Capital gains tax allowances
Welcome to Panthera’s big guide on capital gains tax allowances. Capital gains tax is payable on the profit you make when you dispose of an asset whose value has gone up since you originally came into ownership of it.
As with your income tax personal allowance, you’re allowed to keep a certain amount of profit every year before you pay capital gains tax to HMRC.
Capital gains tax – actual tax rates
Current capital gains tax rates and allowances in the 2017/2018 tax years are as follows –
| 2017/2018 figures | |
| RATES | |
| Standard Capital Gains Tax disposals | |
| Basic rate tax payers | 10% |
| Higher rate tax payers | 20% |
| Capital Gains Tax on non-primary residential property | |
| Basic rate tax payers | 18% |
| Higher rate tax payers | 28% |
| Capital Gains Tax on the sale of businesses | |
| Rate of first £10,000,000 of gain (life-time) | 10% |
| Rate after first £10,000,000 of gain (life-time) | 20% |
| EXEMPTIONS | |
| Individuals | £11,300 |
| Executors or personal representatives of a deceased person’s estate | £11,300 |
| Trustees for disabled people | £11,300 |
| Trustees | £5,650 |
| Chattels | £6,000 |
What you can sell without incurring capital gains tax
You can sell the car you use for travel and your primary residence (in most cases) without having to pay capital gains tax or use up any of your capital gains allowance.
Please be aware that, for your primary residence to count as your home, you must have lived in it as your sole or main residence at some point during your ownership. For married couples and civil partners, you are only allowed to nominate one residence at any time as your primary residence.
You also have capital gains tax exemption on personal possessions worth £6,000 or less. The same is true for
• ISA and PEP savings accounts,
• interest on government gilts,
• interest and winnings on Premium Bonds, and
• money you win through betting, playing the pools, or lottery games.
You don’t pay capital gains tax on gifts made to you by your spouse, your civil partner, or which you received from a charity.
What you pay capital gains tax on
You pay capital gains tax on profit you make on the following assets when you sell them:
• personal possessions worth £6,000 or more
• property that is not your main residence
• shares in companies that aren’t sheltered in an ISA or a PEP
• business assets you own (see Capital Gains Tax Entrepreneurial Relief later on in this article).
If you’re selling your primary residential property and you don’t meet all of the following criteria, you may have to pay some capital gains tax:
• this is your own home and you’ve lived in it as your main home throughout your ownership of it
• you have not let any part of it out (with the exception of a single lodger)
• part of your premises has not been used exclusively for business purposes
• the grounds (including all the buildings on the grounds) are less than 5,000 square metres in size in total
• you didn’t buy it with the primary purpose of capital accumulation through house price inflation.
Capital gains tax tax-free allowance
Most UK citizens, the executors or personal representatives of a deceased person’s estate, and trustees for disabled people get an Annual Exempt Amount (also known as the capital gains tax tax-free allowance) of £11,300 for the 2017/2018 tax year.
In the current tax year, trustees receive a lower Annual Exempt Amount of £5,650.
Capital gains tax on chattels
A chattel is something which is tangible and can be moved that isn’t money. Examples of chattels include jewellery, antiques, paintings, books, and furniture.
Some chattels, called “wasting assets”, are exempt for capital gains tax. Wasting assets are assets that have a predictable life span of fifty years or less – private cars being a prime example.
Chattels can be gifted and the value of the chattel for capital gains tax purposes is set on the date the gift can be made.
You don’t need to calculate any profit you make on a single chattel if you sell it for less than £6,000. For any amount between £6,000 and £15,000, the amount of gain to declare for capital gains tax depends on what you sold it for and the actual gain or profit you made.
To work out your capital gains tax:
• Calculate the amount that the disposal exceeds £6,000 by,
• Multiply this figure by five then divide by three, and,
• This produces your maximum chargeable gain.
For example, you purchase a copy of a rare Beatles album for £1,000 and later come to sell it for £10,000. Your auction fees were £1,000.
To calculate the amount that the sale price exceeds £6,000 by:
• first, subtract £6,000 from £10,000, leaving a figure of £4,000,
• then, take that £4,000, multiply it by 5 (£20,000), and divide it by 3.
• this leaves you with £6,667.
The £6,667 is the maximum chargeable gain.
And then to work out the actual gain, follow this procedure:
• Sale price of the Beatles album is £10,000
• You bought the album for £1,000
• The costs you incurred in selling the album were £1,000
• Subtract the cost of the album and the costs you incurred in selling the album from the sale price achieved - £10,000 minus £1,000 minus £1,000 equals £8,000.
Whichever of the two figures (maximum chargeable gain and actual gain) is lower is the figure you put on your SA108 capital gains tax form.
If you sold your chattel for £15,000 or more, you work out what you chargeable gain is on the SA108 capital gains notes form (from page 9 onwards).
