Capital Gain Tax: Reporting and everything you need to know

Note: The higher rate for carried interest will increase to 32% from 6 April 2025.

The Historical Context: ‘Labour’ and Capital Gains Tax

The foundation of the capital gains tax (CGT) system in the United Kingdom was laid by the Labour Chancellor James Callaghan in 1965.Before this pivotal introduction, profits derived from the sale of capital assets were not subject to taxation. The initial implementation of CGT by the Labour government was partly motivated by the significant increase in property values following World War II.  

Over the subsequent decades, the CGT system has undergone numerous reforms and policy shifts under various governmental administrations. A notable change occurred in 1988 when the Conservative government aligned CGT rates with income tax rates. Later, in 1998, Labour Chancellor Gordon Brown introduced taper relief, a mechanism designed to adjust the tax rate based on the duration an asset was held, aiming to reward longer-term investment. This was followed by Labour Chancellor Alistair Darling’s decision in 2008 to abolish taper relief and introduce a flat rate of CGT, marking a significant shift in policy. The introduction of Entrepreneurs’ Relief, now known as Business Asset Disposal Relief, also occurred during this period, providing a lower tax rate for certain business disposals. More recently, the Autumn Budget of 2024, under a Conservative government, brought about further changes to CGT rates, as discussed earlier. This historical overview naturally integrates the keyword ‘labour capital gains tax’ by highlighting the initial introduction and subsequent significant reforms enacted by Labour governments.  

The introduction of CGT by a Labour government signifies its long-standing presence as a tool for revenue generation and addressing wealth accumulation. The fact that both Labour and Conservative governments have implemented substantial reforms underscores their enduring relevance and their sensitivity to evolving economic and political landscapes. The shifts in CGT policy over time, from aligning with income tax to flat rates and then tiered structures again, reflect an ongoing debate about the most effective and equitable way to tax capital gains. Labour’s introduction of taper relief in 1998, aimed at incentivising long-term investment, further illustrates the dynamic nature of CGT policy and the influence of different economic philosophies. Understanding this historical context is crucial for appreciating the current state of CGT in the UK and anticipating potential future changes. 

Calculating Your Capital Gains Tax Liability 

The fundamental calculation of a capital gain involves subtracting the original cost (or the market value at the time of acquisition, if inherited ) of the asset from the proceeds received upon its sale. It is essential to remember that the tax is levied on this profit, not on the total amount of money obtained from the disposal. To arrive at the taxable gain, certain allowable costs can be deducted from this initial profit. These include the original price paid for the asset, any incidental costs associated with its purchase (such as legal fees and stamp duty), expenses incurred for improvements that enhanced the asset’s value, and incidental costs directly related to the sale (like estate agent fees or advertising expenses).  

Maintaining accurate and comprehensive records of all these transactions is paramount. These records, including purchase and sale prices, receipts for improvements, and documentation of sale-related costs, should be retained for at least five years after the self-assessment deadline. Once the total gain has been calculated and all allowable costs have been deducted, the annual exempt amount (£3,000 for individuals in 2024/25) can be subtracted from the remaining profit to determine the taxable gain. For example, if an individual makes a capital gain of £7,000 from selling shares and has no allowable costs, the taxable gain after deducting the £3,000 annual exempt amount would be £4,000. This taxable gain would then be subject to CGT at the applicable rate based on the individual’s income tax band.  

The detailed nature of allowable costs underscores the potential for reducing CGT liability through effective financial management and thorough record-keeping. By identifying and documenting all eligible expenses incurred throughout the ownership and disposal of an asset, taxpayers can significantly minimize their taxable profit. The multi-step process involved in calculating CGT, from the initial gain to the final taxable amount, highlights the importance of accuracy at each stage. Overlooking any of these steps or making errors in calculations can lead to incorrect tax reporting and potential penalties. For inherited assets, the rule requiring the use of market value at the date of death as the acquisition cost introduces a specific valuation challenge. Obtaining an accurate valuation is essential for correctly calculating the capital gain upon any subsequent disposal of the inherited asset.

Exploring Key Capital Gains Tax Reliefs and Exemptions

The UK tax system offers a range of Capital Gains Tax reliefs and exemptions that can significantly reduce or even eliminate an individual’s or business’s CGT liability. One of the most significant is Private Residence Relief (PRR), which typically exempts the profit from the sale of an individual’s main home from CGT. However, this relief may be restricted if the property has been used for business purposes or let out, and partial relief may be available in such cases.  

For business owners, Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief, offers a reduced CGT rate on qualifying disposals of business assets, currently at 10% but set to increase to 14% from 6th April 2025 and 18% from 6th April 2026. This relief is subject to a lifetime limit of £1 million and has specific qualifying conditions related to ownership percentage and the nature of the company. Other valuable business-related reliefs include Business Asset Rollover Relief, which allows for the deferral of CGT if the proceeds from selling certain business assets are reinvested in new ones within a specified period (usually three years), provided both the old and new assets are used in the business. Incorporation Relief enables business owners to delay paying capital gains tax when transferring their business to a company in exchange for shares; the tax becomes payable when these shares are eventually sold. Gift Hold-Over Relief may also be available, allowing for the deferral of CGT on certain gifts, particularly business assets or gifts subject to Inheritance Tax.  

Capital losses can be a crucial element of CGT planning, as they can be offset against capital gains in the same tax year or carried forward to reduce future gains. However, these losses must be claimed within a specific timeframe, and restrictions apply to disposals made to connected persons. Transfers of assets between spouses or civil partners are generally exempt from CGT, with the assets being treated as transferred on a ‘no gain/no loss’ basis. Similarly, gifts made to registered charities are usually exempt from CGT. Investors’ Relief offers a 10% CGT rate on the disposal of qualifying shares in unlisted trading companies held for at least three years, subject to a lifetime limit which was recently reduced to £1 million.  

The availability of these numerous CGT reliefs highlights the potential for significantly reducing tax liabilities. However, the specific eligibility criteria and application processes can be intricate, often requiring expert interpretation and guidance. For instance, meeting the conditions for BADR requires careful consideration of ownership structure and the nature of the business. Similarly, PRR can be complex in situations involving mixed use or changes in residency. The strategic utilization of capital losses also necessitates a thorough understanding of the relevant rules and time limits.

Table 2: Key Capital Gains Tax Reliefs and Their Purpose