Capital gains are made when you sell something for more money than you paid for it. As a result, you can be subject to tax. Capital gains tax allowances and capital gains tax rates are determined by whether you are an individual or a company.
Effective capital gains tax planning aims to minimise such payments by taking advantage of capital gains tax allowances and reliefs to create a low effective capital gains tax rate.
Rules can be complicated, so take professional advice from your accountant.
Capital gains tax, allowances and rates for individuals
Capital gains tax (CGT) applies to any gains you make when you sell assets such as land or investments. The assets could be business or personal, although some personal assets are exempt (including your main home). If you make gains on some assets and losses on others, CGT applies to the net overall gain made.
The annual capital gains tax allowance reduces the amount of tax you must pay. You only pay CGT on the amount by which your gains exceed this allowance (if at all). The capital gains tax allowance for 2016/17 is £11,100.
Other reliefs can also reduce or defer CGT for individuals. These include Entrepreneurs’ relief for individuals selling part or all of their business and Business Asset Rollover relief, if you reinvest gains in other business assets.
The capital gains tax rate that UK individuals pay depends on their total income and is usually 10% or 20% (reduced from 18% and 28% respectively from April 2016). If your gains qualify for Entrepreneurs’ relief, the capital gains tax rate is only 10%.
CGT is collected through the self-assessment system; you provide details on your self-assessment tax return.
Capital gains for companies — chargeable gains
Capital gains made by companies are treated differently and are usually referred to as chargeable gains.
There is no capital gains tax allowance for chargeable gains, but you can claim an indexation allowance. This reduces the chargeable gain by allowing for inflation.
If a chargeable gain is reinvested in other business assets, it may be possible to roll over the gain, deferring the tax liability. Alternatively, you may be exempt from capital gains tax if your gain is invested in shares under the Enterprise Investment or Seed Enterprise Investment Schemes.
Chargeable gains are subject to corporation tax (unless they are exempt under one of the Enterprise Investment Schemes) and are included on your corporation tax return. So the capital gains tax rate UK companies pay on chargeable gains (after indexation) is their corporation tax rate.
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