, who are selling properties that are not listed as their principal home residence. It also might mean that they could be making CGT payments much sooner than they expected to.

What rules are changing?

From April 6th 2020, the central change on CGT is that people selling their properties will need to pay the full amount owed within a designated period of 30 days, from completion day of the sale, rather than the current rule of paying by means of a self-assessment tax return the following year. The new time frame will need to be taken into consideration by property investors and landlords within the UK, that are selling on for profit.

Another relevant applicable rule change to this group of people to be aware of is that the ‘tax relief period’ allowed against capital gains tax will be reduced. As the rules stand currently, if you are selling a property that has been your main residency in the past, you will qualify for tax relief for the last 18 months of ownership. However, from April 6th 2020, unless you share an occupancy of the property, the 18-month relief period will be significantly reduced to 9 months.

As failure to pay within the 30-day limit will lead to penalties, it is expected that this could potentially create cash-flow problems for people that are selling and completing on properties from April 6th 2020. This is due to significant increases in CGT payable on those sales. There are certain exceptions and deductions on the costs of your own CGT that you will pay, which are not expected to change, such as solicitor fees, home improvement costs, surveyor fees, estate agent fees and stamp duty.

If you are unsure of how the changes will directly affect you, it is vital that you seek professional assistance from a specialist in non-resident tax affairs. We can assist you by introducing you to a tax specialist from our network who will ensure that you are paying the correct amount of tax.

Capital Gains Tax rules for British expats and non-UK residents with a UK property

This rule, which came into effect on April 6, 2015, will particularly affect British Expats and non-UK residents with UK property, especially those with buy-to-let agreements which generate an income. This new rule will mean that the sale of a UK property could incur a UK capital gains tax bill in the region of 28% on any gains made after April 6th 2015, depending on your personal circumstances.

It is recommended that people who own UK property arrange for any properties to be ‘officially’ valued (either by estate agent or property surveyor) as soon as possible to establish an accurate understanding of any gains which have subsequently been made.

If you are a non-UK resident, or expat, with a UK property it is important that you understand the new Capital Gains Tax Rules and the full array of options which could reduce your exposure to all types of UK and international taxation – now and in the future.

Assets liable for Capital Gains Tax

Assets which are liable for Capital Gains Tax include all forms of property (unless it is specifically exempt), certain gifts made, inheritance, shares and assets transferred through divorce or civil partnership which has been dissolved.

The main assets that it applies to are land, buildings, shares and business assets including goodwill. Until recently, expats and non-UK residents with a UK property were not liable for Capital Gains Tax, however, that loophole has now been closed. There is more information about this and the impact later in the article.

Capital Gains Tax rates

In the UK, Capital Gains Tax for residential property is charged at the rate of 28% where the total taxable gains and income are above the income tax basic rate band. Below that limit, the rate is 18%. For trustees and personal representatives of deceased persons the rate is 28%.

For non-residential property and other assets, the rates are 10% and 20% for individuals.

UK Capital Gains Tax rules for British expats

It used to be the case that by simply leaving the UK for a complete tax year, and then disposing of any profitable assets (although different rules have always applied for property) during that year could relieve you of the burden of Capital Gains Tax.

However, one year is no longer a sufficient length of time.  An individual now has to be non-resident for a minimum of five complete UK tax years to take advantage of this rule.  Proper planning is clearly very important in these situations as a few months miss calculation here or there can make a significant difference in your tax liability.

Sometimes it may even be worth taking an extended holiday rather than risk coming back to the UK too soon, when significant asset sales have occurred.

Even though you may be deemed non-resident for income tax purposes, you are treated as temporarily non-resident for capital gains tax purposes for up to 5 years.  Certain gains made during that time are taxed in the year you return to the UK if within five years.

If, however, the asset was acquired after you had left the UK, then the gains are not subject to UK Capital Gains Tax. When double taxation agreements are taken into account, capital gains may be completely exempt from UK tax but taxable in your host country. As such there is still room for planning where the host country charges a lower rate than the UK.

Please note that the sale or disposal of property is subject to slightly different Capital Gains Tax rules, as described above.

Capital Gains Tax reliefs

There are several different tax reliefs which can reduce the chargeable gain:

Rollover/holdover relief on replacement of business assets – allowing you to defer the CGT on a gain of a business asset where this is matched with a replacement of a new business asset in the period commencing one year before and ending three years after the disposal.

Business incorporation relief – available when you transfer your business into a Limited Company in exchange for shares.

Holdover gift relief – on some gifts of business assets, or gifts made into trusts mean the tax does not become payable until the person, or trustee who receives the gift disposes of it.

Absorption of capital losses

Any capital losses made on a chargeable transaction are netted off against any capital gains made in the same tax year. They are applied before the annual exemption. Unused capital losses are carried forward against future capital gains; they cannot normally be carried back. To make use of a capital loss it must be reported to HMRC within five years and ten months of the end of the tax year in which it arose.

Capital gains tax allowance

An annual exemption of £12,300 for the tax year 2021/22 is available to individuals so total gains made in the tax year up to this amount are exempt. Any unused annual exemption is lost and cannot be carried forward or transferred to another person.

Previous years capital gains tax allowances:

2020/21: £12,300

2019/20: £12,000

2018/19: £11,700

2017/18: £11,300

2016/17: £11,100

2015/16: £11,100

2014/15: £11,000

Other Exemptions

Normally the sale of your only or main residence is exempt, although it can become partly chargeable in some circumstances such as if it is let out or used for business purposes;

Transfers of assets between husband and wife or civil partners. Such transfers are normally treated as being made at no gain/no loss;

Most chattels whose value decreases over time (called wasting assets);

Non wasting and business chattels where acquisition cost and disposal proceeds do not exceed £6000;

Certain private motor cars;

Gifts to charity and certain amateur sports clubs;

SAYE contracts, savings certificates and premium bonds;

Betting winnings and prizes including the lottery;

Compensation for damages for personal or professional injury;

Some compensation pay-outs for miss-sold pensions;

Life assurance policies in the hands of the original owner or beneficiaries;

Company reorganisations and takeovers where there is a share for share exchange.

Capital Gains Tax declarations when selling property as a non-resident

Since the new rules came into force in April 2015 as a non-resident, when you sell a UK residential property you must tell the HMRC, even if you have no capital gains tax to declare. This also applies if you are selling, or have sold, your main residence.

Failure to correctly make a capital gains tax declaration to the HMRC within 30 days after conveyancing (transferring ownership of) your property is likely to result in a penalty – even if there is no capital gains tax to pay.

Capital Gains Tax is a complex part of one’s financial plan, and there are many ways to reduce it.

We always recommend that you seek professional advice before finalising any declaration or capital gains tax calculation.