UK CAPITAL GAINS TAX

Introduction to Capital Gains Tax (CGT)

In the UK, Capital Gains Tax (CGT) is a tax on the profit made when you sell or dispose of an asset that has increased in value. CGT is only paid on the gain or profit — not the total amount of money you receive from the sale. However, not all assets are subject to CGT, and one area of frequent confusion concerns whether personal vehicles, particularly cars, are liable for CGT.

For most personal car owners, the good news is that the sale of a private car typically does not attract Capital Gains Tax. However, there are exceptions and specific circumstances where it might apply. Let’s explore the rules and nuances surrounding CGT for personal car owners.

Are Personal Cars Liable for Capital Gains Tax?

In general, personal cars are considered "wasting assets" under UK tax law. A wasting asset is defined as an item with a useful life of 50 years or less, which naturally loses value over time through wear and tear or obsolescence. Because personal cars typically depreciate rather than appreciate, they fall into this category. As a result, most personal cars are exempt from Capital Gains Tax.

Exceptions to the Rule: Classic Cars and High-Value Vehicles;

While everyday personal vehicles are usually exempt from CGT, there are a few exceptions:

1. Classic Cars: If a car is considered a "classic" or collectible vehicle, its value might increase over time, especially if it’s rare or in high demand. For example, vintage cars like a 1960s Jaguar E-Type or an Aston Martin DB5 could be worth significantly more than their original purchase price, making them potentially subject to CGT. However, even in these cases, the CGT exemption may still apply if the car qualifies as a wasting asset — meaning it has a predictable useful life of 50 years or less, regardless of whether it appreciates in value.
   For classic cars that have an unlimited life expectancy or are used for racing, they may be treated differently and considered non-wasting assets, which could trigger CGT upon sale.
2. Cars Purchased as Investments: If you purchase a vehicle solely as an investment, intending to sell it at a profit, HMRC could view this as a capital investment rather than a personal purchase. In such cases, the sale might be subject to CGT, similar to other capital assets like stocks or property. This is relatively rare but is something to be aware of for collectors or investors.

Calculating Capital Gains Tax for Vehicles

If you do find yourself in a situation where CGT applies (e.g., selling a valuable classic car that does not qualify as a wasting asset), the tax is calculated based on the profit you’ve made from the sale. Here’s how it works:

• Calculate the Gain: The gain is the difference between what you originally paid for the car and what you sold it for, minus any allowable costs (such as improvement costs or auction fees).

• Apply the CGT Allowance: Every individual has an annual CGT allowance (known as the "Annual Exempt Amount"). As of the 2023/24 tax year, this allowance is £6,000. If your gains are below this threshold, you won’t pay any CGT. Any profit above the allowance will be subject to tax.

• Determine the Tax Rate: CGT rates vary depending on your income. Basic rate taxpayers generally pay 10% on capital gains, while higher and additional rate taxpayers pay 20%.

For example, if you are a higher-rate taxpayer and sell a classic car for £60,000, having originally purchased it for £30,000, your gain would be £30,000. After applying the £6,000 CGT allowance, you would be taxed on £24,000 at 20%, resulting in a CGT liability of £4,800.

What About Cars Used for Business?

If you use a car for business purposes (as part of a business asset, rather than just for personal use), different rules apply. In these cases, the car might not be considered a personal possession, and any profit made from selling the vehicle could be subject to CGT or other taxes, depending on the structure of your business and whether the car was claimed as a business expense.

*Please consult with your own financial advisor on this matter as the above is not to be deemed as advice.