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Capital Gains Tax – what is it, how does it work, and what do I need to do about it?

An area of tax planning which can often be misunderstood or forgotten about is Capital Gains Tax (CGT).

This quick guide will talk you through the basics of what it is, how it works, and how to manage your affairs to minimise it.

What is CGT?

CGT is a form of tax that is applied to the gains you make on the disposal of an asset.

It is applied against the value of assets which you have owned for over one year that you dispose of – either by transferring it to another person or via its sale.

These assets can include a variety of things, including the sale of shares, the sale of a business, properties you have inherited, or second homes.

More recent additions to CGT include any gains which you have made on cryptocurrency.

What are the current CGT rates?

All gains up to £6,000 each are tax free, and up to £12,000 for assets owned jointly by a married couple or a civil partnership. After this rate, you must start paying tax.

The rates vary depending on if you pay the additional, higher or basic rate of Income Tax.  For higher or additional rate taxpayers, the CGT rates are:

 

How does CGT work?

Unlike your regular income tax from a salary, CGT is not automatically deducted from you by HM Revenue & Customs (HMRC).

Instead, you must send an accurate report to HMRC yourself via a Self-Assessment tax return.

When do I need to do this by?

If you have sold a residential property in the UK and need to report CGT, then you must do this within 60 days of the date of sale.

If the CGT applies to other applicable assets, then you can report it in the tax year after the sale or disposal of the asset if you use a Self-Assessment tax return.

If you are eligible for the use of the Government ‘real time’ CGT service, then you have until 31 December in the tax year after the sale to report it.

What happens if I don’t do this?

As with many other areas of taxation, the failure to report CGT or to report it incorrectly could result in sizeable fines and further investigation by HMRC.

For advice about CGT, or if you would like to find out any further information regarding the accounting services we offer, please do not hesitate to contact us. 

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