Tax free capital gains for individuals

Tax free capital gains for individuals

What are the current rules surrounding capital gains tax? When do you have to pay it? What assets do you pay it on? And how can you benefit from tax free capital gains?

Tax free capital gains – what is a capital gain?

A capital gain is the profit you make when you sell something which has increased in value since the time you purchased it.

Tax free capital gains – capital gains tax

When you sell something for profit, you pay capital gains tax on the profit, not the amount that you sold it for.

You have an annual Tax free capital gains tax allowance of £11,300. That means that you can make £11,300 in profit from the sale of your assets in a financial year before you pay any tax on it.

Once you have passed £11,300, you pay 28% on gains made from the sale of residential property (except for your main residence) and 20% on other assets if you’re a higher-rate income tax payer.

If you’re a basic-rate tax payer, you first work out how much taxable income you have in that financial year. To do that, you add up:

  • salary from employment (including commission),
  • profits you make if you’re self-employed,
  • other income you’ve made from doing tasks for others or renting out personal equipment,
  • pensions,
  • rental income (except those using the Rent A Room scheme earning less than £7,500 from rental of the room),
  • benefits you receive from your employer, and
  • income you get from a trust.

From that figure, you then take off your personal tax allowance (£11,500 at time of writing) and any other income tax reliefs (pension contributions, charity donations, maintenance payments, time spent working on a ship outside the UK, what you spend running your business if you’re a sole trader or a partner, and money you’ve used for travel and purchases that you must buy for your job).

Add the amount of capital gains you’ve made from the sale of assets in that financial year. If the total amount is within the basic income tax band (£11,501 to £45,000 in England, Wales, and Northern Ireland – Scotland £11,501 to £43,000), you pay 18% on residential property gains (except for your main residence) and 10% for other asset gains.

If you go over the £43,000/£45,000 threshold, you pay 28% on property gains (except for your main residence) and 20% on other asset gains for only the amount over the threshold.

Tax free capital gains – what type of asset sale profits attract capital gains?

The HMRC considers the following as assets on which you can make a capital gain which will attract tax:

  • property that is not your main residence (buy-to-let property, for example),
  • shares that are not in an ISA or a PEP
  • personal possessions worth £6,000 or more (including jewellery, paintings, antiques, coins, stamps, and collections/sets that belong together, the constituent parts of which are all sold to the same person)
  • your main home if you’ve let it out and haven’t lived there for a long time, used it for business purposes, or the grounds (including all buildings) are more than 5,000 square metres.

Tax free capital gains – what type of asset sale profits are exempt from capital gains?

You don’t have to pay capital gains tax on:

  • the sale of your primary residence
  • ISAs
  • PEPs
  • UK government gilts
  • Premium Bonds
  • winnings from betting or games of chance (including the National Lottery).

Tax free capital gains – how to tell HMRC

Most taxpayers will use their Self Assessment form to report Capital Gains Tax liability. This can defer paying the tax by up to 22 months. For example, if you sold something on April 6th, 2018, your bill would not be due until 31st January 2020.

You can also use HMRC’s ‘real time’ Capital Gains Tax service – click <a href=””>here</a>. Before you go online, you’ll need to show how you arrived at your calculation of a profit or loss showing information from your records about what you bought it for and what you sold it for. You need to report a gain by 31st of January after the tax year in which you made the gain. Please bear in mind that if you use this service, you will be expected to pay straight away.

Tax free capital gains – get in touch

Let Modina steer your way through capital gains tax as an individual. In a later article, we’ll be looking at capital gains tax when you’ve made a loss, the rules on gifts to spouses and other connected people, gifts to charities, and the concept of market value.

Please call your Modina team on 020 7183 8241 or email and ask how we can help.

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