Sets of chattels have a slightly different treatment. Let’s say you have Ringo Starr’s drum set and you wanted to sell it. The drum kit consisted of 50 different parts with each part being worth £500.
If you sold the drum kit to the same person or to connected persons, it would be treated as one chattel worth £25,000 and taxed as an individual chattel.
If, however, the drum kit’s parts were sold separately to 50 unconnected buyers, each part of the chattel would be considered a separate chattel.
Capital gains tax on gifts & transfers and inheritance tax considerations
Panthera note – some transfers may arguably be liable for capital gains tax, inheritance tax, and income tax. Once one tax has been levied on a gift, no other taxes will be levied. Please get in touch with us if you’re concerned about this.
If you transfer your spouse or civil partner an item of value, it is tax-free.
If you gift a connected person (defined by HMRC as a spouse, civil partner, relatives and their spouses/civil partners, and relatives of spouse/civil partner and spouse/civil partner of those relatives – see HMRC’s connected person flow chart here), the gift is treated as being at market value. If you sell to a connected person something for below the market value, the difference between what you sell it for and what it is worth may be liable to capital gains tax.
However, if you die within seven years and your estate becomes subject to inheritance tax, the connected person will have to pay inheritance tax at 40% within the first three years of your death. The amount they pay inheritance tax on depends on the value of the item if you gave it to them for free or the difference between what the item was worth at the time and what you sold it for.
If they die after three years but before seven years, then inheritance tax taper relief is available.
| Years between gift and death |
Tax paid
|
|---|---|
| 3 to 4 | 32% |
| 4 to 5 | 24% |
| 5 to 6 | 16% |
| 6 to 7 | 8% |
| 7 or more | 0% |
After seven years have passed, no inheritance tax is payable. That’s because it’s no longer considered part of your estate.
Panthera note – under HMRC rules, you can give away £3,000 a year worth of gifts to a person every year under your “annual exemption per person” rule and these gifts will not be considered as liable for capital gains tax or inheritance tax.
Capital gains tax on business disposals – Capital Gains Tax Entrepreneurs’ Relief
If you sell your shares in a business you’ve owned for more than 1 year and hold 5% or more of the shares, then that sale will be eligible for Capital Gains Tax Entrepreneurs’ Relief.
You work out your net gain by subtracting any professional fees (for example, solicitors, accountants, business transfer agents, and so on) from the price you received for your shareholding.
You pay 10% on your net gain at your next Self Assessment. So, if you sold your company in February 2018, this would be in the 2017/2018 tax year. Your Self Assessment form would be due by 31st January 2019 at which point you must make or have made your Capital Gains Tax Entrepreneurs’ Relief payment.
You have a £10m lifetime allowance of Capital Gains Tax Entrepreneurs’ Relief. Over and above that, you’ll pay 20% on any business disposals.
Panthera note – please note that Capital Gains Tax Entrepreneurs’ Relief does not apply to asset-and-goodwill business sales.
Capital gains tax allowances and income tax trade losses
If you’re running your business as a sole trader, you can carry back or forward trading losses against profits made from the same trade.
Sole traders do have an additional advantage in the you can use income tax losses to offset any capital gains in the year of the loss or the preceding year.
Panthera tip – any income losses you incur in your first four years can be carried back against income you make from the three years before but, unfortunately, not be used for capital gains tax purposes.
Capital gains tax allowances – SEIS and EIS
Investors in EIS schemes can take advantage of EIS CGT deferral relief if you make your EIS investment in a period that starts one year before and ends three years after your benefitted from your gain.
Panthera tip – if this is you, please talk to us before you do anything. Due to a quirk in the tax system, this may be a rare occasion when the deferment of tax might actually make you worse off.
For SEIS investors, you can defer 50% of your capital gains tax up to the amount of your investment. For example, if you invest £20,000 as an additional rate taxpayer, your CGT exemption will save you £2,800. That’s because the CGT rate of 28% against £20,000 is £5,600 and 50% of that is £2,800.
For basic rate tax payers (10%), the saving is £1,000 and for higher rate tax payers (20%), the saving would be £2,000.
Investors is SEIS and EIS schemes also qualify for income tax relief. When investing in a scheme, you can, on EIS schemes, receive 50% income tax relief against any EIS investment. So, if you invested £20,000 in an EIS scheme, you could deduct £10,000 (50%) against your income tax bill if you keep your investment for a 3-year period. So SEIS, the relief is 30% so that £20,000 investment would see you claim back £6,666, again subject to holding onto the shares for 3 years.
However, with both SEIS and EIS schemes, if you divest yourself of your shares in the first 3 years, you can claim exemption from capital gains tax on the shares you originally claimed income tax relief on.
Capital gains tax allowances – talk to Panthera
Capital gains tax is a big subject and working with your Panthera accountants means you’ll be able to minimise your exposure to it as much as possible.
Want our help to work out what’s right for you? Please call Panthera on 01235 768 561 or email the team at enquiries@pantheraaccounting.co.uk.