Capital Gains 101

What is a capital gain?

If you sell an asset and make a profit, you may have to pay Capital Gains Tax (CGT). A capital gain is the increase in value of an asset when it is sold.

Basically, you sell an asset for more than you bought it for originally.

Note that if you gift, give away, or “swap” an asset, this counts as a disposal for CGT purposes.

How does it work?

Everyone has an annual CGT allowance of £12,300. This applies across all assets.

So, if you sold an asset for £20,000 that you originally bought for £5,000 you now have £15,000 worth of gains. From this, you would take away the allowance, resulting in £2,700 being taxable.

CGT rates are as follows:

• 18% on your gains from residential property (if income is within the basic rate 20% band)
• 28% on your gains from residential property (if income or gain reaches the higher rate band)
• 10% on your gains from other chargeable assets (if income is within the basic rate 20% band)
• 20% on your gains from other chargeable assets (if income, or gain reaches the higher rate band)

If you’re a basic rate (20%) taxpayer, you can use up your full basic rate income tax band for chargeable gains. It’s always worth using up the basic rate band on residential property gains, to maximise tax efficiency.

Different asset types

There are different asset types that you should be familiar with:

• Personal possessions, such as: jewellery, paintings, antiques, coins and stamps, or sets of things (e.g. matching vases, chessmen, or books by the same author)
• Property that’s not your main home
• Your main home if you’ve let it out, used it for business or it’s very large
• Shares (that are not in an ISA or PEP), units in a unit trust, and certain bonds

Some assets are tax free

It’s worth knowing that you do not pay taxes on certain assets such as:

• Shares held in an ISA or PEP
• UK government gilts and Premium Bonds
• Betting, lottery, or pools winnings (any gains in the casino, or using leverage, or spread bettering while trading would not be taxable).

Now to specific scenarios...

Residential property capital gains

If you lived in your main home during the period of ownership, you will not need to worry about capital gains if you sell the property.

However, if you leave the property for a certain amount of time — for example, to let it out — or if you are moving elsewhere, you may have a chargeable capital gain for the period you were not at the property.

Let’s take a look at a scenario:

1. Isaac bought a new house in January 2010 for £400,000 and lived in this property since;
2. In January 2016, Isaac was asked by his boss if he would take up a new job role in San Francisco, USA. He lived there for 2 years and while he was away, he let out his property;
3. Isaac returned to the UK in January 2018 and lived in the property until July 2019; and
4. He decided to let out his flat from July 2019 until he sold it in January 2020, for £750,000.

Isaac’s total gain is £350,000. We can apply Private Residence Relief. Note that there is also Lettings Relief if part of the property has been rented out.

The duration that Isaac lived in the property is not chargeable. Due to Private Residence Relief, the final 18 months of ownership are also not chargeable.

As Isaac had moved abroad for work, this would be known as deemed occupation as HMRC allow you to go abroad for up to 4 years. But it still classifies for Private Residence Relief.

There is no chargeable gain in this case.

However, if Isaac had purchased another property in the UK which became his main home between Jan 2016 and Jan 2018 then private residence relief will not apply, and these 2 years will be chargeable.

This means that only the 2 years between January 2016 and January 2018 is chargeable.

As Isaac had the property for 10 years (120 months), but lived elsewhere for two years we can calculate the charge as 2 years (24 months) out of the total 10 years (120 months). This is equivalent to 20% and equates to £70,000 chargeable gain (20% x total gain of £350k).

As this gain relates solely to letting we can now look at applying Lettings Relief. In this example you can claim the lower of:

• £280,000 (the 80% of the gain that gets private residence relief)
• £40,000; and
• £70,000 (the gain attributable to letting)

The lower amount is the fixed £40,000 so to calculate the gain we do the following:

Sale: £750,000

Original cost: (£400,000)

Gain: £350,000

Private Residence Relief: (£280,000)

Lettings Relief: (£40,000)

Chargeable gain: £30,000

By using up the full £12,300 allowance, only £17,700 would be taxable. Assuming Isaac is a higher rate taxpayer, this amount would be taxed at 28%, equating to a £4,956 Capital Gains Tax.

At Taxd, we’re developing our capital gains logic to automatically pick up the relevant reliefs for you. You tell us your situation, we’ll handle the rest.

Gains on shares

Shares sales can quickly become complicated. The main source of complication is that there are different rules based on the type of share bought.

We’ll focus on the scenario of buying shares on a listed exchange or trading app.

First of all, trading with leverage, spread-betting, and CFDs are all considered betting. Therefore, they are exempt from CGT. Any shares purchased through an ISA or pension are also exempt.

When you sell (or “dispose”) the shares, you need to match the shares being sold with shares you bought in order to work out the capital gain or loss.

To do this, the tax rules say you must match the shares or units you are selling to the ones you bought in this order:

• shares or units you buy on the same day;
• shares or units you buy within 30 days following the day of disposal — this is known as the “bed and breakfasting rule”; and
• the rest of your shares or units – these are treated as being held in a pool and acquired at their average price as part of the Section 104 holding.

Let’s take a look at an example:

• Isaac buys 2,000 shares in Apple on 1 January 2015 for £20,000;
• Isaac sells 1,000 shares in Apple on 15 July 2020 for £100,000; and
• Isaac buys 200 shares in Apple on 30 July 2020 for £15,000.

So:

• No shares or units were bought on the same day;
• 200 of the sold shares can be matched against the 200 shares purchased on 30 July under the bed and breakfasting rule; and there are
• 800 sold shares to be matched against the shares from the initial purchase.

This leads to a gain of:

• Bed and breakfasting (30-day sale) gain: £20,000 - £15,000 = £5,000
• Longer term gain: £80,000 - £8,000 = £72,000.

Total chargeable gain is £77,000.

Assuming no other assets are sold, the full £12,300 allowance would apply. So £64,700 would be taxable.

Cryptocurrencies

We’ve previously written an article on reporting crypto sales. Read it here!

How do Capital Losses work?

If you’ve been burnt by the market, you can offset any losses against gains. So it’s worth keeping track of losses.

How can capital losses be used?

• Capital losses that arise in a tax year must be offset against any capital gains for that tax year first. This often means that the CGT allowance is also used up by the loss (unfortunately, you cannot offset part of a gain with a loss, to maximise your CGT allowance).

For example, if you make a £15,000 gain in a tax year, £2,700 is taxable as £12,300 is covered by the CGT allowance.

If you also had a £10,000 loss, you cannot only use £2,700 to offset the gain. You must use the full £10,000 in this tax year and cannot carry forward.

• Capital losses from previous years may be carried forward to offset against capital gains in future years.
• Current tax year capital losses are offset before any capital losses brought forward from earlier tax years may be used.
• Capital losses cannot be carried backwards to previous tax years.