Capital Gains Tax
CAPITAL GAINS TAX
Capital Gains Tax (CGT) is imposed on the profit made from the sale or transfer of assets. This tax is applied when assets such as stocks, bonds, precious metals, and property are sold or gifted. It differs from income tax, which is levied on regular earnings.
WHAT CONSTITUTES DISPOSING OF AN ASSET?
Disposing of an asset can occur in several ways, including:
- Selling the asset
- Gifting or transferring the asset to someone else
- Swapping the asset for another item
- Receiving compensation for the asset, such as an insurance payout if it is lost or destroyed
WHERE IS CAPITAL GAINS TAX IMPOSED?
Capital Gains Tax is prevalent globally and tends to be high in countries like:
- USA
- Canada
- Australia
- UK
- Ireland
- Germany
- France
- Portugal
- Spain
- Italy
- Denmark has the highest top marginal rate at 42%
Some countries differentiate between short-term and long-term holdings and property, with varying tax rates for individuals and corporations. Notably, some countries, such as the UAE, do not impose any capital gains tax.
RETURNING TO THE UK
The UK’s tax system is global, meaning that returning British expatriates will find their income and capital gains taxed in the UK regardless of where they were earned. In the UK, CGT is payable on the profit made from disposing of chargeable assets, including:
- Personal possessions worth over £6,000, excluding cars
- Property that is not your main residence
- Your primary residence if it has been rented out, used for business, or is exceptionally large
- Shares not held in an ISA or PEP
- Business assets
Profits from the sale of certain properties are taxed at either 10% or 20%, depending on your income tax bracket. Residential properties not eligible for Private Residence Relief are taxed at 18% and 28%.
Even if you are considered a non-resident for income tax purposes, you may still be liable for CGT for up to five years. Certain gains made during this period are taxed in the year you return to the UK within this five-year window.
CALCULATING CAPITAL GAINS TAX
When preparing a CGT calculation, consider the following:
- CGT is only payable on gains above an annual tax-free allowance
- Gifts to your spouse, civil partner, or charity are usually exempt from CGT
- Different rules apply to non-domiciled spouses and partners
- Depending on the asset, you may reduce your tax liability by claiming relief
- Relief may also be available if there is a double-taxation agreement between the UK and the country where the asset was disposed of
- Net capital losses can offset gains before applying the annual exemption, and unused losses can be carried forward to future gains
Trusts and corporate structures can be used to mitigate CGT liability
ADDITIONAL TAX CONSIDERATIONS
UK expats may still be liable for inheritance tax on worldwide assets, not just UK-based ones.
Pension income is taxed at marginal rates, so careful planning on how you receive this income can result in significant savings.
Understanding the agreements between the country where your assets are located and your country of residence is essential, especially for those retiring overseas with UK pensions.
Given the complexity of tax regulations, it is always advisable to seek professional advice before finalising any tax declarations or CGT calculations.
