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What Is a Chargeable Gain in the UK?

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There are two parallel tax regimes in the United Kingdom for businesses and individuals. One tax regime applies to income (or sales revenue), and the other applies to gains arising from the sale of capital assets. Any money you or your business obtains from selling a capital asset is not subject to the income tax regime. Instead, if the gain is taxable, it will be a chargeable gain. If you or your business receives money subject to tax, but it is not an income receipt, it will be a chargeable gain. This article explains:

  • what are the different kinds of chargeable gains; and 
  • the difference between chargeable gains and taxable income.

Income vs Capital 

If you receive money from a sale, the law will ask if the money qualifies as an income receipt or a capital receipt. The answer determines which tax regime will govern the receipt. 

Lawyers and accountants often use the fruit tree analogy to explain the difference between income and capital assets. Say you own a pear tree, and you sell pears to your neighbour. Any money you make from selling a pear is akin to income because you regularly sell a recurring product. This is an income asset.

On the other hand, the tree itself is a capital asset. While you do not sell the pear tree every time you sell a pear, you need the tree to produce the pears you sell. If you sell the pear tree, the money you receive is a capital receipt. Therefore, if the transaction is subject to the chargeable gain tax regime.

Chargeable Gains 

HM Revenue & Customs (HMRC) will only asses tax under a chargeable gain if:

  • you are not exempt from a chargeable gain;
  • the capital asset you sold is not exempt from a chargeable gain; and 
  • the sale transaction is a disposal for tax purposes. 

If you meet all three conditions, the law will assess different kinds of chargeable gains depending on the circumstances of the transaction. For instance, capital gains tax (CGT) is a particular chargeable gain. Not all chargeable gains will be capital gains tax, though all capital gains taxes are a kind of chargeable gains. 

Tax Liabilities of Individuals and Businesses 

HMRC assess chargeable gains differently depending on whether an individual, non-corporate, or corporate business was involved in the transaction. 

IndividualsIn most cases, if you are a UK taxpayer, HMRC will consider you a qualifying individual. However, provided you meet the other two conditions outlined above, HMRC will assess the chargeable gain as capital gains tax (CGT).

In most cases, HMRC assesses CGT based on the taxable difference between the price you paid for the capital asset and the price you sold it for. HMRC may tax this difference at 10% or 20%.
Companies or Other Corporate BodiesSuppose HMRC considers a company (or other corporate body) to be a qualifying entity for tax purposes. In that case, it will tax any chargeable gain under the rules for corporation tax, provided you meet the other two conditions.
 
Consequently, HMRC will factor in any gains your company makes from selling a capital asset into your company’s total taxable profit (TTP). TTP also includes money you have made from income sales. As a result, HMRC taxes the total amount at the corporate tax rate, currently 19%. 

HMRC considers a qualifying company to be any business incorporated in the UK.

Capital Assets

Some common examples of capital assets include:

Additionally, intangible items like branding, intellectual property, and goodwill are capital assets. In some cases, HMRC will treat certain capital assets as exempt from chargeable gains. The most common example is your primary residential property. You do not pay capital gains when you sell your home. 

Disposals 

A disposal includes the sale, gift, transfer, or destruction of a capital asset. Suppose you own a capital asset and transfer ownership to another person. In that case, the law will almost certainly consider it a disposal regardless if you received any money or how much you received.

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Capital Gains Tax vs Corporation Tax 

HMRC has different rules depending on whether the chargeable gain constitutes capital gains tax (CGT) versus corporation tax. 

In all cases, you must make a gain on the disposal of the capital asset. If you have lost money, then you do not pay tax. Instead, you pay tax on the difference between the purchase and sale price i.e. the gain. 

Depending on whether the disposal is subject to CGT or corporation tax, HMRC grants the seller various reliefs and allowances, such as setting off other capital losses against your chargeable gain. 

Key Takeaways 

If you sell something, the law will first ask if you have sold a capital asset or an income-producing asset. HMRC will assess the transaction under the chargeable gains regime where the transaction involves a capital asset. Individuals and unincorporated businesses pay capital gains tax if they owe any chargeable gains to HMRC. Companies add the taxable chargeable gains to their total taxable profit for the accounting year, which HMRC assess at the corporate tax rate. 

If you need help with your business, our experienced business lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us on 0808 196 8584 or visit our membership page.

Frequently Asked Questions

What is a chargeable gain?

A chargeable gain is a kind of tax liability HMRC assesses for transactions involving capital assets. Since chargeable gains differ from taxable income, each has its rules for determining how much you pay HMRC.

What is the difference between a chargeable gain and capital gains tax?

Capital gains are a type of chargeable gain. If an individual or unincorporated business owes money to the HMRC for a transaction involving a capital asset, capital gains tax will determine how much tax you must pay. Businesses do not pay capital gains tax. Instead, any chargeable gains they owe are added to their total taxable profit for the year and charged at the corporate tax rate.

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Jake Rickman

Jake Rickman

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