Chancellor Rishi Sunak has announced the government will slightly increase the capital gains tax (CGT) allowance, and significantly reduce entrepreneurs’ relief in today’s Budget.
The CGT allowance has been increased to £12,300, and the time to pay CGT on property sales will be cut to 30 days from the date of sale from 6 April.
A more significant change will see the lifetime limit on entrepreneurs’ relief in CGT, which costs the Treasury over £2bn, reduced from £10m to £1m.
However, corporation tax will remain at 19%, and the dividend tax allowance threshold will remain at £2,000.
Here, Which? explains what the taxes mean and looks at the changes in greater detail.
CGT allowance up £300
CGT is a tax on the increased value of your possessions – such as a second home, antiques or shares – during the time you have owned them.
The CGT allowance is the amount you can make from the increased value of your possessions tax-free.
The CGT allowance will increase from £12,000 to £12,300 for individuals and representatives, and from £6,000 to £6,150 for trustees of settlements from 6 April.
How CGT allowances have changed
CGT 30-day payment window
Meanwhile, from 6 April 2020, anyone who makes a taxable capital gain from UK residential property will have to pay the tax they owe within 30 days of the completion of the sale or disposal.
Currently, you have between nine months and 18 months to pay.
To pay this, you’ll need to submit a ‘residential property return’ and make a payment on account.
This change will significantly reduce the amount of time you have to calculate and report your CGT bill, but note that it only applies to UK residential property sold on or after 6 April 2020, and only applies where CGT is chargeable.
You can report capital gains to HMRC via the Report Capital Gains Tax online service from the government.
Alternatively, you can file a self-assessment tax return. If you usually fill in a tax return, you must also report any capital gains, regardless of whether you’ve already used the online service.
You also need to include how you worked out each capital gain. If you have lost money through an investment (for example, selling a second home at a loss) you should also include this on your tax return.
- Find out more: capital gains tax on property
Entrepreneurs’ relief slashed
If you’re selling a business, there are extra reliefs available which might mean you can pay less CGT when you sell or give away your company. This is called entrepreneurs’ relief.
For 2020-21 you’ll be charged at 10% on the first £1m of gains, when selling a qualifying business.
This is instead of being charged 10% on the first £10m of gains, meaning anything above £1m will be taxed at the usual 20%.
The allowance applies at an individual level, so £1m is the maximum you can claim per person, rather than for each business you sell.
In his Budget speech, Mr Sunak said 80% of those using the relief will remain unaffected by the change.
You can claim entrepreneurs’ relief if:
- you are a sole trader or partner selling part or all of your business or its assets
- you control at least 5% of the company’s net assets of which you are selling and are entitled to 5% of its distributable profits
- you sell assets from the above businesses within three years of closing down.
- Find out more: entrepreneurs’ relief explained
How does CGT work without entrepreneurs’ relief?
You’ll need to calculate and pay your capital gains tax bill in the same way as when selling any other asset.
You start by working out the gains you make on the sale of your business. This means you take the sales price, and deduct what you paid for it, as well as any investments in the business, and any costs relating to buying or selling it.
Once you have that, you deduct your personal allowance.
Bear in mind that your capital gain will count when working out your tax bracket for the year, so even if you’re a basic-rate taxpayer, a large capital gain can push you into paying the higher rate.
- Find out more: small business tax: what you need to pay
Corporation tax stays the same
Corporation tax – which is paid by UK businesses – is calculated on annual profits, in a similar way to income tax for individuals.
The corporation tax rate has been 19% for all limited companies since April 2016. Prior to this, the rate varied depending on the company’s profits.
It was reportedly going to be lowered in the next tax year but has instead remained frozen.
Corporation tax is payable by all UK limited companies. The following organisations may also need to pay it, even if they’re not incorporated:
- Members clubs, societies and associations
- Trade associations
- Housing associations
- Groups of individuals carrying out a business (such as co-operatives).
- Find out more: corporation tax explained
No changes to dividends tax allowance
Dividends tax is charged on dividends received by shareholders of a company.
The tax-free dividend allowance has stayed the same for the 2020-21 tax year, at £2,000.
Above this dividend income tax-free allowance, you pay tax based on the rate you pay on your other income – known as your ‘tax band’ or sometimes called your ‘marginal tax rate’.
It’s also possible to avoid tax on your investment income if you hold your shares or funds in a stocks and shares Isa.
If your only income is from investments, then you can also use your tax-free personal allowance before you start paying tax on dividends.
- Find out more: what is dividends tax?