Capital Gains Tax (CGT)

What capital gains tax means for you while living abroad Capital gains tax isn’t like regular tax. Here’s our complete guide to understand gct and what you can do to reduce it.

Understanding the UK tax system, particularly Capital Gains Tax (CGT), is crucial for expats. This tax, which applies when you sell an asset that has increased in value, can significantly impact your financial planning. This article provides a comprehensive overview of UK CGT, covering allowances, reliefs, exemptions, recent changes, the rules for temporary non-residency, and the calculation of CGT rates.

What is Capital Gains Tax?

Allowances

Capital Gains Tax is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that has increased in value. It’s the gain you make that’s taxed, not the amount of money you receive. Typical assets liable to CGT include:

Property (that isn’t your primary home).
Shares.
Business assets.
Personal possessions worth over £6,000 (excluding your car).

The first step in understanding CGT is knowing about the tax-free allowance. For the tax year 2023/2024, the annual CGT allowance is £6,000. This means you can make gains up to this amount before paying any tax.

Rates of Capital Gains Tax

The rates at which CGT is charged depend on your total taxable income, which includes your income and the gains you’ve made. The rates differ for different types of assets and depending on your income tax band.

Basic Rate Taxpayers

If you are a basic rate taxpayer (with taxable income up to £37,700 for the 2023/2024 tax year), the CGT rates are:

10% on most assets
18% on residential property and carried interest

Higher and Additional Rate Taxpayers

If your taxable income exceeds £37,700, making you a higher or additional rate taxpayer, the CGT rates are:

20% on most assets
28% on residential property and carried interest

Calculating Capital Gains Tax

1. Determine the Gain: Subtract the cost of acquiring the asset and any allowable expenses (e.g., legal fees, improvement costs) from the sale price.
2. Apply Allowances: Subtract the annual CGT allowance (£6,000 for 2023/2024).
3. Add to Taxable Income: Add the remaining gain to your total taxable income. This determines your income tax band.
4. Apply Rates: Apply the relevant CGT rates (10% or 20% for most assets; 18% or 28% for residential property and carried interest) depending on your total taxable income.
Example Calculation
Suppose you’re a basic rate taxpayer with a taxable income of £30,000, and you sell an asset (not residential property) for a gain of £20,000:
Gain Calculation: £20,000 (sale price) – £6,000 (annual allowance) = £14,000.
Total Taxable Income: £30,000 (income) + £14,000 (gain) = £44,000.
Basic Rate Threshold: You’ll pay 10% on the first £7,700 of the gain (the remaining basic rate threshold) and 20% on the remaining £6,300.
Tax on Gain: £7,700 x 10% = £770, £6,300 x 20% = £1,260.
Total CGT: £770 + £1,260 = £2,030.

Reliefs and Exemptions

Principal Private Residence Relief (PPR)

If the asset is your main home, you may not have to pay CGT on any gain made when you sell it. This is known as Principal Private Residence Relief. However, specific conditions must be met for this relief to apply.

Business Asset Disposal Relief

Formerly known as Entrepreneurs’ Relief, this allows you to pay a reduced rate of 10% on gains from qualifying business assets up to a lifetime limit of £1 million. This relief is particularly relevant for expats with business interests in the UK. If you are selling a property that has been your main residency in the past, you will qualify for tax relief for the period of time you lived in the property over the whole ownership period.

Investors' Relief

Investors’ Relief is another form of relief that allows individuals to pay a reduced CGT rate of 10% on gains from qualifying shares in trading companies. The lifetime limit for this relief is also £1 million.

Temporary Non-Residency

The concept of temporary non-residency is crucial for expats. If you are temporarily non-resident, certain gains made while you are away may become taxable in the UK when you return. For CGT purposes, you are considered temporarily non-resident if your period of non-residency is less than five complete tax years.

The Five-Year Rule

If you are away for fewer than five complete tax years and return to the UK, gains on assets you owned before you left may be taxed upon your return. The rule is intended to prevent individuals from avoiding CGT by becoming non-residents for short periods.

Recent Changes to CGT

The UK government frequently updates tax legislation, and CGT is no exception. Recent changes include:
– Reduction in the Annual Exempt Amount: From April 2023, the annual exempt amount has been reduced to £6,000.
– 30-Day Reporting and Payment: If you sell a UK residential property that results in a CGT liability, you must report and pay the tax within 30 days of the sale.
– Changes to PPR Relief: Amendments have been made to the final period exemption, reducing it from 18 months to 9 months for most people. This means that if you sell your home, the final 9 months of ownership are exempt from CGT, provided it has been your main residence at some point during ownership.

Special Considerations for Expats

Double Taxation Agreements
Many countries have double taxation agreements with the UK to prevent individuals from being taxed twice on the same income. Understanding how these agreements interact with UK CGT is essential, as they can significantly impact your tax liability.
Split-Year Treatment
If you move to or from the UK partway through the tax year, you might qualify for split-year treatment. This means the tax year is divided into a UK part and an overseas part, potentially reducing your CGT liability.
Practical Steps for Expats
1. Maintain Records: Keep detailed records of your asset acquisitions and disposals, including purchase and sale prices, dates, and associated costs.
2. Understand Your Residency Status: Determine your residency status under the Statutory Residence Test to understand how UK CGT applies to you.
3. Seek Professional Advice: Taxation can be complex, and seeking advice from a tax professional with expertise in expat taxation can help you navigate the rules effectively.

Summary

Understanding UK Capital Gains Tax is essential for expats to ensure compliance and optimize their tax position. Expats can effectively manage their tax liabilities by staying informed about allowances, reliefs, exemptions, recent changes, and the implications of temporary non-residency. Always seek professional advice to tailor the guidance to your specific circumstances and stay abreast of any legislative changes that may affect your tax position.

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