A Complete Guide to Capital Gains Tax for UK Businesses

When you sell an asset (e.g., house), and make profit, you need to pay tax called Capital Gains Tax (CGT). The individuals pay UK capital gains tax at…
by Contact @ Sterling Wells
July 26, 2023
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When you sell an asset (e.g., house), and make profit, you need to pay tax called Capital Gains Tax (CGT). The individuals pay UK capital gains tax at 18% or 28% on residential property. Capital gains tax on commercial property and other assets are charged at 10% or 20%.

A UK resident (unless s/he is not a UK domicile) does not need to pay CGT on overseas assets.

Limited companies do pay tax on capital gains at the rate of 19% to 25% (as the corporation tax).

Calculation of capital gains

Capital Gain is the difference between what you receive by selling the asset and what you pay to purchase (and enhance) the asset:

Proceeds    £XXX,XXX
Less: Cost of purchase         (£YYY,YYY)
Less: Cost of enhancement   (£ZZ,ZZZ)
Capital Gain      £AA,AAA
Less: Annual Exemption   £ (B,BBB)
Net Capital Gains     £C,CCC

Costs incurred during purchase like legal fees, stamp duty land tax, planning permission fees all should be included as cost of acquisition. Allowable deductions for capital gains tax on UK property include any expense incurred to enhance or improve the property.

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Assets not subject to CGT

CGT is not payable when you sell certain assets like cars, racehorses, greyhounds and gilts. Shares in an Individuals Savings Accounts and Venture Capital Trusts are also exempt (subject to some conditions).

CGT on Gift

Not only the sale of assets but also gifts are chargeable to CGT (based on market value) . But gifting asset to spouse/civil partner and gifting to charity is exempt from CGT.

Transfer to connected parties

An individual, attempting to reduce CGT, may sell an asset to a close relative (connected party) at a price below the market rate. In such case, HMRC requires CGT to calculate not based on the selling price but on the market price as on the date of sales.

Brought forward losses

If a loss is incurred during disposal, the loss can be carried forward and deducted against future gains earned by capital disposal. But the loss incurred on disposal to the connected person can only be offset against future disposal to the same  connected person.

Part disposals

tax-concept-illustration

While only a part of property is disposed, the cost of acquisition should be proportioned as:

(Total cost of acquisition) * (Gross proceeds received/Market value of the whole property during disposal)

Here, market value of the whole property = (Gross proceeds received+ Market value of the remaining property)

CGT for non-residents

Since April 2015, a non-resident individual and a non-resident company disposing a UK residential property also have to pay CGT. For a property acquired before 5 April 2015, CGT is calculated using one among the three methods:

MethodSteps to follow
Rebasing methodOnly the gains for the period after 5 April 2015 is calculated.

 

 

Market value of the property on 5 April 2015 is deducted from the sales proceeds to arrive at capital gains.

Time apportionment methodNormal method is used (sales proceeds minus acquisition cost)

 

 

The whole gain is split into:

 

Gains prior to 5 April 2015 and

Gains post 5 April 2015

 

Gains post 5 April 2015 is taxable, gains prior to 5 April 2015 is exempt.

Retrospective methodGains is calculated by normal method (sales proceeds minus acquisition cost) and whole gain is chargeable.

Note to SEO: please make this table appealing, may be by slanting the first column texts by 45 degree or other ideas.

In case of non-residential (commercial) property, rebasing or retrospective method applies and time apportionment method does not apply. Cut-off date for rebasing is 5 April 2019 (before then, CGT on non-residential properties was exempt).

For detailed guidance visit our article NRCGT.

How to reduce capital gains tax in the UK?

reduce capital gain tax

You can reduce capital gains tax by claiming different kinds of reliefs:

Principal Private Residence Relief (PPR relief)

CGT is reduced for the period you lived in the house (this is called Principal Private Residence- PPR relief). You can claim PPR even for the period you did not live in the property for a certain period:

  • PPR for up to 36 months for any reason
  • PPR for up to 48 months (if you left the property for employment)
  • PPR for unlimited period (if you left the property for abroad employment)

To claim the above, you must have lived in the property both before and after the period of claim (except for certain cases).

