Whether you’ve recently filled out a self-assessment tax return, or are thinking of selling an asset in the near future, you may have heard of capital gains tax (CGT) and be wondering exactly how it affects you.
Here, we outline exactly what CGT is, who it applies to, how it works, and what you may need to pay – depending on your situation.
What is capital gains tax?
Gov.uk defines CGT as tax on the profit you make when you sell (sometimes called ‘disposing of’) something (often referred to as ‘an asset’) that has increased in value over time.
You pay tax on the gain that you make – not the entire sale value of the asset. For example, if you bought a piece of art for £5,000 and then sold it for £25,000, your gain is £20,000 (what you sold it for minus what you paid for it).
You don’t have to pay CGT on everything you sell, as some assets are tax-free. There’s also a yearly tax-free allowance for capital gains, meaning you can sell some assets without paying tax on the profit.
When does capital gains tax apply?
As well as selling something, HMRC also classes certain other scenarios as disposing of an asset, including gifting or transferring to someone else, getting compensation for it (like an insurance payout), or swapping for something else.
You’ll usually have to pay CGT on what are known as ‘chargeable assets’, including:
- personal possessions worth more than £6000 (apart from your car)
- business assets
- any property that’s not your main home (though you may have to pay CGT on your main home if you let it out, used it for business, or it’s very large)
- shares that aren’t in an ISA or PEP.
Some assets are exempt from CGT, including:
- ISAs or PEPs
- UK government gilts and Premium Bonds
- betting, lottery or pools winnings.
You also won’t usually pay CGT on gifts to your spouse, or to a charity.
How is capital gains tax calculated?
You’ll only have to pay CGT on qualifying assets once you’re over your annual tax-free threshold (called the annual exemption allowance). The allowance for most groups for 2022/23 is £12,300 and £6,150 for trusts. You can also see a list of previous years’ tax-free allowances.
If you’re a basic rate taxpayer, the rate of CGT you’ll pay depends on several things, including:
- the size of the gain
- your income
- whether your gain is from residential property or something else.
Broadly, you can take the following steps to work out how much CGT you owe:
- Work out how much taxable income you have
- Work out your total taxable gains
- Deduct your tax-free allowance
- Add this amount to your taxable income
- If the total amount is within the basic income tax band, you’ll pay 10% on your gains (18% on residential property). For anything above the basic tax rate, you’ll pay 20% (28% on residential property).
If you pay higher or additional rate tax, you’ll pay 20% CGT, and 28% on residential property.
Depending on the asset, you might be able to reduce the amount of CGT you pay by deducting losses or claiming certain reliefs – but you’ll need professional advice on where this does or doesn’t apply.
The rules are also a little more complicated when it comes to assets that:
- are inherited
- are from overseas
- are owned with someone else
It can also be more complex to work out the correct rate of CGT when you’ve sold residential property alongside other assets.
Understanding your situation
While this guide gives you a broad overview of what CGT is and how it works, every situation is unique. That’s why it’s best to ask for advice from an expert before making any decisions.
We’re here to help, so if you’re looking for support with your tax bill and CGT, we’d love to hear from you.