Capital Gains Tax is the tax which is due as a result of the financial gain (often referred to as profit) received once an asset is sold or disposed of.
The total gain is calculated by subtracting the sale value from the original purchase value.
For example, if you are selling a property, the sale value will normally be the sale price, or in some cases the market value which the property could be reasonably expected to sell for in an open market. You would use the market value if you give the property away, sell it at a reduced cost or pass it to a connected person (such as a family member).
You may also need to use the market value when calculating how much the property originally cost, often used if the property was inherited or was owned before 31st March 1982.
It may also be possible to deduct the costs of any improvements made to the property during ownership. These costs may include advice received, general improvements (but not decoration or maintenance) and also some taxes.
Once the total gain has been calculated, you would then need to apply any tax relief and/or allowances before calculating the Capital Gains Tax using the appropriate rate.
New Capital Gains Tax rules affecting British expats and non-UK residents with UK property
The UK tax loophole which allowed overseas investors and British Expats to avoid Capital Gains Tax (CGT) on the sale of residential property is now closed.
The new rule, which came into effect on April 6, 2015, will particularly affect British Expats and non-UK residents with UK property, especially those with buy-to-let agreements which generate an income. This new rule will mean that the sale of a UK property, which currently attracts no UK capital gains tax could incur a UK capital gains tax bill in the region of 28% on any gains made after April 6th 2015, depending on your personal circumstances.
It is recommended that people who own UK property arrange for any properties to be ‘officially’ valued (either by estate agent or property surveyor) as soon as possible to establish an accurate understanding of any gains which have subsequently been made.
If you are a non-UK resident, or expat, with a UK property it is important that you understand the new Capital Gains Tax Rules and the full array of options which could reduce your exposure to all types of UK and international taxation – now and in the future.
Enter your details via the form on the right to apply for a free tax consultation with a qualified UK tax adviser who will talk you through your options and recommend a course of action for you.
Assets liable for Capital Gains Tax
Assets which are liable for Capital Gains Tax include all forms of property (unless it is specifically exempt), certain gifts made, inheritance, shares and assets transferred through divorce or civil partnership which has been dissolved.
The main assets that it applies to are land, buildings, shares and business assets including goodwill. Until recently, expats and non-UK residents with a UK property were not liable for Capital Gains Tax, however, that loophole has now been closed. There is more information about this and the impact later in the article.
Capital Gains Tax rates
In the UK, Capital Gains Tax for residential property is charged at the rate of 28% where the total taxable gains and income are above the income tax basic rate band. Below that limit, the rate is 18%. For trustees and personal representatives of deceased persons the rate is 28%.
For non-residential property and other assets, the rates are 10% and 20% for individuals.
When selling a non-publicly listed business, if you are eligible, you may benefit from the Entrepreneurs’ Relief scheme under which you will only have to pay 10% on the sale of a business or business shares.
UK Capital Gains Tax rules for British expats
It used to be the case that by simply leaving the UK for a complete tax year, and then disposing of any profitable assets (although different rules have always applied for property) during that year could relieve you of the burden of Capital Gains Tax.
However, one year is no longer a sufficient length of time. An individual now has to be non-resident for a minimum of five complete UK tax years to take advantage of this rule. Proper planning is clearly very important in these situations as a few months miss calculation here or there can make a significant difference in your tax liability.
Sometimes it may even be worth taking an extended holiday rather than risk coming back to the UK too soon, when significant asset sales have occurred.
Even though you may be deemed non-resident for income tax purposes, you are treated as temporarily non-resident for capital gains tax purposes for up to 5 years. Certain gains made during that time are taxed in the year you return to the UK if within five years.
If, however, the asset was acquired after you had left the UK, then the gains are not subject to UK Capital Gains Tax. When double taxation agreements are taken into account, capital gains may be completely exempt from UK tax but taxable in your host country. As such there is still room for planning where the host country charges a lower rate than the UK.
Please note that the sale or disposal of property is subject to slightly different Capital Gains Tax rules, as described above.
Capital Gains Tax reliefs
There are several different tax reliefs which can reduce the chargeable gain:
- Rollover/holdover relief on replacement of business assets – allowing you to defer the CGT on a gain of a business asset where this is matched with a replacement of a new business asset in the period commencing one year before and ending three years after the disposal.
- Business incorporation relief – available when you transfer your business into a Limited Company in exchange for shares.
- Holdover gift relief – on some gifts of business assets, or gifts made into trusts mean the tax does not become payable until the person, or trustee who receives the gift disposes of it.
- Entrepreneurs’ relief – for disposals after 5th April 2008. This allows disposal of a material part or all of your business to have the CGT rate reduced to 10%. There is a lifetime limit which from 6 April 2011 is £10million.
Absorption of capital losses
Any capital losses made on a chargeable transaction are netted off against any capital gains made in the same tax year. They are applied before the annual exemption. Unused capital losses are carried forward against future capital gains; they cannot normally be carried back. To make use of a capital loss it must be reported to HMRC within five years and ten months of the end of the tax year in which it arose.
Capital gains tax allowance
An annual exemption of £12,000 for the tax year 2019/20 is available to individuals so total gains made in the tax year up to this amount are exempt. Any unused annual exemption is lost and cannot be carried forward or transferred to another person.
Previous years capital gains tax allowances:
- 2018/19: £11,700
- 2017/18: £11,300
- 2016/17: £11,100
- 2015/16: £11,100
- 2014/15: £11,000
- Normally the sale of your only or main residence is exempt, although it can become partly chargeable in some circumstances such as if it is let out or used for business purposes;
- Transfers of assets between husband and wife or civil partners. Such transfers are normally treated as being made at no gain/no loss;
- Most chattels whose value decreases over time (called wasting assets);
- Non wasting and business chattels where acquisition cost and disposal proceeds do not exceed £6000;
- Certain private motor cars;
- Gifts to charity and certain amateur sports clubs;
- SAYE contracts, savings certificates and premium bonds;
- Betting winnings and prizes including the lottery;
- Compensation for damages for personal or professional injury;
- Some compensation pay-outs for miss-sold pensions;
- Life assurance policies in the hands of the original owner or beneficiaries;
- Company reorganisations and takeovers where there is a share for share exchange.
Capital Gains Tax declarations when selling property as a non-resident
Since the new rules came into force in April 2015 as a non-resident, when you sell a UK residential property you must tell the HMRC, even if you have no capital gains tax to declare. This also applies if you are selling, or have sold, your main residence.
Failure to correctly make a capital gains tax declaration to the HMRC within 30 days after conveyancing (transferring ownership of) your property is likely to result in a penalty – even if there is no capital gains tax to pay.
We always recommend that you seek professional advice before finalising any declaration or capital gains tax calculation.
Request a free introduction to a UK tax specialist
If you have a UK property, or other assets, in the UK which you are considering selling, you should seek qualified advice about your best course of action to mitigate any unnecessary Capital Gains Tax bills.
Our free introduction service enables you to have a free consultation with a UK tax specialist that has expert understanding of UK tax rules for non-residents and will be able to help you:
- Establish your current UK residency status, including recommendations on how you could reduce your tax burden
- Understand and apply any relevant double tax treaties
- Identify opportunities to make your income and gains more tax efficient