What is capital gains tax?

woman by second home

If you sell a property, other than your main home, or an asset that has increased in value while you have owned it, you will need to pay capital gains tax on the profit.

Like income tax, capital gains tax is linked to your residence status. If you are UK resident and domiciled you will need to pay tax on any profits made worldwide, unless the country concerned has a double-tax-relief arrangement with the UK.

What are the capital gains rates for 2017/18?

There are two bands in place, depending on your income, and the rates for each are set out below:

Standard capital gains tax rate

If you are a basic-rate taxpayer, you need to work out your taxable income and add your taxable gains, then deduct your tax-free allowance. If the result is within the basic income tax band, you will pay:

  • 18% on residential property
  • 10% on other assets

Higher capital gains tax rate

If you are a higher-rate taxpayer, you will pay:

  • 28% on residential property
  • 20% on other assets

What is exempt from capital gains tax in 2017/18?

  • Each person has an annual exemption of £11,300
  • Trusts have an annual exemption of £5,650
  • Your main residence
  • Gifts to charities or your spouse or civil partner

Entrepreneurs’ and investors’ relief

You may be eligible for entrepreneurs’ relief if you dispose of all or part of your business as a sole trader or business partner. This is taxed at 10% for amounts up to £10 million, and then at 28%.

You may receive investors’ relief if you sell qualifying shares in an unlisted share trading company held by individuals. This is taxed at 10% subject to a limit of £10 million. Qualifying shares are those newly issued to the individual, on or after 17 March 2016, and held for a period of at least three years from 6 April 2016.

You must report losses to the UK’s tax authority, HM Revenue and Customs (HMRC), if they are four times the personal allowance, i.e. over £44,400.

What are double tax relief and unilateral relief?

The same gains may be taxed in more than one country, but you may be able to avoid paying tax twice if either unilateral relief, or double-tax-relief applies.

If you are unclear whether you need to pay capital gains tax, or at what rate, you may wish to speak to a professional tax advisor.