PPR may be available (for last nine months) even for the second home if you have lived sometimes in the house before.

For example, you bought a house in January 2010 and lived there until December 2012. You gained £200,000 by disposing of the property in December 2022. You owned the property for 12 years (144 months) and you lived there for 2 years (24 months).

Here, you will be eligible to claim 33 months (24 months of residence and 9 last months of ownership). So, 33/144 of total gain will be exempt from CGT. There are detailed rules on ppr relief.

Business Asset Disposal Relief (BADR)

Disposing of the asset that you used for business avails Business Asset Disposal Relief (BADR). The relief is not available for property letting business (but is available for Furnished Holiday Letting). To qualify for BADR, disposal should be of:

  • The whole or the part of business or
  • Asset that had been used in the business for at least two years prior to the cease of business (and sold within 3 years of cessation).

The relief reduces tax rate to 10% (even for higher rate/additional rate taxpayer who would otherwise pay 20% or 28%). One in their life can claim BADR for a total of £1 million.

Rollover Relief

As per the rollover relief, if you sell a business asset and invest the proceeds to buy another business asset, you do not need to pay CGT until you finally dispose the new asset. If the proceeds is not fully used to buy another asset, the amount retained is chargeable to CGT immediately (and the reinvested portion is charged later).

Only the assets used in trading business qualify for relief (so a Furnished Holiday Letting qualifies but not the property letting business).

Gift Relief

Gift relief with Capital Gain Tax

Normally, when you gift an asset to someone other than your spouse, CGT is charged immediately. But in following conditions, Gift Relief will defer the CGT payment until the recipient finally disposes of the gifted asset:

  1. If the asset being disposed of is a business asset. Here, only the shares in trading companies qualify as business assets (so property letting does not qualify and FHL qualifies).
  2. If any asset (not necessarily business asset) is transferred to trust (except for settlor interested trust).

Annual Exemption (AE)

Capital gains up to a certain amount (£6,000 for 2023/24 and £3,000 onwards 2024/25) is exempt. The annual exemption which is not utilized in the current year cannot be transferred to future years. Many people dispose of their property partly on year-by-year basis so that they can utilise AE fully.

Annual exempt is available for every individual, the spouse who jointly own the properties can get a twice of annual exemption.

Suppose Rahul has two properties in his name and his wife Aishorya does not hold any property in her name. If Rahul disposes both his properties, he can utilise annual exemption of £6,000 (for tax year 2023/24).

But if he transfers one of these properties to Aishorya, annual exemption they together can utilise in 2023/24 is £12,000 (£6,000*2). So, transferring property between spouses (or owning jointly) helps reduce CGT.

If an individual has disposal of both: residential properties and other properties, annual exemption should be reduced against the one that attracts the higher rate of tax.

Reporting capital gains

You need to report Capital Gains Tax through UK property disposal return form and pay tax within 60 days of completion of sales. The actual amount of CGT depends on your total personal income of the tax year.

The total personal income might not have been determined by the time you report CGT. So, you can pay estimated CGT during the CGT return (and adjust deficit or excess via self-assessment).

If your capital gains tax return was incorrect, you can amend during your self-assessment. The one not required to file SA can amend CGT return within the anniversary of 31 January after the end of the tax year. CGT return for the disposals made within tax year 2023-24 should be amended within 31 January 2026.

The UK residents need to report only the capital gain (not the loss) while the non-residents need to report even the capital loss.

FAQs

When do you pay capital gains tax?

If you dispose of a UK property, you need to pay CGT within 60 days of completion of sales. Companies can pay it within 9 months of their year-end.

What is UK capital gains tax rate?

The individuals pay UK capital gains tax at 18% or 28% on residential property. Capital gains tax on commercial property and other assets are charged at 10% or 20%.

How to avoid capital gains tax on second homes/buy to let properties in the UK?

If you have lived sometime in your second home, PPR relief is available for last 9 months of sale. To reduce CGT on second home, make sure that you have occupied your second home at least for few weeks as main residence.

Need support?

Our team of experts can provide you proper capital gains tax advice.

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