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clientservices@lsrpartners.comMost people assume that if they have no income tax liability, their entire basic rate band is available for capital gains tax at 18%. That is not always correct.
That assumption is often wrong.
Capital gains tax for expats and non-residents is one of the areas where we see the most miscalculations. The rate you pay depends on more than just whether you have a tax bill. Your full UK income picture for the year determines the answer, including income that generates no tax liability at all.
Here is how the calculation actually works.
Capital gains tax is the tax you pay on the profit from selling or disposing of an asset. HMRC taxes the gain, not the total sale proceeds.
Every individual has a tax-free CGT allowance of £3,000 per tax year. Gains below this threshold attract no tax. Gains above it are taxable at either 18% or 24%, depending on where they sit relative to your basic rate band.
CGT applies to gains from the disposal of most personal possessions worth £6,000 or more (excluding your personal car), property that is not your main home, your main home if it has been let out or used for business, shares held outside an ISA or PEP, and business assets.
The rate you pay depends on a single calculation. Take your taxable income. Add your taxable gains. If the combined total falls within the basic rate band of £37,700, you pay 18% on the gains. For any amount above that threshold, you pay 24%.
The critical point is the word taxable. Your personal allowance reduces your taxable income before the calculation begins. Certain types of income interact with this in ways that most people do not expect.
Taxable income of £20,000 and total capital gains of £12,600. Deduct the £3,000 CGT allowance to reach taxable gains of £9,600. Adding that to taxable income gives £29,600. This falls within the basic rate band, so CGT is charged at 18% on the full £9,600, giving a total bill of £1,728.
Taxable income of £20,000 and total capital gains of £52,600. Deduct the £3,000 allowance to reach taxable gains of £49,600. Adding that to taxable income gives £69,600. After the £20,000 income, £17,700 of basic rate band remains. CGT at 18% applies to that £17,700, giving £3,186. The remaining £31,900 is taxed at 24%, giving £7,656. Total CGT bill: £10,842.
Please note that CGT rates differ for trustees, personal representatives and businesses.
This is the part of the calculation that catches people out most regularly.
A non-resident client came to us planning to sell a UK property. He had rental income of £16,000 and enough mortgage interest to cover his entire tax liability. He assumed his full £37,700 basic rate band was available for CGT at 18%.
He did not have it.
Mortgage interest relief on residential property is a tax credit, not a deductible expense. HMRC does not reduce your income figure by the mortgage interest you pay. Your rental income still counts in full against your basic rate band.
In this case, the client had £16,000 of rental income and a personal allowance of £12,570. That left £3,430 of his basic rate band already used before accounting for a single pound of capital gains. His available 18% band was £34,270, not £37,700.
For clients with larger rental incomes or smaller personal allowances, the impact compounds quickly. The difference in tax between 18% and 24% adds up fast across a larger gain.
Non-residents sometimes choose the disregarded income route for certain UK income sources. This removes the requirement to pay UK tax on that income and sounds attractive at first glance. However, it comes with a significant trade-off.
Choosing disregarded income means losing your personal allowance entirely for that tax year. Without a personal allowance, taxable income starts from zero rather than from £12,570. That eats into your basic rate band immediately, pushing more of your capital gain into the 24% bracket.
Take the client example above. Going down the disregarded income route with a £15,000 private loan would have removed his personal allowance entirely. The full £15,000 would have reduced his available 18% band to £22,700 rather than £37,700.
The right choice between these two routes depends entirely on your specific income mix and the size of your gain.
Many non-residents are surprised to learn that UK CGT applies to disposals of UK property and land. Non-residency does not remove this obligation.
Selling UK residential property as a non-resident means reporting the disposal to HMRC within 60 days of completion and paying any CGT due at the same time. Missing this deadline triggers automatic penalties.
UK tax residents who sell assets located overseas may also face a UK CGT liability. UK residents pay tax on worldwide gains. A double tax treaty with the country where the asset is located may provide relief, but it does not remove the UK reporting obligation.
The CGT rate you pay is not simply a matter of checking whether you have a tax liability. Rental income, the type of relief you claim, your personal allowance position and the size of your gain all interact in ways that affect the final bill.
Getting this wrong after a sale has completed is a much harder problem to fix than getting it right beforehand.
LSR Partners help you pay the right tax in the right place at the right time. Book a call with us at lsrpartners.com.
This article is for general information purposes only and does not constitute tax advice. Your individual circumstances will affect the tax treatment of any disposal. Please contact us to discuss your specific position.
